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Effectiveness of market incentives in China’s National Emission Trading Scheme

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  • Lyu, Chen
  • Wang, Ke
  • Shi, Xunpeng
  • Cai, Bofeng
  • Yan, Gang

Abstract

We provide the quantitative evaluation of the incentive structure of China National Emission Trading Scheme (CN ETS) by analyzing 2282 compliance firms and find that CN ETS provides economic incentives for emission abatement through trading profits but exhibits a Matthew effect, whereby firms with larger emission reductions achieve higher marginal profits. In the second compliance cycle, the market incentive effect improved, evidenced by an increase in trading profits per ton of emission reductions and a weaking of the Matthew effect. The benchmark allowance allocation has effectively encouraged low-emission-intensity coal-fired units while expediting the phase-out of high-emission intensity units. However, gas-fired units, despite their lowest emission intensity and high flexibility, receive weak incentives. Central state-owned enterprises and units with prior experience in China’s ETS pilots, exhibit lower trading participation. Enhancing allowances scarcity, implementing paid allowances, strengthening compliance enforcement and penalties, and increasing trading activity are suggested to improve the CN ETS.

Suggested Citation

  • Lyu, Chen & Wang, Ke & Shi, Xunpeng & Cai, Bofeng & Yan, Gang, 2026. "Effectiveness of market incentives in China’s National Emission Trading Scheme," Structural Change and Economic Dynamics, Elsevier, vol. 76(C), pages 251-261.
    • Handle: RePEc:eee:streco:v:76:y:2026:i:c:p:251-261
    DOI: 10.1016/j.strueco.2025.12.011
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