« Back to Results

China's National Carbon Market

Paper Session

Friday, Jan. 5, 2018 8:00 AM - 10:00 AM

Marriott Philadelphia Downtown, Grand Ballroom Salon I
Hosted By: American Economic Association
  • Chair: William A. Pizer, Duke University

Lessons From China’s Seven Regional Carbon Market Pilots

Junjie Zhang
Duke University


Under the dual incentives of climate mitigation and co-benefits, China has launched seven regional carbon market pilots since 2013. The pilots cover all four province-level municipalities (Beijing, Shanghai, Tianjin, and Chongqing), two provinces (Guangdong and Hubei), and one special economic zone (Shenzhen). The total allowances for the seven trading programs add up to 1.2 billion tons of carbon dioxide per year, about 11.4% of national emissions in 2014.

Although the seven regional pilots cover a relatively small share of China’s total carbon emissions, it is a giant step for the world’s largest emitter to test market-based instruments in climate change mitigation. In addition, the seven pilot regions are important provincial/city units in terms of their economic and political clout. The experience and lessons from these pilots will facilitate other subnational units to join in the upcoming national carbon market.

This paper overviews the mechanisms and outcomes of China’s regional carbon market pilots. In particular, we introduce the design of key market elements including selection of pilot regions, emission allowance, covered sectors, allowance allocation, monitoring, reporting and verification, compliance and penalties, and offset market. We assess the performance of the seven carbon markets using publicly available secondary market trading data and explain why different carbon market pilots differ significantly in market performance.

China's Rate-Based Approach to Reducing CO2 Emissions: Strengths, Limitations, and Alternatives

Lawrence H. Goulder
Stanford University
Richard Morgenstern
Resources for the Future


China is launching what is expected to become the world’s largest carbon dioxide emissions
trading system (ETS). A key feature of this new system – and one that distinguishes it from
other ETSs around the world – is its rate-based structure. This structure governs the way
emissions allowances are allocated and the conditions for compliance. Relative to the more
common, mass-based ETSs, it generates different incentives to producers regarding their levels
of output and extent of emissions abatement. These differences have important implications for
the performance of the program.

This paper looks closely at the rate-based aspect of China’s new program and suggests what it
implies for the efficiency, cost-effectiveness, and distributional equity of the program. After
acknowledging some attractions of the rate-based system, we identify three key limitations in
such a system in terms of cost-effectiveness and efficiency. First, we show the rate-based system
implies a gap between the marginal costs of abatement as perceived by firms and the marginal
cost to society of such abatement. This discrepancy limits the ability of allowance trading to
reduce system-wide costs of abatement. Second, we indicate that there is substantial
heterogeneity across facilities in the assigned benchmark emissions-output ratios. We show that
in the rate-based system, perfectly fluid allowance trading (i.e., trading without restrictions or
transaction costs) does not eliminate the adverse impact of such heterogeneity on costeffectiveness.
Third, relative to a mass-based system with the same assignments of benchmark
emissions-output ratios to covered facilities, the rate-based system leads to higher output and
emissions, all else equal. This reflects the implicit subsidy to output under a rate-based system.
The implicit subsidy implies inefficiently low output prices even when the stringency of the
benchmarks implies an optimal level of emissions reductions in the aggregate.

These findings suggest that the conversion of China’s system to a mass-based system would
yield significant gains in terms of efficiency and cost-effectiveness. We indicate that these gains
could be realized while addressing concerns about distributional equity.

Design Issues in China’s National Carbon Market

William A. Pizer
Duke University
Xiliang Zhang
Tsinghua University


China is poised to implement the world’s largest emission trading program to regulate carbon dioxide in 2017. Emerging details suggest a number of interesting design features. Most plant-level allowance allocations will be adjusted based on a specified benchmark emission rate and realized production. This essentially creates a multi-sector tradable performance standard, with implications for both the realized emission level and effects on product prices. Emissions from the power sector will be regulated at both the generation facility and among large electricity users. This follows experience with pilot programs but raises concerns about double counting the savings from electricity conservation. Provincial governments will have some ability to tighten national standards. This highlights both similarities and differences with the EU ETS, where member states have had some ability to determine their own allocations. These and other features contrast with much of the experience in the US and Europe. This makes the Chinese national carbon market both intriguing and challenging to those experienced with western emission trading programs. These features have a number of implications, raise new policy questions, and suggest topics for future research. This paper walks through the design of China’s new carbon market, contrasts it with more familiar program, and highlights possible implications as well as research questions raised by this design.

Institutions and CO2 Emissions Trading in China

Valerie Karplus
Massachusetts Institute of Technology


Maximilian Auffhammer
University of California-Berkeley
JEL Classifications
  • Q5 - Environmental Economics
  • Q4 - Energy