IEA: China's Emissions Trading Scheme: Designing efficient allowance allocation - June 2020 - eng (pdf)

In 2017, the People’s Republic of China (hereafter, “China”) decided to implement a national emissions trading scheme (ETS) to limit and reduce CO2 emissions in a cost-effective manner. Set to start in 2020, the ETS will initially cover coal- and gas-fired power plants. It will allocate allowances (also known as permits), based on the plant’s generation output, with a different benchmark for each fuel and technology. China’s ETS, set to expand to seven other sectors, will be the world’s largest by far, covering one-seventh of global CO2 emissions from fossil-fuel combustion.

The initial years of operation will be crucial to test the ETS’s design and establish trust. Given the dominance of coal power in China’s power sector and in its overall CO2 emissions, how the country’s fleet of coal-fired power plants is managed will be essential for China to meet its climate goals and other sustainable energy goals.

The effect of the ETS on the operation of coal-fired power is worth examining because the ETS will co-exist with a suite of other policies, such as energy conservation standards, air pollution standards, power market reform and capacity retirement plans.

This report weighs the implications of proposed benchmark options under the ETS for China’s coal-fired power sector. It assesses how different options will affect allowance allocation to different types of plants, and considers the key elements that will determine whether generation units experience a deficit or a surplus of allowances. The report also looks at how these impacts will be distributed across provinces and companies. The report suggests how the ETS design could evolve to play a more central role in driving China’s energy transition.