Yan Qin, Alistair Ritchie and Yi Chen
October 2022
16 p.
Benchmarks, Power sector


China’s national emissions trading system (ETS) is intended to serve as the primary tool in assisting China to meet its “dual carbon” target of CO2 peaking before 2030 and carbon neutrality by 2060. In its first phase, it covers the power sector and approximately 40 percent of China’s national emissions. However, some critical challenges need to be overcome before the ETS can fulfil its emissions reduction potential in the power sector by driving the switch away from coal, toward renewables and low-carbon fuels, through the carbon price. This issue paper examines these challenges in relation to both the ETS itself and its interactions with the power market and proposes a policy pathway to address these challenges and unlock their potential to drive significant and cost-effective CO2 emissions reductions in the power sector and raise large amounts of revenue to fund the transition to carbon neutrality across the expanding ETS sectors.

Key requirements for the power market include speeding up the introduction and expansion of spot power market pilots leading to the establishment of spot markets nationwide by 2030, incorporating ETS carbon costs in the medium- and long-term market tariff and removing limits on cost fluctuations,
and establishing cross-provincial regional markets that account for carbon costs and can be connected to form the national market.

For the ETS, key reforms include harmonizing the power sector benchmarks (BMs) into one coal BM and then one combined BM for coal and gas; ensuring BM levels are in line with power sector and national emissions targets, the pathway to carbon neutrality, and best practice in the sector; introducing auctioning for the power sector at an initial low level but increasing to full auctioning over a defined time period; establishing an auction revenue fund to finance investments for clean energy and carbon neutrality transition; introducing an absolute ETS cap in line with national emissions targets and the
required burden for ETS sectors to contribute to achieving those targets; and introducing compliance obligations for gas power plants.

Finally, an essential element to implement and coordinate these reforms, which span the responsibilities of different ministries, will be interministerial cooperation, supported by relevant technical working group and overseen at a high level with strong political will, involving the Ministry of Ecology and Environment (MEE), the National Development and Reform Commission (NDRC), the National Energy Administration (NEA), and the Ministry of Industry and Information Technology (MIIT).

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