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Project Details
Funding Scheme : General Research Fund
Project Number : 14634116
Project Title(English) : Greenhouse Gas Emissions Trading in China: Insights from the EU’s Experience 
Project Title(Chinese) : 中国的温室气体排放交易:从欧盟的经验中获取启发 
Principal Investigator(English) : Prof Boute, Anatole 
Principal Investigator(Chinese) : n/a 
Department : Faculty of Law
Institution : The Chinese University of Hong Kong
E-mail Address : anatole.boute@cuhk.edu.hk 
Tel : 3943 1927 
Co - Investigator(s) :
Prof Li, Zhiping
Prof Lin, Jolene
Mr Navraj, Ghaleigh
Dr Sanja, Bogojevic
Prof Xu, Yan
Panel : Humanities, Social Sciences
Subject Area : Social and Behavioural Sciences
Exercise Year : 2016 / 17
Fund Approved : 427,992
Project Status : Completed
Completion Date : 31-12-2018
Project Objectives :
Determine how the regulation of energy markets in China interacts with the market-based rationale underlying Emissions Trading
Propose specific adjustments to the regulation of ETS in China that fit with the regulated nature of energy markets and contribute to stimulate low-carbon energy investments
Propose specific stabilization mechanisms to ensure stable and predictable carbon signals in the context of rapid but uncertain economic growth in China
Publish article on “Emissions Trading in China: The Challenge of Energy Market Regulation” 
Publish article on “Price Stability under the Chinese Emissions Trading System: Lessons from the EU Market Stability Reserve”
Organize two workshops on the regulation of ETS in China and the EU
Abstract as per original application
(English/Chinese):
Aim: To formulate proposals on the regulatory adjustments necessary for Emissions Trading to be operated successfully in China. Project Background: In 2013 China established seven pilot Emissions Trading Schemes (ETS), with the goal of a national scheme in 2017 to reduce its carbon emissions. In developing its national scheme, China has been inspired by the world’s largest greenhouse gas (GHG) ETS – the European Union ETS. ETS is a market-based “cap and trade” approach to GHG emission reductions: the total amount of authorized emissions of industrial installations are capped and reduced over time, and installations can meet their carbon obligations by trading allowances. In theory, ETSs reduce emissions in a more cost-effective way than “command and control” measures. However, in practice, ETS has yet to demonstrate its effectiveness in stimulating low-carbon investments. Ten-years of emissions trading in the EU have highlighted investors’ reluctance to invest in low-carbon energy solely based on carbon prices – considered too low, volatile and unpredictable. The EU is currently engaged in a structural reform of its ETS to address these concerns. Despite the widespread perception that the EU ETS has failed, China is emulating this scheme. Project Description: This project will reflect critically on the “legal transplant” of the EU ETS “model” to China. Answering this question is essential for evaluating the potential effectiveness of China’s climate policy – particularly the success of its ETS in generating low-carbon investments. Two theoretical strands underpin this project. First, building on the “lesson-drawing” literature, it assesses the lessons to be learnt from the European experience. Second, building on the “legal transplant” literature, it examines whether the EU market-based ETS “model” can successfully be introduced into China, where energy and environmental regulation is still characterized by “command and control”, despite repeated announcements of market reforms. Significance of Project: As the largest single GHG emitter, it is critical to global climate policy that China adopts measures that are effective in reducing emissions. Market-based schemes have great theoretical potential to be both effective and economically efficient, but have disappointed in practice. This project will make recommendations that could enable China to realize the full potential of ETS, and thus contribute to global climate mitigation efforts. This analysis will be of relevance to Hong Kong taking into account opportunities for Hong Kong in the field of carbon finance, and the possible introduction of ETS in Hong Kong itself.
