China's pilot emission trading systems and electricity markets (Hubei and Shenzhen) : influence of market structures and market regulations on the carbon market : case study report

This report analyses the influence of the design features of China’s pilot emissions trading systems (ETS) in the Province of Hubei and the Municipal City of Shenzhen and the development of the electricity markets on the quality of the carbon price signal. Based on publicly available data and expert interviews, we derive four main findings on the impact of carbon market design and the electricity market structure on the quality of the allowances price. First, the pilot ETS in Hubei and Shenzhen have adopted very different design features due to the specific local circumstances and both pilot programs are designed to strike a balance between emissions reduction and economic development. Second, despite the overall completeness of the design features, the pilot ETS in Hubei and Shenzhen and the allowance prices are affected by the lack of clarity and enforcement of certain rules, as well as limited support from the central government. Third, due to strong government regulation of China’s electricity sector, including the electricity markets in Hubei and Shenzhen, carbon pricing has played a very limited role in driving low carbon investments. Finally, the electricity sector reform since 2015 has led to the adoption of some ambitious plans to deregulate electricity pricing for certain end-users and establish a more market-oriented electricity trading market, which will create a level-playing field for carbon pricing. However, there are signs that the reform process has been guided by the political agenda to reduce electricity prices in the short term and thus the effectiveness of China’s ETS in internalizing the carbon cost in the future will depend on the political acceptability of electricity price increases resulting from the strong carbon price signal. This case study is part of the project “Influence of market structures and market regulation on the carbon market” that aims to investigate the interdependencies between carbon and energy markets in Europe, California, China, South Korea, and Mexico.