National Emission Trading System Research Articles

Options to enhance China’s national emission trading system design for carbon neutrality

ABSTRACT To better align the emissions trajectory of China’s power sector with the country’s neutrality target for 2060, China’s national Emission Trading System (ETS) needs to be enhanced. This study uses a power system planning model that incorporates an output-based ETS module to explore the effects of three enhanced ETS options: 1) tightening the benchmark faster, 2) introducing auctions, and 3) transitioning to a cap-and-trade ETS. A cap-and-trade ETS can achieve deep decarbonization at the lowest cost by encouraging cheap renewables. With an increased benchmark stringency under free allocation and output-based ETS, the power sector can achieve the same level of emission reduction at a 5.2% higher cost compared to a cap-and-trade ETS. This is due to the extensive development of carbon capture, utilization, and storage (CCUS) technology, facilitated by the free allowance allocation of the output-based ETS. Introducing auctions into an output-based ETS would encourage both renewables and CCUS and increase the cost by 1.4% compared to the cap-and-trade ETS. First, we suggest that auctioning be introduced into an output-based ETS to cost-effectively encourage a diversified power supply. Subsequently, we recommend turning to a cap-and-trade ETS after 2030 to reduce the cost of decarbonization.

Impact of benchmark tightening design under output-based ETS on China's power sector

China's national Emission Trading System (ETS), which covers the power sector, is a key policy for supporting the low-carbon transformation of the power sector under China's carbon neutrality target. This study improved the portrayal of China's national ETS in the power planning model and characterised its output-based mechanism and special gas-fired power design. The impacts of different output-based ETS designs on the decarbonisation of power systems in China were then explored. The results show that the ETS can effectively peak the emissions of China's power sector earlier and support the application of carbon capture and storage (CCS) technology with slight impact on the average electricity cost. Benchmark tightening by 2%–5% every five years can lead to 3%–7% lower peak emissions of the power sector and deployment of CCS technology in 2025–2030. However, the current ETS design, which covers only coal- and gas-fired power units, plays a limited role in promoting renewable energy development by encouraging power generation by 1.3 % in 2035, with benchmark tightening of 5 % every five years. Distribution effects will occur among technologies and regions and will increase under more stringent benchmarks. Therefore, a moderate benchmark tightening rate is required to balance emission reduction and distribution effects in the near future.

Machine learning for data verification in emissions trading system

Data quality is the cornerstone of any emissions trading system (ETS), although developing an effective assurance mechanism is a considerable challenge. To evaluate potential data quality issues of regulated firms and develop a cost-efficient data verification scheme for the authorities, this study uses domain knowledge and data-driven approaches to identify firms with high data quality risks. Using a unique dataset from China's national ETS, each sample obtains an ensemble outlier score generated by several supervised and unsupervised machine learning techniques, and limited inspection resources are allocated to the facilities with higher scores. Our results show that the models make good predictions where potential misreports are found among the predicted high-risk samples, and 70 % of tampered datapoints are detected in the robust test. The method presented here helps in efficiently verifying firms’ self-report emissions and proposes a feasible solution for intelligent data quality management under ETS context.

Economic aspects of assessment and marketing of carbon emissions by enterprises based on the principles of sustainable development

Purpose. To analyze the economic aspects of carbon emissions by industry and conduct a marketing assessment of the emissions trading system (ETS). To develop recommendations for the introduction of market mechanisms for regulating emissions. Methodology. Special and general methods of scientific knowledge are used: abstract-logical analysis to identify the predominant causes of greenhouse gas (GHG) generation; statistical methods of analysis to establish the correlation of capital investments and emissions; induction and deduction to identify complex management approaches to reducing harmful emissions; mathematical – for the formalization of the factors of the ETS market and their functional dependencies, necessary for the analysis of the market. Findings. A correlation between capital investments and emissions has been established, which confirms the long-term trend of implementing a strategic policy of enterprises to reduce emissions. The presence of sectoral differences in correlation coefficients indicated the need for differentiation of institutional support for industries as a tool for changing the export structure. The effects of Carbon Border Adjustments Mechanism (CBAM) influence on the economy of Ukraine are indicated. Recommendations for harmonizing issues regarding Ukraine’s obligations to reduce emissions are proposed. Measures to reduce risks for the economy during the introduction of the national ETS are proposed. Originality. Factors of the ETS market and their functional dependencies that are necessary for market analysis are presented mathematically. An equivalence function is proposed for the assessment of individual specific indicators of enterprises. The factors that determine prices and the amount of demand at the ETS market are stratified. Principles of this market are formulated. Practical value. It is proposed to introduce regional emission control laboratories and agree on the recognition of their certificates by Ukraine and the EU.