目标:对如何在中国成功得运行碳排放市场交易体系所需要做出的控规调整提出建议 项目背景:中国于2013年启动了七个碳排放交易试点,以期于2017年建立一个全国性的交易体系从而减少二氧化碳的排放量。欧盟碳排放交易体系是世界上规模最大的碳排放交易市场,对中国建立其自己的交易体系影响颇深。碳排放交易体系采用以市场为基准的“总量管制和交易”规则以达到对温室气体排放量的削减:对于工业生产设备的碳排放数量总额加以限制并逐步削减,在该机制下的工业生产部门可以通过对污染物排放许可配额的交易来完成各自的减排任务。理论上来说,碳排放市场交易体系相比“命令和控制”的方法在减排方面具有更高的成本效率。但是,从实践上来说,碳排放市场体系能否有效促进低碳投资仍然不得而知。从欧盟为期十年的碳排放交易经验中来看,由于碳价格的过低,不稳定和难以预估,投资者往往都不愿意对低碳能源进行投资。欧盟正在对碳排放交易体系进行结构性的改革,以期解决这些问题。尽管欧盟的碳排放交易体系的在很多人的眼中是失败的例子,中国仍然在对其进行模范。 项目介绍:该项目将对欧盟碳排放交易模式在中国的法律移植进行批判性的分析。解答该问题对于中国气候政策有效性的评估至关重要,尤其是如何在中国的碳排放交易体系成功开展低碳投资。对此有两种观点值得探究:第一,以一些“经验学习”的文献为基础,考察如何从欧洲实践当中学到经验。第二,从“法律移植”的文献中探究欧盟以市场为基础的碳排放交易体系能否为中国成功借鉴。尽管中国已经反复强调要对市场进行改革,但是目前其在能源和环境领域的管理仍然带有“命令和控制”的特色。 项目意义:作为世界上温室气体排放总量最高的国家,中国能否实施有效的减排措施对于全球气候政策都有至关重要的影响。以市场为基础的交易体系从理论上来说可以很大得发挥作用又兼具经济效率,但在实际应用中却往往不尽如人意。该项目将对如何确保中国在碳排放市场交易体系中发挥所有的潜能提出意见,从而对减缓全球气候变化做出贡献。本文就香港在碳融资领域中如何抓住机遇以及有可能引进的碳排放交易体系也会给出相关讨论。
Realisation of objectives: All objectives of the project have been achieved and, in many ways, overachieved. The interaction between ETS and electricity regulation in China and price stabilisation mechanisms in the Chinese ETS have been studied in detail. The findings of our research have been published in world-leading and high-impact environmental law and climate policy journals (including two papers in Climate Policy - Impact Factor 4.797 - and one paper in the Journal of Environmental Law). We have organised two international conferences that covered the topics of ETS-electricity interaction and price stabilization, and have presented our research at international conferences organised by leading institutions. These events enabled us to have impact by sharing our research with policy-makers in China and the region. 1. The project participants have developed a sophisticated analysis of the interactions of ETS and energy market regulation in China. The main conclusion is that the importance of traditional energy regulation does not mean that the ETS will not contribute to the decarbonisation of China’s energy supply, but the role of the ETS will be different from that in liberalised energy markets (e.g., the EU) where the market is supposed to be the main driver of emission reductions. In China, the role of the ETS will be limited to helping achieve the energy investment targets set under the government’s central planning policy. The analysis was published in a leading law journal - the Journal of Environmental Law (Oxford University Press) - and has already been cited in different academic publications and in reports by international organisations, such as the International Carbon Action Partnership. 2. The project participants proposed specific adjustments to the regulation of ETS in China, to address the constraints of energy market regulation.At the retail level, covering indirect emissions or imposing an additional charge that reflects the allowance price (for large consumers) under the ETS represents a design option that can allow an ETS to pass through the cost of carbon to end-consumers, despite retail price regulation. At the production level, competitive wholesale electricity markets ensure the allowance price is reflected in dispatch decisions, incentivizing investments in low-carbon technologies and closing high-carbon generators. Alternatives to the coordination and incentive role that markets play in delivering low-carbon electricity are limited and inevitably incur efficiency losses. Where an ETS is introduced within the context of a regulated wholesale electricity market, design options that look to ensure the carbon price signal reaches generation as well as consumption decisions are important. In particular, tariff authorities have a crucial role to play in determining the extent to which power producers can recover the cost of carbon through regulated wholesale prices. Tariff authorities will also play a key role in incentivizing low-carbon investments. With the cost-plus method, at least some of the additional cost of purchasing allowances must be kept out of the tariff basis to ensure electricity producers also have an incentive to reduce the carbon intensity of the electricity they supply. With the rate-of-return method, tariff regulators can incentivize power producers to prioritize low-carbon alternatives by including the capital invested in clean projects in the regulated tariff base of utilities. In contrast to the volatility of liberalized electricity markets, regulated price guarantees may provide significant stability to investors, and thereby provide a stable framework for low-carbon investments. Where electricity production is regulated, administrative dispatch could prioritize low-carbon parameters and thus deliver an analogous effect on dispatch that an ETS is designed to deliver. 3. The project participants analysed the stabilisation of carbon prices in China and critically reflected on these mechanisms, based on a comparative analysis with the EU ETS and with the Chinese pilot ETSs. This study has shown that China’s pilot ETSs have incorporated the price stabilization mechanisms examined in the environmental economics and financial market literature. The adoption of these mechanisms reflects the concern of local governments over the impact that exogenous economic developments may have on the carbon price trend and daily price volatility in China. China’s experience can serve as a reference for others in designing ETSs, as concerns about excessive price fluctuation increase together with growing economic uncertainty. Varying market performances help demonstrate the effectiveness of the different price stabilization mechanisms in stabilizing the