The Role of the Market and Traditional Regulation in Decarbonising China’s Energy Supply

Abstract

The introduction of an Emissions Trading Scheme (ETS) to decarbonise the Chinese economy faces challenges relating to the tradition of heavy regulation that characterises the functioning of the largest carbon-emitting sector – coal-fired electricity production. This article examines what scope there is for the market to drive the decarbonisation of China’s electricity supply, when hitherto most emission reductions have been achieved through traditional regulation (eg., emissions performance standards and the forced closure of inefficient installations). 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 (eg, the European Union) 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.