Accounting CO2 Emissions of the Cement Industry: Based on an Electricity–Carbon Coupling Analysis

Since the cement industry acts as a significant contributor to carbon emissions in China, China’s national emission trading system has announced that it should be included in the system soon. However, current cement carbon accounting methods require high-resolution data from various processes on the production line, making it a cumbersome and costly process. To address this issue, this study explores the feasibility and reliability of using machine learning algorithms to develop electricity–carbon models. These models estimate carbon emissions based solely on electricity data, enabling faster and more cost-effective accounting of carbon in cement production. This study investigates the correlations between electricity data and carbon emissions for a large cement manufacturer in southern China. It compares the performance of models based on the supply of electricity (purchased electricity and waste heat electricity) with those based on the consumption of electricity (electricity used on the grinding machines in the production lines) to identify the key factor for carbon emission calculations. The identified best performing model showed high accuracy, with an R2 of 0.96, an RMSPE of 3.88%, and a MAPE of 2.56%. Based on this, the novel electricity–carbon model has the potential to act as one of the optional methods for carbon emissions accounting in the cement industry and to support carbon emissions data promotion within China’s national emission trading systems.

How the thermal power sector affects carbon trading: an empirical study on China’s carbon markets

ABSTRACT By using a dynamic panel data model, this study investigated how the production of thermal power affects China’s regional pilot carbon markets with a focus on carbon price, trading volume, realized volatility, and market liquidity. Our results suggest that the production of thermal power has slightly increased the trading volume, but has not affected carbon prices based on the existence of excessive CO allowances. Moreover, thermal power production has increased realized volatility in the pilot markets. However, this impact was reduced following the announcement of the National Emission Trading System (ETS). This demonstrates that thermal power companies in pilot carbon markets tend to trade carbon credit more actively in response to policies favouring further market liberalization, rather than passively following government instructions. Furthermore, we find that realized volatility and liquidity increased in the Hubei and Shanghai pilots following the announcement. This demonstrates that the announcement of the National ETS improved the market activity and efficiency, and pricing capacity of its host pilot markets. However, this improvement could only be observed in the short term. Therefore, the government should reallocate CO allowances to match its emission reduction targets and incentivize industries with high carbon intensity to participate in carbon trading.

Место систем торговли квотами на выбросы в современном инструментарии политики низкоуглеродного развития

At the 2021 Conference of the Parties to the United Nations Framework Convention on Climate Change in Glasgow, many leading economies have cemented the intention of achieving carbon neutrality by mid-century (2050-2070). However, the geopolitical and economic crisis of 2022 threatens to reduce the priority of decarbonization policy and postpone the introduction of more restrictive measures. In the face of growing constraints, the choice of climate policy instruments becomes even more complex and important. It is necessary to analyze different options from the low-carbon development policy toolkit, to understand their strengths and weaknesses, and their potential to be used to build a comprehensive policy. This article analyzes the strengths and weaknesses of emissions trading systems (ETS) as a tool for direct carbon pricing - a measure that experts from international organizations, as well as the academic community, believe is essential for achieving climate goals. Despite the fact that carbon taxes (the second option of direct pricing) is easier to implement and administer, many jurisdictions still opt for an ETS. Several factors influence the choice of ETS as a decarbonization tool: if optimally designed, a market-based mechanism provides cost-effective emission reductions, there is potential for linkage into a larger systems, the flexibility of the instrument can also provide additional benefits, China’s national ETS is a good example of exploiting the ETS’ flexibility. Political and administrative characteristics (EU, Germany, UK, California), Kyoto, Brussels, and OECD effects (Mexico and other jurisdictions) play an important role in the choice in favour of ETS. The experience of complex and comprehensive low-carbon development strategies already being implemented shows that it is not necessary to place the ETS at the center, making it the cornerstone of policy. The role of ETS in the entire set of decarbonization measures can be central, supportive, or enabling. ETS can have different objectives and stimulate not only direct emission reductions, but also technological transformation, energy transition. For Russia as a federal state, conducting pilot projects with different instruments of carbon pricing implemented in different regions seems to be the best solution for the near future and finding the right instruments for the Low Greenhouse Gas Emissions Development Strategy.

