China’s pilot carbon trading schemes : assessment and lessons from EU

Abstract

This paper assesses the seven Chinese pilot carbon schemes that will be implemented in late 2013, and relates the most critical and relevant lessons from the European Union’s Emission Trading Scheme (EU ETS) to the Chinese circumstances. This paper reviews the key policy designs of the pilot schemes, and discusses the unique Chinese policies and market environment that would differentiate the Chinese schemes from the EU ETS. In terms of expected emission abatement, this paper estimates that, compared to business as usual (BAU) level, Guangdong, Hubei and Shanghai are expected to mitigate the highest amount of CO2 emissions. In terms of carbon price, this paper expects the schemes of Guangdong and Hubei to have the highest carbon price while the price in Beijing and Tianjin will be the lowest. By reviewing EU’s experience, this paper proposes recommendations on 1) avoiding allowances over-­‐supply and windfall profits, 2) maintaining market stability, 3) bottom-­‐level allocation, 4) use of allowance reserve and provision, and 5) sector selection and allocation. The paper finds that the unique designs of the Chinese pilot schemes indicate a lower likelihood of price crash than EU ETS. With regard to these special designs, and the size of the Chinese pilot schemes, the paper concludes that the Chinese pilot schemes have a significant global implication in terms of promoting a global-­‐wide ETS, reforming existing ETS and setting examples for developing countries.