Emissions trading in China: emerging experiences and international lessons

Abstract

China has implemented emissions trading schemes in seven cities and provinces, and is planning a national cap-and-trade scheme. The seven pilot schemes show marked differences in design and operate in very diverse economic circumstances. Challenges encountered in the pilot schemes include the risk of over-allocation of emissions permits, unpredictable underlying growth trends, robust measurement and verification procedures, and the interaction with regulation in the energy sector. In addition, experiences from developed countries’ emissions trading schemes, in particular the EU ETS, can help inform the decisions about the design of a future Chinese national scheme. We find that Chinese policymakers will need to pay particular attention to the operation of emissions trading in a heavily regulated electricity sector. Setting emission caps in the context of a national emissions intensity target creates specific difficulties. Related price developments are uncertain and depend largely on underlying emissions growth rates. The option of auctioning permits and using the proceeds for other purposes is not taken into consideration extensively. Finally, implementing reliable systems for monitoring, reporting and verification of emissions remains a major task. This paper serves as an introduction to the special issue “Emissions trading in China” and draws on insights from the papers in the special issue.