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Economics of Energy & Environmental Policy
Volume 6, Number 2

China’s National Carbon Dioxide Emission Trading System: An Introduction

Lawrence H. Goulder, Richard D. Morgenstern, Clayton Munnings, and Jeremy Schreifels

DOI: https://doi.org/10.5547/2160-5890.6.2.lgou
No Abstract

Lessons learned from China’s regional carbon market pilots

Junjie Zhang, Zhenxuan Wang, and Xinming Du

DOI: https://doi.org/10.5547/2160-5890.6.2.jzha
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This paper gives an overview of the performance of China's seven regional carbon market pilots and the range of approaches they have used. We assessed the outcomes of these pilots using publicly available secondary market trading data. The differences in market performance are explained by the design of key market elements such as emission allowances, covered sectors, allowance allocation, monitoring, reporting and verification, compliance and penalties, and offset market. The lessons learned from the regional carbon market pilots are used to provide insights that can aid in the design of the upcoming national carbon market. Keywords: Climate change, carbon market, China

Interactions between Market Reform and a Carbon Price in China’s Power Sector

Fei Teng, Frank Jotzo, and Xin Wang

DOI: https://doi.org/10.5547/2160-5890.6.1.ften
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The electricity sector accounts for a large share of China's carbon dioxide emissions and of the economy-wide abatement potential. China's planned national emissions trading scheme would include electricity generation, as nearly all emissions trading schemes do. The critical difference is that in most existing carbon pricing systems the power sector operates with competitive markets and cost-based pricing, while the Chinese power industry still uses a highly regulated dispatch and pricing system. Together these limitations mean that the effect of a carbon price on China is limited in terms of the impact on operational decisions for existing power stations and in terms of the effects on investment decisions. We explore the channels of interaction between electricity market reform and carbon pricing in China, and provide quantitative estimates of the effects and interactions on electricity sector emissions. A probabilistic discrete choice model is used to simulate the behavior of investors in the power sector. The analysis indicates that market reform can help reduce emissions intensity, but to meet China's 2030 targets for non-fossil fuel generation a low to moderate carbon price is also necessary; conversely, a carbon price will only be effective with market reform that provides flexibility in dispatch. Using our simplified quantitative analysis, the carbon price required for the same share of non-fossil fuel generation would be about twice as high without market reform. Combining market reform and a carbon price could achieve significant rates of decarbonization and is likely to be the most effective and most feasibly policy package to cut emissions from China's power sector. Keywords: Climate change, emission trading scheme, electricity reform, policy interaction

Key issues in designing China’s national carbon emissions trading system

Maosheng Duan and Li Zhou

DOI: https://doi.org/10.5547/2160-5890.6.2.mdua
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The design of China's national carbon emissions trading system (ETS) has been shaped by major considerations including the significant disparities that exist between the different regions of the country, concerns about possible impacts of the ETS on the economy, the continuously evolving policy environment, and the need to divide responsibilities appropriately among relevant authorities. To address these issues and other policy constraints while adhering to the principles of high efficiency and effectiveness within a national system of unified rules, China created a legal framework with unique rules for the coverage and scope of emissions trading, allocations, cap setting, monitoring, reporting and verification, compliance, and division of responsibilities. The system was designed to maintain unified rules across the entire system while also providing flexibility in aspects ranging from coverage and scope, allocation and cap setting to compliance. This design will not only facilitate the formulation of a State Council regulation providing the necessary strong legal foundation for the ETS but will also avoid the frequent changes of regulations that often occur in an evolving policy environment.Keywords: China, carbon, emissions trading, national, design

Incentivizing firm compliance with China’s national emissions trading system

Valerie J. Karplus and Xiliang Zhang

DOI: https://doi.org/10.5547/2160-5890.6.1.vkar
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When it launches in 2017, China's CO2 emissions trading system (ETS) will cover the largest CO2 emissions volume of any system to date and be among the very first to launch in a developing country. We evaluate the potential of an ETS to alter the emitting behavior of covered firms and to support the achievement of national CO2 intensity reduction targets at least cost. Specifically, we focus on two questions: (1) What factors have limited firms' past compliance with environmental policy in China, and (2) what can be done to strengthen compliance with China's national ETS? We argue that altering firm behavior will require a simultaneous effort to strengthen firms' compliance incentives through changes to national institutions - in particular, a strong legal foundation for the system, a nationally unified set of measurement, reporting, and verification requirements subject to independent scrutiny, and ongoing broader economic reforms to support system operation. It will also require signaling a sustained commitment to experimentation, evaluation, and modification of the system based on performance, given that system effectiveness will depend on expectations about its longevity and credibility, but will inevitably require adjustments. We illustrate the importance of these recommendations for firm compliance behavior by drawing on the experience of the Beijing pilot ETS (2013-2015). Given vast heterogeneity across provinces, special attention should be given to strengthening institutional foundations where they are least developed alongside the construction of a national ETS. Keywords: Climate change, emissions trading system, firm compliance, China

Influence of Climate Policy and Market Forces on Coal-fired Power Plants: Evidence on the Dutch market over 2006-2014

Machiel Mulder and Melboy Pangan

DOI: https://doi.org/10.5547/2160-5890.6.2.mmul
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Many governments aim to reduce the dependence on coal-fired generation to decrease carbon emissions. At the same time power markets with competition between independently operating power firms have been created which leave the actual decisions concerning electricity production to these firms. This paper analyzes the interaction between climate policies and policies to foster power markets. Using hourly plant-level data on the Dutch power market over 2006-2014, we find that the dispatch of fossil-fuel power plants is strongly influenced by relative fuel prices, despite the existence of several climate policy measures. Coal-fired power plants have become more important in the Dutch market since 2006, not only in share of total production, but also as provider of flexibility. Examining the short-term dispatch decisions and the past volatility in relative fuel prices, the maximum CO2 price which was needed to provide incentives for power producers to dispatch a gas-fired plant instead of a coal-fired plant was 43 euro/ton. We conclude that internalizing the external (CO2) costs by raising the CO2 price is a more appropriate measure than a forced closure of coal-fired power plants to align the principles of a market-based power industry and the wish to implement effective climate-policy measures at relatively low costs.Keywords: Coal-fired power plants, electricity market, dispatch, climate policy

The Future of Russian Gas Exports

Finn Roar Aune, Rolf Golombek, Arild Moe, Knut Einar Rosendahl, and Hilde Hallre Le Tissier

DOI: https://doi.org/10.5547/2160-5890.6.2.faun
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Disputes between Russia and Ukraine over the terms for gas transit and deliveries prompted Russia to accelerate development of new gas pipelines to Europe circumventing Ukraine, as well as exploring the potential for gas export to additional markets like Turkey and China. The current paper examines implications of Russia increasing its gas exports capacity by building Nord Stream 2 (to Germany), Turkish Stream (to Turkey and Greece) and Power of Siberia (to China). We find that these projects have moderate effect on Russian gas exports and also that the impact on the European natural gas market is minor. We have also examined the impact of new Russian export pipes if subsidies to large Russian natural gas consumers are halved, or there are no sales to, or transit via, Ukraine. We find that the effects of increased export capacity are much stronger in these cases. The main policy implication of our study is that the EU and Russia have common interest in supporting further integration of European markets, although for somewhat different reasons. Russia wants to sustain, or increase, its exports to Europe, whereas the EU wants to make sure that the market functions well and that no country becomes vulnerable to pressure from Russia.Keywords: Russian gas export; Russia-Ukraine natural gas disputes; Turkish Stream; Russia-China natural gas trade agreement

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