The role of output-based emission trading system in the decarbonization of China's power sector

The emission trading system (ETS) is a key policy for China to achieve carbon neutrality. China's national ETS started operation and covered the power sector first, which will promote its transformation. This study explores how China's national ETS can support the future decarbonization of the power system. With benchmark tightening, China's ETS can cost-effectively peak CO2 emissions of the power sector before 2030 and reduce 13% of the total emissions by 2035, compared to a No-Carbon-Pricing Scenario. Under the ETS, the allowance price would rise gradually to 350 yuan/tCO2 by 2035. The main driving factor for emissions reduction would be improving the efficiency of coal-fired power generation between 2020 and 2025 and deploying carbon capture and storage (CCS) from 2030, respectively. Fuel-switching away from coal is limited under the ETS with technology-specific benchmarks and free allocation. Regional distributional effects could arise under the ETS. Regions with a higher share of ultra-supercritical units could have allowance surpluses at the beginning, while only regions with CCS-equipped coal-fired units have the potential to gain high allowance surpluses by 2035.

The New National Emission Trading System – Austria’s Approach to Carbon Taxation

In this note, the authors explain and comment on the design of Austria’s new law on carbon pricing.

Scaling up Climate Mitigation Policy in Germany

Germany has set national greenhouse emissions targets of a 65 percent reduction below 1990 levels by 2030 and net zero emissions by 2045, along with various sectoral emissions goals. To achieve these targets, the government has introduced multi-pronged policy measures, including a national emissions trading system (ETS), which complements the ETS at the EU level. This paper shows the substantial variation in the price responsiveness of emissions across sectors and thus prices implied by sectoral targets. It proposes the following measures to help Germany meet emissions targets with greater certainty and cost effectiveness: (i) further strengthening carbon pricing, for example through automatically rising price floors for the national ETS after 2026; (ii) harmonizing carbon pricing to reduce cross-sector differences in marginal abatement costs; and (iii) introducing feebates (revenue neutral taxsubsidy schemes) to reinforce incentives at the sectoral level. The paper also studies the distributional impact of higher carbon pricing and suggests that reducing social security contributions can mitigate the regressive direct impact of higher carbon pricing on lowerincome households. Concerns with carbon leakages and firms’ competitiveness are best addressed through agreeing on an international carbon price floor.

Convergence analysis of regional marginal abatement cost of carbon dioxide in China based on spatial panel data models.

China has announced to launch a national emission trading system (ETS). The heterogeneity of marginal abatement cost (MAC) is prerequisite for trading, and the knowledge about the evolutionary characteristics of MAC is particularly necessary. However, the β convergence theory has been proved to be suitable yet rarely applied to the study of MAC of CO2. To fill this gap, this paper connects them creatively, and the convergence of MAC during 2001-2015 and the influential factors are explored by spatial panel data models. Results show that China's MAC converges during the study period whether the spatial effect is considered or not. When evaluating the convergence of MAC, the spatial effect should not be ignored, because it will improve the explanatory power of models and promote the convergence. The size of labor force, emission level, coal consumption, foreign direct investment, and industrial structure significantly affect the growth rate of MAC. Low-carbon policies could be formulated fully considering the factors and their spillover effects. Those findings are certainly significant in imposing carbon reduction targets and adopting policy instruments. In addition, a national ETS is more applicable to China's reality at this stage and suggested to introduce carbon tax in due course in the future.

Impacts of the carbon emission trading system on China's carbon emission peak: a new data-driven approach.

Over the past four decades, China’s extensive economic growth mode has led to substantial greenhouse gas emissions, and China has become the world’s largest emitter since 2009. In order to alleviate the dual pressures from international climate negotiations and domestic environmental degradation, the Chinese government has pronounced it will reach its emission peak before 2030. However, through analyzing 12 scenarios, we found that it will be very difficult to meet this ambitious goal under the current widely used policies. With the trial implementation of China’s carbon emission trading system (ETS), concerns arise over whether national ETS can accelerate the carbon peak process. In this paper, we propose a new proactive data envelopment analysis approach to investigate the impacts of national carbon ETS on carbon peak. Several important results are obtained. For example, we find that carbon ETS has a significant accelerating effect on carbon peak, which effect will advance the carbon peak by one to 2 years, and the corresponding peak values are reduced by 2.71–3 Gt. In addition, the setting of carbon price in the current Chinese pilot carbon market is found to be overly conservative. Last, our estimation on the carbon trading volume indicates that the ETS lacks vitality as the annual average carbon trading volume only represents approximately 4.3% of the total average carbon emissions. Based on these findings, several policy implications are suggested regarding the means by which China can more smoothly peak its carbon emissions before 2030 and implement national carbon ETS.

