China’s New National Carbon Market

On December 19, 2017, China announced the official start of its national emissions trading system (ETS) construction program. When fully implemented, this program will more than double the volume of worldwide carbon dioxide emissions covered by either a tax or tradable permit policy. Carbon pricing, through either policy, transparently equalizes the economic incentive to reduce emissions across firms and is synonymous with conditions for least-cost regulation. The scale of environmental and economic consequences for China and the world make this an important program to understand and inform. Yet the context and program design differ from those of emissions trading programs in the United States and Europe. In particular, the design of the program follows a tradable performance standard. Design choices matter. This article in the journal AEA Papers and Proceedings reviews the policy context and initial program design of China’s new national emissions trading system. It highlights important concerns, discusses possible modifications, and suggests topics for further research. The article reflects some of the findings in the working paper “China’s New National Carbon Market,” published by the Nicholas Institute for Environmental Policy Solutions.