Key challenges for China's carbon emissions trading program

Abstract

China's national carbon emissions trading program is expected to become the world's largest carbon market and is critical for achieving China's domestic mitigation goals. But China's trading program is likely to face significant challenges, due to its large scale and high complexity. First, the accuracy and credibility of China's emissions data have been widely criticized. There are significant inconsistencies between the national and provincial emissions inventories, and the facility-level data are even less satisfying. Institutional capacities related to the carbon market need to be significantly enhanced to strengthen monitoring, reporting, and verifying capabilities. Second, compared to emissions trading programs in other parts of the world, China's program is likely to face greater market volatility, due to the country's economic structural transition from a manufacturing-based to a service-based economy. Wise cap-setting and allowance allocation methods and proper price containment mechanisms are needed to maintain market stability. And third, China is a market economy with many features of a central planning system, particularly in the energy sector. Large state-owned enterprises (SOEs) do not act as profit-maximizing entities, and their behaviors could undermine the efficiency of the cap-and-trade program. To address these challenges, we provide a series of policy recommendations, including capacity building from central to local levels, wise selection of allowance allocation methods to cope with changing economic realities, and deepening market-oriented reforms in energy sectors and SOEs. This article is categorized under: The Carbon Economy and Climate Mitigation > Policies, Instruments, Lifestyles, Behavior.