China’s Pilot Emissions Trading Systems and Electricity Markets (Hubei and Shenzhen)

Emissions trading systems have proven an effective tool for reducing emissions from the electricity sector. However, their impact depends on carbon market design, electricity market regulations, the structure of the electricity sector and additional policies. This report analyses the interaction of carbon and electricity markets in two pilot systems in China: Hubei and Shenzhen. The two pilot systems have adopted different design provisions that reflect local economic circumstances. As a result of market uncertainty and strong government regulation of the electricity sector, the carbon price has played a very limited role in driving low carbon investment in both systems. The gradual introduction of electricity market reforms announced in 2015 are likely to support the effectiveness of the ETS. This will, however, depend on the political acceptability of electricity price increases which so far has been a limiting factor. 

This case study is part of the project “Influence of market structures and market regulation on the carbon market” that aims to identify the impact of market structures and regulations on carbon markets and to investigate the interdependencies between carbon and energy markets in Europe, California, China, South Korea, and Mexico.