Building the Chinese Carbon Market and Its Regional Connections
ABOUT THE PROJECT
The Asia Society Policy Institute’s project ‘Building the Chinese Carbon Market and Its Regional Connections’ seeks to contribute to China’s national ETS policy construction in order to benefit China’s environmental trajectory and enhance the regional and global fight against climate change through carbon market maturation and cooperation in Asia. ASPI aims to realize these goals through three interrelated approaches: contributing to resolving design challenges of China’s national ETS; building regional and international connections; and supporting its prioritization and implementation.
AREAS OF WORK
ETS Policymaking Processes
Investigate the detailed development work, decision-making and designs of ETS.
ETS policymaking processes include but are not limited to gaining high-level political support, facilitating effective and informed decision-making on ETS design, gaining necessary levels of buy-in from affected industries and support from other government departments, and determining the optimal role of ETSs in the policy mix. Related to these processes is capacity building of policymakers, competent authorities, 3rd party verifiers and covered entities.
Coverage and Cap Setting
Support the development of practical cap setting policies that reflect the contribution expected to national GHG mitigation targets of the covered sectors and their technical mitigation potential and costs.
Decisions surrounding coverage and cap-setting are fundamental for ETS design, determining its environmental and economic impacts. Myriad approaches are pursued throughout Asia and internationally. Key considerations include deciding what sectors and entities to cover, how to implement an absolute cap, deciding the level and trajectory of the cap, how to align the cap with Nationally Determined Contributions and net-zero GHG emission targets, as well as other detailed cap-setting issues.
Identify solutions for an effective ETS allocation policy.
A key concern for governments and industry in implementation of emissions trading systems is how to protect industry’s global competitiveness and prevent “carbon leakage”, that is, the transfer of production to world regions with less ambitious climate policies that would lead to an increase in total emissions. To address this concern, ETS allowances are typically allocated for free to GHG-intensive or trade-intensive industries at risk of carbon leakage using emissions intensity benchmarks. At the same time, it is recognized that auctioning of allowances should be introduced where possible, to more completely adopt the polluter pays principle and strengthen the carbon price signal to drive low carbon action. An emerging tool to consider for carbon leakage prevention is a carbon border adjustment mechanism as proposed by the EU, which would gradually phase-out free allocation and replace this with auctioning. Determining an effective mix and design of allocation approaches, and their trajectory across phases, is therefore a challenging and critical aspect of developing an effective ETS.