Allowance allocation design for China's national ETS: Based on the unit-level data

Using benchmarking as the free allowance allocation method, China has constructed the world's largest national carbon emissions trading system (ETS). Yet in its initial phase, overallocation led to modest carbon price declines, and limited research has assessed the performance of the current allocation approach or proposed improvements. To address this gap, we propose an optimization framework, involving unit-specific information, to specifically delve into the performance and future enhancement of the existing policy. Using this framework, we estimate unit-level emissions, identify the disadvantages of the existing benchmarking method, and optimize benchmarks within the current policy framework in the four typical provinces. The results indicate that the optimized benchmarks, compared to the existing policy, align better with targeting high-emitting outdated units, allocating 3.62 % surplus allowances to gas-fired units (versus only 0.99 % for actual allocation) and 1.69 % deficit (versus otherwise 12.64 % surplus) to unconventional coal-fired units. Additionally, we suggest two enhancements, the removal of the heat supply ratio parameter and a refinement of the grouping approach, to improve the existing allowance allocation method. These findings provide valuable guidance for future ETS construction in China and the experiences of China's first-phase national ETS offer insights for other countries seeking to establish their own ETS.