Going to the Source: Using an Upstream Point of Regulation for Energy in a National Chinese Emissions Trading System

There are many choices within the design of an emissions trading system. In this paper we focus on one specific aspect – the point of regulation for the energy sector. This choice affects transaction costs; comprehensiveness, and hence the amount of emissions covered and the extent to which the potential cost-effectiveness gains are realised; and credibility of the system. We discuss how an “upstream” energy sector emissions trading system works and present arguments for going upstream (in particular, simplicity of administration) while also discussing arguments for other points of regulation in light of the Chinese circumstances. We present experiences with the New Zealand system, the only system that is entirely upstream for energy, showing ways to address issues that may arise with an upstream system. Ultimately the success of emissions trading depends on markets that operate in a relatively free and competitive way. Simply copying others’ systems to the context of a largely controlled economy such as the Chinese one is likely to be ineffective; each system must be uniquely tailored to local circumstances, possibly in China more than ever before.