Effectiveness of market incentives in China’s National Emission Trading Scheme

Transparency in carbon markets is considered critical to ensure market effectiveness and public accountability. Low levels of transparency and lack of participation of non-governmental actors are persistent criticisms of Chinese (pilot) emission trading systems. Building on debates around authoritarian environmentalism and China's role therein, this article analyses transparency, manifested as information disclosure, in China's national carbon emission trading scheme (C-ETS) – the largest carbon emission market worldwide. Using expert interviews and content analysis, the article outlines practices of C-ETS information disclosure and discusses its characteristics in the context of China’s environmental governance. Key findings include discrepancies both between central and provincial governments related to information disclosure, and between different provincial governments. And while most industry actors lack interest and capacity to engage in C-ETS disclosure, environmental non-governmental organizations (ENGOs), by contrast, are significantly more involved in the policy process and information disclosure, often as ‘eco-elites’. Overall, this reveals that international and domestic ENGOs retain high-level channels to influence policy design and implementation. Yet, ENGO input is not pursued as a public good valuable for its own sake, but sought strategically as a means to the larger goal of efficient market functioning. This type of ‘strategic transparency,’ as we call it, suggests that China’s environmental governance model – regularly considered to be a key example of authoritarian environmentalism – instead represents an evolving mixture of liberal and illiberal tactics.

Assessing regional employment effects of the national emission trading scheme in China: Does Okun's law work?

ABSTRACTChina is expected to launch its national emissions trading scheme (ETS) in 2017. When designing an ETS, the cap, coverage and allocation are three key elements that must be considered. In general, three approaches are used to determine a scheme’s cap, coverage and allocation when considering whether a cap should be set and the method of setting a cap, namely, no-cap, top-down and bottom-up approaches. However, as a multi-tiered ETS established in an emerging economy, China’s national ETS faces special economic, technical and bargaining cost issues. To address these special issues, a unique approach, which is different from general approaches in theory and in major global ETSs, has been used in China’s national ETS to integrate its cap, coverage and allocation. Based on a comparative analysis of general approaches in theory and practice, this article provides a detailed introduction to the method for integrating the cap, coverage and allocation in China’s national ETS. It further reveals three challenges behind this unique approach and puts forward relevant policy suggestions.Key policy insightsAs a multi-tiered ETS established in an emerging economy, China’s national ETS faces special economic, technical and bargaining cost issues.The general approaches (i.e. no-cap, top-down and bottom-up approaches) to determine a scheme’s cap, coverage and allocation cannot completely address the special issues in China’s national ETS.China’s national ETS uses a unique approach combining top-down and bottom-up methods to integrate its cap, coverage and allocation.Three challenges remain behind this approach: the harmonization of local differences and national unified rules, the independent selection of covered sectors by local governments and the rationality underlying the selected allocation method.

Carbon markets devolve governance to external institutions and displace power from sovereign states. Major producers in these markets, notably China, have expressed concern about the adverse implications for national interests and sovereignty associated with selling off the rights to emit carbon emissions abroad. This article suggests that such concern has shaped the discursive context in which emission trading schemes have gained popularity in the country. Our discourse analysis shows that notions of market power are made manifest as a powerful storyline. In the Chinese language, “power,” “sovereignty,” and “rights” all use the same character. The storyline captures all these expressions and allows for a positive view about active engagement in carbon trading as a way to protect development rights and redeem carbon sovereignty. Thus, the contested policy of emissions trading becomes embedded in the more appealing narrative of national development and made politically attractive, despite unfavorable realities against it.

China announced the launch of a national emissions trading scheme (ETS) in December 2017 for the regulation of its carbon dioxides emissions. In emissions trading, China is likely to encounter issues different from those encountered by the European Union and other developed countries. This study first identifies the contextual factors that influence the design of China’s national ETS and affect its performance. After an overview of the design of China’s national ETS, this study focuses on two key features: (1) ex-post adjustment of the initial allowance allocation in proportion to the actual output levels, and (2) treatment of the power sector. Finally, the study analyzes the interaction between China’s national ETS and some overlapping policies such as those on air pollution control. The study’s key findings are that China’s ETS cannot fully achieve cost-effectiveness because of its design, the price behavior of China’s ETS will be different from that of a cap-and-trade ETS, and overlapping policies such as the command-and-control regulations for energy conservation and/or air quality improvement will decrease the demand for allowances and limit the opportunity for allowance trading. These findings are based on existing theoretical studies and relevant global ETS experience.

