Legal Nature of The Emission Allowance in China's National Carbon Trading Scheme

Abstract

Emission trading scheme is a market-based approach used worldwide to reduce greenhouse gas emission and mitigate climate change. However, the legal nature of emission allowance in the ETS is controversial and differs across countries, which brings concerns to the operation of the market and the feasibility of cross-region trading. This issue has been raised in China since its national ETS is initiated in 2017. With few relevant research available, no consensus regarding the legal nature of emission allowance has been achieved in the scheme. In our study, we try to fill this research gap by examining laws and regulations of countries or regions with enforced ETS. Through literature review and case analysis, the study summarizes the practices regarding the legal nature of emission allowances in the ETS worldwide. We also provide potential options and the criteria for Chinese policymakers when deciding the legal nature of emission allowances for China’s ETS. The study finds that the legal nature of emission allowances in the ETS worldwide can mainly fall into four categories: Property Right, Limited Property Right, Compliance instrument and Depend-on-context. Different classifications of emission allowance have different key features. For example, emission allowance as a property right encourages market participation; emission allowance as a compliance instrument provides more regulatory flexibility; emission allowance as the limited property right balances regulatory flexibility and market participation and; emission allowance that depends on context brings flexibility as well as uncertainty. To decide the legal nature of emission allowance for the scheme, the policymaker should take several factors into consideration, including the emission reduction goals, the need for flexibility, the need for market participation, and the corresponding enforcement costs. Further steps to support the decision on legal nature would be researches on the features of emission allowances as different types of property rights, as well as the relevancy between legal nature and the efficiency of carbon trading markets based on empirical data.