The launch of China’s national carbon market has doubled the emissions covered by global carbon pricing mechanisms, making it the world’s largest carbon market. It is expected to be a crucial tool for China in achieving its climate goals of peaking CO2 emissions by 2030 and reaching carbon neutrality by 2060.
A research team composed of members from Tsinghua University and Carnegie Mellon University, recently published a review article in the journal Energy and Climate Management, outlining the development background and process of China’s national carbon market, introducing the policy design principles and prominent features, and summarizing the significant progress and challenges faced by the current national carbon market in China. This research helps to promote transparency and knowledge sharing among carbon pricing researchers and scholars in the field of climate policy.
“China’s national carbon market integrates economic theory with international experience in its design, and more importantly, it fully considers China’s situation,” said Xiliang Zhang, the corresponding author of the paper and director of the Institute of Energy, Environment, and Economy at Tsinghua University. “This is particularly reflected in its rate-based design instead of a mass-based system, which is essentially a multi-sector tradable performance standard.”
This paper systematically reviews the evolution of China’s policies in the field of carbon dioxide emissions reduction and the development of the carbon market in the past two decades. Since the energy conservation law of the people’s Republic of China in 1997 and the renewable energy law of the People’s Republic of China in 2005 established the legal framework, China has effectively promoted the improvement of energy efficiency through a series of institutional arrangements (such as incorporating energy conservation and emissions reduction targets into the local government performance evaluations), and actively participated in the practice of the clean development mechanism, accumulating valuable experience for the construction of the domestic carbon market. Since 2011, China has launched carbon emissions trading pilots in seven provinces and cities, including Beijing, Tianjin, Shanghai, Chongqing, Shenzhen, Hubei, and Guangdong, and explored the operation mode of carbon market in line with China’s national conditions through regional practice. The official launch of the national carbon market marks the transformation of China’s climate policy tools from relying mainly on administrative measures and financial subsidies to market-based mechanisms.
After years of institutional construction, China’s national carbon market started trading on July 16, 2021. “The release of Interim Regulation by China’s top administrative body marks the first administrative regulation aimed at strengthening the governance of China’s carbon market, providing a critical legal framework,” said Xiliang Zhang.
The article details the main policy designs of China’s national carbon market, primarily covering sectoral coverage, cap setting, allowance allocation, and the MRV system. It also systematically summarizes the progress and the inadequacies. “Although achieving significant milestones in its initial stage, China’s national ETS faces several challenges — lack of an official phased development roadmap and effective market stability measures, moderate market activity, unclear coordination with other energy and climate policies, and the role of local government needs to be further leveraged,” Xiliang Zhang mentioned.
The research team hopes this paper will offer valuable insights for researchers and policymakers worldwide on carbon pricing. Xiliang Zhang stated, “It is vital to construct China’s carbon market in phases that align with its climate goals and socio-economic development needs, gradually establishing an effective, active, and influential carbon market.”