Allowance allocation matters in China's carbon emissions trading system

Abstract China's national carbon emissions trading system (ETS) initially started by covering the power generation sector with a rate-based allocation of emission allowances. This single-sector ETS scheme is a tradable performance standard and loosens the participants' emission abatement effort. Given the stringent emission reduction targets implied by China's Nationally Determined Contributions (NDCs) and the expectation that ETS will cover more sectors in the future, we simulate a national ETS of ten carbon-intensive sectors with mass-based, output-based allocation (OBA) of emission allowances. We uncover the impacts and mechanisms of this ETS by comparing the sectoral abatement behaviors across policy scenarios with varying allocation schemes and numbers of benchmarks. We evaluate if the simulated ETS meets important efficiency principles and exhibits desired features. The results show that this ETS achieves China's NDCs with modest macroeconomic losses. The mass-based OBA leads to evenly distributed emission reduction efforts for all ETS participating sectors. It also limits the emission trading volumes and results in slight to modest impacts on sectoral output, especially for the upstream sectors. OBA with fewer benchmarks enhances emission abatement efforts with the caveats of relatively cleaner participants being subsidized by the ETS and slightly higher impacts on the macroeconomy.

Who Owns REDD+? Carbon Markets, Carbon Rights and Entitlements to REDD+ Finance

The question of who is entitled to benefit from transactions under the United Nations framework to reduce emissions from deforestation and forest degradation (REDD+) remains one of the most controversial issues surrounding cooperative efforts to reduce deforestation in developing countries. REDD+ has been conceived as an international framework to encourage voluntary efforts in developing countries to reduce greenhouse gas emissions and enhance carbon removals from forest activities. It was designed as an international framework under the United Nations Framework Convention on Climate Change (UNFCCC) to enable the generation of emission reductions and removals (ERRs) at the national—and, provisionally, the subnational—level and is, thus, primarily a creature of international law. However, in defining forest carbon ERRs, the international framework competes with national emission trading systems and domestic REDD+ legislation as well as private standards that define units traded on the voluntary carbon market. As results-based and carbon market systems emerge, the question remains: Who can claim participation in REDD+ and voluntary carbon market projects? The existence of different international, national and private standards that value ERRs poses a challenge to countries that participate in REDD+ as well as to communities and private actors participating in voluntary carbon market projects. This paper seeks to clarify the nature and limitation of rights pertaining to REDD+ market transactions. It also links the notion of carbon rights to both carbon markets and government’s decision on benefit sharing. Applying a legal lens, this paper helps to understand the various claims and underlying rights to participate in REDD+ transactions and addresses ambiguities that can lead to conflict around REDD+ implementation. The definition of carbon rights and the legal nature of carbon credits depend on local law and differ between countries. However, by categorizing carbon rights, the paper summarizes several legal considerations that are relevant for regulating REDD+ and sharing the financial benefits of transacting ERRs.

Stylized agent-based modeling on linking emission trading systems and its implications for China's practice

Abstract China established a national emission trading system (ETS) to peak its carbon emission around 2030, building on the experience of pilot ETSs that are planned to be linked. Firms are the main entities that conduct carbon reduction and allowance trading. Due to the heterogeneity in the initial stock of technologies, firms' abatement costs differ, resulting in different abatement activities and the dynamics of the carbon price. Most of the studies on linking ETSs pay little attention to firms' behaviors, especially the interactions among firms' technology adoption strategies and their allowance trading strategies. In addition, whether linking ETSs can reduce carbon emission with lower system costs remains insufficiently explored. This study develops a stylized agent-based model (ABM) to explore the impact of linking two ETSs considering firms' heterogeneities and the interactions between their technology adoption strategies and allowance trading strategies. The model considers two ETSs, each of which includes energy-service-providing agents who are heterogeneous in the production scale and initial stock of technologies (and thus with different abatement costs), and attempts to minimize the total cost for a given output by adopting different technologies and trading emission allowances. The carbon price is dynamically affected by agents' willingness to pay, and a Walrasian auction is introduced to obtain the equilibrium. The results show that linking ETSs could be cost-effective to achieve carbon reduction commitment and creates a larger and more liquid carbon market; however, it also provides agents the opportunity to purchase more allowances rather than adopt low-emission technologies, which may result in more carbon emission. Adding restrictions on the linkage could somehow mediate this negative effect. Imposing strict exchange rate restrictions to the system with more balanced market shares of agents or quantitative restrictions would result in desirable results at the expense of increasing system costs. Moreover, restricted linkages could help alleviate the difficulties in initialing a linkage. The stylized ABM is mainly used for exploratory modeling purposes as a heuristic research device to examine in depth the effectiveness of unrestricted linkages and restricted linkages on adopting low-emission technologies at firms' level and the resulting carbon reduction. On the basis of the main findings of the ABM, we discuss the case if the Hubei pilot ETS links with the Guangdong pilot ETS, which could improve the understanding of the potential impact of linking ETSs on technology adoption and carbon reduction and provide policy implications for linking different ETSs.

