China’s national emissions trading system: implications for carbon markets and trade

China’s introduction of a national ETS, scheduled for 2017, is an important development in the expanding carbon market landscape. As countries move towards implementation of the recently-adopted Paris Agreement, this sends a powerful signal about China’s mitigation commitment and support for carbon markets. As the largest emitter of greenhouse gases and a key player in world trade, China’s move to a nation-wide ETS can have significant implications for the future of carbon markets around the world. This paper explores the implications of a national ETS in China for carbon market developments globally and the potential formation of “carbon market clubs”. It examines how the presence of a Chinese ETS may affect competitiveness and carbon leakage concerns in other countries, and, related to that, the further uptake and ambition of carbon markets. The paper also discusses the design of China’s national ETS. It identifies key challenges the scheme may encounter and makes recommendations for designing and running an effective ETS that may be linked with other schemes in the future. The author further explores the potential for plurilateral carbon market clubs, both with and without China’s participation.