China’s National Carbon Market: Paradox and Potential

Overview

China announced it would launch a national carbon market in 2017, yet this policy is taking years to come into effect. What will it take for a carbon market to work in command-and-control China? This policy brief explores an understudied challenge—emissions accounting—and identifies potential opportunities that have arisen in the first phase of China’s national carbon market.

Main Findings

In early designs, China’s carbon market was going to cover 14 sectors, but successive planning documents from 2016 to today have shrunk the number to eight, then three, and now one: the electric power sector. The electric power sector poses a major challenge for the design and efficacy of the carbon market policy due to the highly regulated nature of China’s power markets. 

The main challenges to accurate emissions accounting, even in just one sector, are overcoming a history of discrepancy in national-level versus provincial-level reporting, a lack of standardization across diverse companies and provinces with different levels of economic development, and the need for a legal foundation to support verification efforts.

There is strong potential for capacity builders to help local governments and regulated industries effectively participate in China’s carbon market, including national government actors, consultancies, and international organizations. 

In order for China to scale up a national carbon market to meet its original scope and emissions reduction goals, three things have to occur: emissions accounting must be standardized, capacity building organizations must engage with reporting entities so that emissions data is transparent and accurate, and policymakers must confront the issue of market structure in China’s electric power sector, with the long-term goal of reforming and degregulating the sector.