Carbon Price Pass-Through in the Chinese Emissions Trading Scheme: Lessons from Korea and the European Union

Abstract

On July 16, 2021, the Chinese Emissions Trading Scheme (ETS) opened trading. Covering more than 4 billion tons of carbon dioxide, the ETS accounts for 40% of China’s national carbon emissions and is the largest carbon market in the world by volume. However, as it stands, the cost of carbon is not being reflected in electricity prices for consumers due to government regulation of the Chinese power market. This study examines the relationship between the Chinese ETS design and power market design to make a recommendation to facilitate the pass-through of carbon costs to consumers. Specifically, the study confronts the feasibility of two potential reform pathways for price pass-through, (1) power market deregulation, and (2) evolution in design of the Chinese emissions trading scheme. Comparative case study analysis of price-signaling methods in the Republic of Korea and the European Union informs the ultimate recommendation. The findings indicate that Chinese ETS design should optimize long-term coordination and mutual efficiency between the Chinese ETS and power market by implementing the regulation of indirect emissions with an upstream coefficient in the short-term to respond to the long-term gradual deregulation of the Chinese power market.