intrinsic price trend and limiting daily price volatility. The price ceiling–floor and cap-update mechanisms have the most significant effects on intrinsic price trends, as ETS pilots that have properly designed these mechanisms show better performance. Trading risk management measures limit daily volatilities, but with little influence on price trends. Our research contributes to the understanding of the importance of regulatory intervention to manage carbon price instability and volatility. However, we remain cautious about the desirability of regulatory intervention with regard to ETS. Mechanisms that enhance supply flexibility can undermine investors’ expectations and, in some cases, jeopardize the environmental integrity of an ETS. As illustrated by the Chinese experience, without pre-determined rules or trigger conditions, policymakers can interfere with the market at their own discretion. To avoid excessive government intervention, the regulatory design of price stabilization mechanisms must integrate a sufficient degree of transparency and predictability. 4. The PI published two papers on the subject of ETS and energy market regulation in China in two world leading journals: First, “The Role of the Market and Traditional Regulation in Decarbonising China’s Energy Supply” (2018) 30(2) Journal of Environmental Law 261–284 [impact factor: 1.487] Second: "Emissions Trading in Regulated Power Markets" (2019) Climate Policy [impact factor: 4.797] https://www.tandfonline.com/doi/full/10.1080/14693062.2019.1682491 5. The PI published two papers on the subject of price stabilisation in the Chinese ETS in world leading journals. First: “Fixing the Emissions Trading Scheme: Carbon Price Stability in the EU and China” (2019) 26 European Law Journal 333-347 [impact factor: 1.81] Second: "Price Stabilization in China's Pilot Emissions Trading Schemes" (2019) Climate Policy [impact factor: 4.797], https://www.tandfonline.com/doi/full/10.1080/14693062.2019.1680338 6. Two workshops were organised on ETS in China and the EU. The first at CUHK Law, in cooperation with the Konrad Adenauer Foundation, https://www.law.cuhk.edu.hk/en/event-recap/20171117.php, the second in Bangkok, in cooperation with the International Carbon Action Partnership, the Konrad Adenauer Foundation and Chulalongkorn university, https://www.kas.de/web/recap/veranstaltungen/detail/-/content/carbon-markets-and-the-electricity-sector-issues-opportunities-and-priorities-for-east-asia
Summary of objectives addressed:
Objectives Addressed Percentage achieved
1.Determine how the regulation of energy markets in China interacts with the market-based rationale underlying Emissions Trading Yes100%
2.Propose specific adjustments to the regulation of ETS in China that fit with the regulated nature of energy markets and contribute to stimulate low-carbon energy investments Yes100%
3.Propose specific stabilization mechanisms to ensure stable and predictable carbon signals in the context of rapid but uncertain economic growth in China Yes100%
4.Publish article on “Emissions Trading in China: The Challenge of Energy Market Regulation”  Yes100%
5.Publish article on “Price Stability under the Chinese Emissions Trading System: Lessons from the EU Market Stability Reserve” Yes100%
6.Organize two workshops on the regulation of ETS in China and the EU Yes100%
N/A
Research Outcome
Major findings and research outcome: The introduction of an ETS to decarbonise the Chinese economy faces challenges relating to the tradition of heavy regulation that characterises the functioning of the most carbon-intensive sector – coal-fired electricity production. However, the importance of traditional regulation does not mean that the ETS will not contribute to the decarbonisation of China’s energy supply, but the role of the ETS will be different from that in liberalised energy markets (e.g., the EU) where the market is supposed to be the main driver of emission reductions. In China, the role of the ETS will be limited to helping achieve the energy investment targets set under the government’s central planning policy. Following the experience of high price instability and unpredictability in the European ETS, the management of carbon prices is a key concern for Chinese authorities. The objective is to avoid excessive price volatility in daily trading and stabilize the intrinsic price trend. Building on environmental economics and financial market theories, we reviewed the design of carbon price stabilization mechanisms in China’s seven pilot ETSs and assessed their performance. The pilot ETSs have incorporated most price stabilization mechanisms recommended in the literature, including price ceiling–floor, intensity-based allocation, ex-post adjustment of allowances, intertemporal flexibility, and daily trading risk management. By examining this wide range of mechanisms, our analysis helped understand the different design options available to stabilize carbon prices. Furthermore, by decomposing carbon price data in the different pilot ETSs, our analysis helped evaluate the effectiveness of these mechanisms. Price limits (ceiling–floor) and intertemporal flexibility (update of ETS cap) are the most effective mechanisms for stabilizing the intrinsic price trend. Daily trading risk management mechanisms help control price volatility but have little impact on the intrinsic price trend. However, we are cautious about the desirability of regulatory intervention for influencing carbon market prices. Depending on the institutional context and their design, price stabilization mechanisms can cause regulatory uncertainty.
