Abstract
AbstractThis paper analyses the role that companion policies have had in the reduction of emissions regulated by the EU Emissions Trading System (EU ETS) and the related policy interactions, with a view to identifying relevant insights for China's forthcoming Emissions Trading System (ETS). The investigation rests on: (a) the observation of the EU's and China's ETSs and policy mixes; (b) economic theory concerning companion policies and ETS design; and (c) empirical ex-post evidence from the EU ETS. Three main conclusions emerge from the analysis. First, China's ETS, while not imposing a fixed cap on emissions, will not be immune to waterbed effects of companion policies. Second, the European experience stresses the importance of making explicit the objectives pursued by companion policies, and of balancing policies for innovation and policies for adoption of low-carbon technologies. Third, in the presence of a major market surplus, only permanent adjustments to allowance supply can be effective in raising prices.
Highlights
Since the launch of the EU Emissions Trading System (EU ETS), in 2005, the diffusion of large-scale emissions trading systems (ETSs) for climate change mitigation has been confined to advanced economies, with the exceptions of Kazakhstan and, recently, Mexico
We have asked ourselves whether the European experience with the EU ETS and its companion policies may offer useful insights for China’s forthcoming system
Our analysis firstly showed that China’s ETS, despite fundamental design differences with the EU ETS, will not be immune to waterbed effects of companion policies
Summary
Since the launch of the EU Emissions Trading System (EU ETS), in 2005, the diffusion of large-scale emissions trading systems (ETSs) for climate change mitigation has been confined to advanced economies, with the exceptions of Kazakhstan and, recently, Mexico. In the last few years, the development of China’s forthcoming ETS has attracted much attention worldwide from policymakers, industry, investors, researchers and civil society Both the role of China in the fight against climate change, as being responsible for about a quarter of global greenhouse gas (GHG) emissions, and the size of China’s ETS, which will be about double that of the EU ETS, explain such a level of interest and expectation on the part of the international community. It exemplifies how design features that are standard among existing ETSs can be adapted to specificities of developing economies These specificities relate to: (a) higher and more uncertain rates of economic growth, which implies that determining appropriate long-term emission caps can be an improbable task; and (b) highly regulated electricity markets inhibiting the pass-through of carbon costs.. We use the term ‘companion policies’ in its broadest sense to indicate any instrument or measure that reduces emissions regulated by an ETS.
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