Crossing the River by Feeling the Stones: The Case of Carbon Trading in China

Putting a price on carbon is considered a crucial step for China's endeavor of harnessing the market forces to reduce its energy consumption and carbon emissions. Indeed, aligned with China's grand experiment with low-carbon provinces and low-carbon cities in six provinces and thirty-six cities, the Chinese central government has approved the seven pilot carbon trading schemes. These pilot trading schemes have features in common, but vary considerably in their approach to issues such as the coverage of sectors, allocation of allowances, price uncertainty and market stabilization, potential market power of dominated players, use of offsets, and enforcement and compliance. This article explains why China turns to market forces and opts for emissions trading, rather than carbon or environmental taxes at least initially, discusses the five pilot trading schemes that have to comply with their emissions obligations by June 2014, and examines a wide range of design, implementation, enforcement and compliance issues related to China's carbon trading pilots and their first-year performance. The article ends with drawing some lessons learned and discussing the options to evolve regional pilot carbon trading schemes into a nationwide carbon trading scheme.