Potential for further development of the research
and the proposed course of action:
To the extent that final end customers are shielded from the allowance (ETS) price through retail electricity price regulation, abatement opportunities in the residential sector will be lost. It is then an empirical question as to how much mitigation potential will be foregone that must be considered against the policy goals of retail price regulation. This is an area where further empirical investigation could be beneficial. With auctioning, pass-through will almost entirely depend on the regulatory decisions of the tariff authorities. With free allocation of allowances, covering indirect emissions or imposing an additional charge that reflects the allowance price (for large consumers) under the ETS represents a design option that can allow an ETS to pass through the cost of carbon to end-consumers, despite retail price regulation. Coverage of indirect emissions has been adopted under the Chinese pilots where electricity prices are subject to various forms of government control. That said there has been little assessment of this design option in terms of its effectiveness in circumnavigating electricity regulation. This is an area that demands attention.
Layman's Summary of
Completion Report:
Emissions Trading Schemes (ETS) are an increasingly common approach to addressing climate change. However, the use of ETS to decarbonise the Chinese economy faces challenges relating to the heavy regulation that characterises the Chinese electricity industry. We argued that, although economic agents are constrained in how they can respond to an ETS through various forms of electricity market regulation, the ETS can be adjusted to the electricity market reality. On this basis, we proposed regulatory alternatives to address the efficiency losses that may emerge from specific forms of power sector regulation. One of the main risks for investors in environmental markets is the high volatility of market prices, combined with the risk of government intervention in the market. We examined the stabilisation of carbon prices in the Chinese ETS and concluded that regulatory adjustments are necessary to address the risk of price instability in China, but more stringent government control over the market exacerbates the threat that price control measures represent to the integrity of the ETS.
Research Output
Peer-reviewed journal publication(s)
arising directly from this research project :
(* denotes the corresponding author)
Year of
Publication
Author(s) Title and Journal/Book Accessible from Institution Repository
2018 Anatole Boute* and Hao Zhang  “The Role of the Market and Traditional Regulation to Decarbonise China’s Energy Supply” , Journal of Environmental Law, Volume 30, 1-24  No 
2017 Hao Zhang* and Ping Xu  "Designing Regulation for China’s Emission-Trading Pilot Programs Through Trial and Error: An Effective Approach?", Climate Law  No 
2019 Anatole Boute* and Hao Zhang  "Fixing the emissions trading scheme: Carbon price stability in the EU and China", European Law Journal, 25:333–347, ttps://doi.org/10.1111/eulj.12307  Yes 
2019 William Acworth*, Mariza Montes de Oca, Anatole Boute, Carlotta Piantieri &Felix Christian Matthes  "Emissions trading in regulated electricity markets", Climate Policy, 2019, https://doi.org/10.1080/14693062.2019.1682491  Yes 
2019 Banban Wang, Anatole Boute & Xiujie Tan*  "Price stabilization mechanisms in China’s pilot emissions trading schemes: design and performance", Climate Policy, 2019, https://doi.org/10.1080/14693062.2019.1680338  Yes 
2019 Hao Zhang  "The Carbon Externality of Investments Financed by China’s Development Banks: The Case of Energy Investments in Central Asia", Journal of World Investment and Trade, 2019, 20, 335–354, DOI: https://doi.org/10.1163/22119000-12340134  Yes 
Recognized international conference(s)
in which paper(s) related to this research
project was/were delivered :
Month/Year/City Title Conference Name
Oxford “Carbon Price Stabilization in the Chinese and EU ETS” (conference expenses were not supported by other similar/related projects; RGC funding of presented research was acknowledged during presentation)  9th Annual Meeting of the Society for Environmental Law & Economics, University of Oxford, Oxford, UK, 26-27 May 2017 
Hong Kong “The Role of the Market and Traditional Regulation for the Decarbonization of the Chinese Power Sector"(conference expenses were not supported by other similar/related projects; RGC funding of presented research was acknowledged during presentation)  Investment Perspective to Carbon Trading, The Chinese University of Hong Kong, Hong Kong SAR, 17 November 2017 
Bangkok Adjusting the ETS to “companion policies”: the role of carbon price stabilization  Carbon Markets and the Electricity Sector: Issues, Opportunities, and Priorities for East Asia 
Chicago Fixing the Emissions Trading Scheme: Carbon Price Stability in the EU and China  The Tenth Annual Meeting of the Society for Environmental Law and Economics 
Other impact
(e.g. award of patents or prizes,
collaboration with other research institutions,
technology transfer, etc.):

  SCREEN ID: SCRRM00542