Which Sectors Should Be Included in the Ets in the Context of a Unified Carbon Market in China?

Abstract

It is crucial to determine an adequate sectoral coverage in the design of a Chinese emissions trading mechanism, as there is a huge diversity in regional economic development in China and an Emission Trading Scheme (ETS) would not initially be able to cover all sectors. This paper uses an inter-regional model to estimate the regional and sectoral abatement cost curves and simulate the operation of an emissions trading system where, like the European Union Emissions Trading Scheme (EU ETS), emissions are regulated at the point of emissions downstream where there is a large number of firms, rather than ‘upstream“. Then we build a Nash-Cournot model to analyse the influence of strategic partitioning of allowances based on the analysis of compliance cost in different sectoral coverage schemes in the unified carbon market. We take into account the allowance price, trading volumes, transaction cost, and regional differences in reduction potentials. We come to the following main conclusions: (a) the strategic partitioning of reduction requirements between trading and non-trading sectors has little impact on allowance prices and compliance cost. Despite this western regions in China are likely to receive more benefit than those in the east though the gains are limited; (b) when industrial sectors are successively included in the ETS, allowance prices range from 40–50 RMB/tonne. This approaches that in the ideal scenario in which all sectors are included; (c) the following sectors could be included in a reasonable sectoral coverage of a downstream ETS in China: mining, paper and printing, processing of petroleum, coking, processing of nuclear fuel, chemical products, metals and non-metal products, and production and supply of electric power and gas.