ABSTRACTChina is now in the process of building its national carbon emissions trading scheme (ETS). Data are the foundation for the design and operation of an ETS. This paper presents a comparative analysis of the data requirements for China’s national ETS construction and the existing ETS-related data for enterprises in China. In doing so, it identifies the underlying data gap in building China’s national ETS in terms of data availability and data quality. Based on the experiences of international ETSs, and experiences at national and pilot levels in China, we propose two short-term strategies and four long-term solutions to meet the challenges from technical and management perspectives.Key policy insightsThe major data requirements for China’s national ETS can be categorized into six groups: production, emissions, technology, management, economy and policy data.The ETS-related data are generally available in China except for parts of data on emissions, such as energy carbon content and the oxidation factor.The data challenges that are faced by China’s national ETS include differences in corporate data availability and imperfect data quality.Short-term strategies to address the challenges include establishing data collection guidelines based on existing data and prioritizing major emissions or sectors with better data for inclusion under the ETS.Long-term solutions to address the challenges include introducing the concept of tiers, clarifying data sources and introducing a monitoring plan, conducting MRV capacity building and establishing a rigorous third-party verification system.

Market-based solution in China to finance the clean from the dirty

Ex-post cap adjustment for China’s ETS: an applicable indexation rule, simulating the Hubei ETS, and implications for a national scheme

Sector decomposition of China’s national economic carbon emissions and its policy implication for national ETS development

China’s national Emissions Trading Scheme (ETS), the largest ETS in terms of the amount of CO2 regulated, was launched on the trading platform operated by the Shanghai Environment and Energy Exchange (SEEE) on July 16th 2021, and has successfully completed its first compliance cycle on December 30th, 2021. During the operation of its first cycle, China’s national ETS differs from other international ETSs in many aspects, including trading products and participants, allowance allocation method, compliance term, and offset mechanism, leading to certain unique trading patterns. Some unique settings are worth noticing including key emitters dominated by state-owned enterprises (SOEs) who also dominate transactions, large-scale power groups’ carbon strategies, allowances for 2 years of 2019 and 2020 being processed in one compliance period and allowed inter-year banking of allowances. All these have led to trading patterns characterized by cyclical demand-driven trading, insufficient trading capabilities of regulated entities, stable allowance price and an increased price of CCER. Nonetheless, the successful running of its first compliance cycle offers invaluable experience for future ETS development in operational mechanism improvement, sector coverage expansion, allocation optimization, and introduction of different types of market players and tradable products, and provides a good reference for future international expansion.

Distributional effects of China's National Emissions Trading Scheme with an emphasis on sectoral coverage and revenue recycling

China’s national emission trading scheme (ETS) started operating in 2021 after four years of preparation. In the initial stage of national ETS, benchmarking approach is one of the hottest topics that have gained sufficient attention. For the reason that benchmarks will greatly affect the permits allocation results and thus affect the effectiveness of the carbon market. This paper attempts to investigate the impacts of the benchmark designs of China’s ETS by using plant-level data. Main results show that the current lax benchmark standards adopted by the national ETS will lead to excess surplus of permits. The whole carbon market will achieve market clearance only when the benchmark standards are set as high as the top 2% efficiency levels. If the carbon price is 200[Formula: see text]yuan/ton, the annual trading volume will be 16.4 billion yuan and 13.2 billion yuan in extra will be spent on carbon offsetting for compliance. If the auction mechanism is introduced, the total market size will significantly increase. The auction revenue will exceed 300 billion yuan when 50% of permits are allocated through auction and will exceed 600 billion yuan when all permits are auctioned. These revenues can provide sufficient funds to accelerate China’s low-carbon transformation as well as improve social welfare.

In order to tackle climate change and build a low-carbon economy, China has selected seven provinces and cities as carbon trading pilots and plans to establish the national emissions trading scheme (ETS) in 2017. However, since China has not yet reached peak carbon emissions, and as a major developing country, the conflict between increasing energy demand and the requirement to reduce emissions brings challenges to the design of a national ETS suitable for China’s development. In this paper, we summarize the current situation of China’s seven ETS pilots with respect to coverage, allowance allocation, transactions, punishment mechanisms and especially the market performance. By analyzing the common practice of three international mandatory schemes, combined with China’s current circumstances and characteristics of market construction and regulation, we emphasize China’s own economic reality, and propose several recommendations for building a suitable and effective national ETS. This paper could provide new perspectives towards scheme design for China and other similar countries.

CO2 Emissions Trading Scheme is a key policy instrument for dealing with increasing greenhouse gas emissions. This work aims at giving some policy recommendations on the design of China’s National Emissions Trading Scheme. The experience accumulated in China’s Carbon Emissions Trading Pilots is quite valuable for China’s National Emissions Trading Scheme, so it is important to analyze the determinants of the prices in these pilots. We use the difference-in-differences model to study various policies respectively, including auction, investment access of individual and institutional traders, and carbon forward. Principal components of economy, energy, climate and allowance characteristic are respectively extracted from alternative variables, such as CPI, energy price, extreme temperature, in four categories. These principal components are set as control variables. Results show that these policies play a big role in the price discovery and stabilization. Auction drives the market price to approach the auction completion price. Carbon price exhibits a positive sensitivity to non-regulated entities’ participation and carbon forward. All the significant variables together can reflect most of the pilots’ price information. Policies have heterogeneous impacts on carbon price. The finding is robust to alternative specifications.

How to design emission trading scheme to promote corporate low-carbon technological innovation: Evidence from China