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Emissions Trading in China: Principles, Design Options and Lessons from International Practice

  • Frank Jotzo

China is considering a national emissions trading scheme, to follow several pilot schemes, as part of the suite of policies to reduce the growth of greenhouse gas emissions. A carbon tax or tax-like scheme could be an alternative. However there are special challenges in a fast-growing economy where the energy sector is heavily regulated. This paper analyses policy design options based on principles, China’s circumstances, and Australian and European experiences. The main findings are the following. (1) Features such as variable permit supple, price floor/ceiling or a fixed permit price are desirable to provide a stable price signal, especially in China’s case. A carbon tax can be a viable alternative or complement to emissions trading. (2) Any free permits or other assistance to industry should be carefully designed to preserve incentives to cut emissions, limited so that governments can use carbon revenue to support households or pay for other policy measures, and regularly reviewed to avoid lock-in of unnecessary payments. (3) Broad coverage of emissions pricing is necessary for effectiveness, including in electricity supply and demand. Carbon pricing can be partly effective in the electricity sector ahead of comprehensive energy sector reform, ultimately however market-based energy pricing is needed. (4) Carbon pricing should be seen in the broader context of economic policy reform. It offers opportunities to support broader goals of fiscal, energy and environmental policy.

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Paper provided by Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University in its series CCEP Working Papers with number 1303.

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Date of creation: May 2013
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Handle: RePEc:een:ccepwp:1303
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  1. Olivia Boyd, 2012. "China's Energy Reform and Climate Policy: The Ideas Motivating Change," CCEP Working Papers 1205, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
  2. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
  3. Wood, Peter John & Jotzo, Frank, 2009. "Price Floors for Emissions Trading," Research Reports 94885, Australian National University, Environmental Economics Research Hub.
  4. Frank Jotzo & Tim Jordan & Nathan Fabian, 2012. "Policy Uncertainty about Australia's Carbon Price: Expert Survey Results and Implications for Investment," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 45(4), pages 395-409, December.
  5. David I. Stern & Frank Jotzo, 2009. "How Ambitious are China and India's Emissions Intensity Targets?," Environmental Economics Research Hub Research Reports 1051, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
  6. Zhang, Da & Rausch, Sebastian & Karplus, Valerie J. & Zhang, Xiliang, 2013. "Quantifying regional economic impacts of CO2 intensity targets in China," Energy Economics, Elsevier, vol. 40(C), pages 687-701.
  7. Frank Jotzo & John Pezzey, 2007. "Optimal intensity targets for greenhouse gas emissions trading under uncertainty," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 38(2), pages 259-284, October.
  8. Richard Newell & William Pizer & Jiangfeng Zhang, 2005. "Managing Permit Markets to Stabilize Prices," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 31(2), pages 133-157, 06.
  9. Ross Garnaut, 2012. "The contemporary China resources boom," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 56(2), pages 222-243, 04.
  10. John Pezzey, 1992. "The Symmetry between Controlling Pollution by Price and Controlling It by Quantity," Canadian Journal of Economics, Canadian Economics Association, vol. 25(4), pages 983-91, November.
  11. Sijm, J. & Neuhoff, K. & Chen, Y., 2006. "CO2 cost pass through and windfall profits in the power sector," Cambridge Working Papers in Economics 0639, Faculty of Economics, University of Cambridge.
  12. Harry Clarke & Robert Waschik, 2012. "Policy Forum: Designing a Carbon Price Policy: Is the Australian Climate Plan Fair to Australia's Energy‐Intensive, Trade‐Exposed Industries?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 45(1), pages 105-113, 02.
  13. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. C�Dric Philibert, 2009. "Assessing the value of price caps and floors," Climate Policy, Taylor & Francis Journals, vol. 9(6), pages 612-633, November.
  15. Frank Jotzo, 2011. "Carbon Pricing that Builds Consensus and Reduces Australia's Emissions: Managing Uncertainties Using a Rising Fixed Price Evolving to Emissions Trading," CCEP Working Papers 1104, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
  16. Frank Jotzo & Steve Hatfield-Dodds, 2011. "Price Floors in Emissions Trading to Reduce Policy Related Investment Risks: an Australian View," CCEP Working Papers 1105, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
  17. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
  18. Warwick McKibbin & Adele Morris & Peter Wilcoxen, 2009. "A Copenhagen Collar: Achieving Comparable Effort Through Carbon Price Agreements," CAMA Working Papers 2009-29, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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