In its 12th Five-Year Plan, China indicates its intent to rely on emissions trading to curt its greenhouse gas emissions. Co-authored by the IEA and China’s Energy Research Institute, this paper discusses how China could use an emissions trading system (ETS) to control CO2 from its power generation sector, the single largest emitter of the country’s energy-related emissions. The paper presents the contextual elements of China’s power generation (trends, regulations and challenges); a primer on emissions trading in electricity; how a price on CO2 emissions could affect electricity in the near term, and illustrates the implications for generation cost and prices. It then identifies the key parameters of an ETS fit for implementation in China’s electricity sector, and concludes on the interplay of the ETS and electricity regulation in China.
Emissions trading will only be viable in China’s electricity if its helps to solve some of the sector’s existing challenges – inefficiency in overall generation, running deficits of coal generators, system reliability – while contributing to balanced economic development objectives. This paper indicates what the first steps should be to make emissions trading work for China’s power generation.