The evolution of China's emission trading mechanisms: From international offset market to domestic Emission Trading Scheme

With the decline of the international market under the Clean Development Mechanism, China is establishing a national Emission Trading Scheme by setting up emission cap and trade rules for high emission industries in seven pilot areas. The shift from the international to domestic market and from an offset program to a true cap and trade mechanism requires several significant changes. This paper reviews the development and evolution of China's carbon trading market policy instruments. We find that there are substantial changes in both structure and policy. First, Emission Trading Scheme is a broad cap-and-trade mechanism with many new stakeholders added to those already involved in China's Clean Development Mechanism. Second, the administrative structure is decentralized compared to that of the Clean Development Mechanism. Third, while the Emission Trading Scheme is best thought of as a new policy, China's experience with the Clean Development Mechanism influences that policy. A large number of Clean Development Mechanism projects are being converted into offsets for the national Emission Trading Scheme market, and many institutional stakeholders that emerged during the Clean Development Mechanism are now involved in the Emission Trading Scheme. The combination of new policies and stakeholders, a decentralization of structure and the conversion of Clean Development Mechanism projects raise questions regarding the integrity of the cap and the enforcement of compliance as the Emission Trading Scheme is expanded into a nationwide system.