Emissions Trading Systems in China

This case study explores how an ETS operates, through the lens of the China National ETS. Officially launched in 2017, its first compliance period covered the years 2019 and 2020, and the first trading of allowances started in July 2021. China’s ETS differs from other major “cap-and-trade” schemes, like the EU ETS, in that it caps the emissions intensity of output rather than the absolute quantity of emissions. This means that compared with a traditional cap-based approach, emissions can continue to rise with output, creating an additional challenge for emission reduction objectives. Currently, all allowances in China’s ETS are allocated free to regulated entities based on technology and fuel benchmarks. Although this has been done to help address regional redistribution objectives, it likely distorts emission reduction incentives and lowers the scheme’s overall cost-effectiveness. The evolving design of China’s national ETS— including from an intensity-based to an absolute cap-based scheme—provides the opportunity to address and improve several design elements.