Issues Concerning the Design of China’s National Emissions Trading System

Abstract

An Emissions Trading System (ETS) is a market-based tool for controlling greenhouse gas emissions and has been used by many countries or regions. Built on the results of previous carbon market pilots, China plans to launch a nationwide ETS in 2017. This paper analyzes the main features of China’s National ETS design and the causes of the features, identifies the major issues and challenges that need to be addressed. The National ETS consists of a central-level system and provincial systems. The design not only attaches great importance to the uniformity of trading rules but also provides the provincial authorities a certain degree of autonomy. It sets carbon intensity targets and industrial benchmark based on historical emission rates of industries, issues free emission allowances to corporate legal entities, and includes indirect emissions in the system. The basic statistical unit of the ETS is corporate legal entities. At present, China’s National ETS faces the following major problems and challenges: lack of higher-level legislation; inconsistency in data requirements between the monitoring, reporting and verification (MRV) rules and the benchmarking rules, and lack of effective mechanism to link the ETS to other energy and climate policies. China should pass higher-level legislation for the National ETS as soon as possible, develop operational rules to regulate the allocation of emission allowances, MRV, certification of third-party verification agencies, compliance by companies, trading of emission allowances and other important activities under the ETS, dovetail ETS rules and financial industry supervision and budgeting regulations and develop a mechanism to correlate the ETS and other energy and climate policies.