Do the performance and efficiency of China's carbon emission trading market change over time?

Whether or not China can succeed at the forefront of international development in the coming decades will largely hinge on its ability to adapt to low-carbon economic development and its efforts to promote the Unified National Emission Trading System (UNETS). To understand the evolution of China's carbon market, this paper firstly divides the development of China's regional carbon markets into three phases: pilot construction (phase 1, before 31 May 2015), preparation for the UNETS (phase 2, 1 June 2015-19 December 2017), and formal construction of the UNETS (phase 3, 20 December 2017-present). Then this research reviews the trading performance and employs four robust variance ratio (VR) tests to capture structural changes and examine the efficiency of China's eight regional carbon markets in different periods. Results show that compared to phase 1, smaller price volatility, larger daily trading volume, and higher market liquidity are more frequent at the later stages of majority markets. Despite these improvements, results from the VR tests indicate that the statistic in majority of China's regional carbon markets is insignificant in any given period and, therefore, they are not weak-form efficient. The additional detrended cross-correlation analysis demonstrates that market liquidity affects market efficiency in the Hubei market only, which implies that Hubei, where the market liquidity reaches almost 100% in phase 3, is highly likely to be weak-form efficient shortly. Finally, several recommendations are provided to improve the efficiency and maturity of China's carbon markets, including strengthening legislation, improving the market design, and constructing information platforms.

Air quality and health co-benefits of China's national emission trading system

Quantification of the air quality and health co-benefits of climate policies can provide explicit near-term localized assessment of the benefits of efforts to mitigate climate change. In the study, the air quality and PM2.5 associated health co-benefits of China's national Emission Trading System to achieve the Nationally Determined Contribution is analyzed. The interdisciplinary integrated assessment model framework, named the Regional Emissions Air quality Climate Health Model, is applied. The results showed that substantial air quality improvement and health benefit will be achieved under the national Emission Trading System. But the cost and benefits varies according to the CO2 emission cap set. To peak CO2 emissions by 2025 will bring about more obvious improvement in air quality (ranging from 3% to 12% PM2.5 concentration reduction at provincial level compared with that to peak CO2 emission by 2030), more morbidities avoided from acute exposure and more mortalities avoided from acute exposure and chronic exposure. While the net health benefit to achieve peaking by 2025 is US$ 100 billion less than that to achieve peaking by 2030 due to greater GDP loss in 2030. The net benefit is subjected to the valuation of the health benefits. If a higher Value of a Statistical Life, US$ 1.92 million, is chosen, the net benefits to achieve peak CO2 emissions by 2025 can be equal to that to achieve peak CO2 emissions by 2030.

Market-based Climate Policy in China? The Case of Emissions Trading Systems

China recognises the need to reduce carbon emissions in order to avoid negative consequences from climate change in the future. Therefore, the Chinese government initiated seven emissions trading system (ETS) pilots in 2013 and began to develop China’s national ETS in 2017. However, Chinese efforts to implement ETS have encountered legal, institutional and political issues that must be solved so that a national ETS could help to mitigate emissions in China.

The efficiency of carbon trading market in China: evidence from variance ratio tests.

On December 19, 2017, China's National Development and Reform Commission (NDRC) announced the official launch of the much-anticipated national emissions trading system (ETS), which is a critical period for the transition from the eight carbon emission trading pilot projects to the national market at this stage. Comprehensively evaluating the efficiency of China's eight carbon trading pilots is vital for strengthening the construction of its national ETS. This paper investigates the weak-form efficiency of eight carbon trading markets in China. We use a series of variance ratio tests to identify the efficiency from the market set up to the May 4, 2018, of all markets. The results indicate that the majority of the carbon trading markets are inefficient and only Beijing, Hubei, and Fujian markets are efficient. The China's carbon trading market is gradually maturing and implemented. In addition, we analyze the factors have impact on the market efficiency. It shows that the liquidity, volume, allocation allowance, and transparency in information are significant factors; meanwhile, the regional policy and cross cooperation also are important factors. Finally, this paper puts forward several policy recommendations on how to strengthen the effectiveness of China carbon trading markets based on the empirical results.

Considerations for Chinese power industry to participate in carbon market

In 2017, China started its national emission trading system. Power industry has been covered as a critical member. During the carbon market construction, the new power market reform has started in 2015 in China. It is crucial for power industry to simultaneously meet the requirements from both power market reform and emissions reduction. This paper puts forward four key considerations for power industry to participate the emission trading system in China, including cap setting approach, the quota allocation approach, coordination mechanism for carbon trading and power trading, and the carbon cost transmission mechanism.