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 report identifies the contextual factors that influence the design of China’s ETS and affect its performance. It focuses on two key features:
- Ex-post adjustment of the initial allowance allocation in proportion to the actual output levels, and
- Treatment of the power sector.
Finally, the study analyses the interaction between China’s 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.