• developing an ETS requires consideration of
three key questions: how many units to create, how to distribute them, and how to
govern their trade;
• the supply of emission units should reflect the
nature of the climate policy problem in the
longer term. This requires movement to caps
and targets that reflect the absolute global
emission reductions required;
• some auctioning is important for price formation early on, but movement to full auctioning may be gradual;
• allocating free permits may be necessary, but
costs can be reduced through benchmarking
and limiting allocations to cost pass-through
in constrained industries; this requires
addressing data constraints as a priority;
• the early learning phase of an ETS brings a
risk of price shocks, so that price controls
may be needed;
• broad coverage increases market efficiency
and stability, and should be sought as rapidly
as politically feasible;
• full banking is preferable to support investment from the outset, so long as caps do not
create hot air;
• designing an ETS that is robust to shocks is
essential for success. ETSs to date have suffered from fragility, with poor design interacting with cyclical, technological and/or
supply shocks to undermine their effectiveness; and
• investing in early data collection can help
improve policy outcomes and better ETS design.
Overall, China has an important opportunity
to learn from international experience and deliver
a robust carbon market. While the design of
China’s forthcoming ETS is largely finalised,
revisions are expected by 2020. Therefore the
next few years provide an important opportunity
to learn from the initial stage of China’s ETS and
determine which path, evolutionary or revolutionary, China should take in the next phase of its
ETS, drawing on the best practice of international experience to ensure a robust design and
taking into account the competing objectives and
shocks the ETS is likely to face.
8.2 Introduction
8.2.1 Policy Objectives, Market Failures
and Trade-Offs
Responding to climate change requires a transformation of energy systems. The world’s
fossil-fuel-dependent energy mix is not consistent with the Paris Agreement objective to limit
global temperature rise to well below 2°C above
pre-industrial levels. If this objective is to be
achieved, it means that all countries must take
action to ensure that their future energy needs are
provided by low-emission energy sources.
This transformation requires significant
investment in the development and deployment
of low-emission technologies and practices. The
energy sector is capital-intensive, relying heavily
on long-lived assets with high upfront costs.
Further, there are multiple technologies that can
deliver low-carbon energy. These include mature
technologies like nuclear and hydropower, and
rapidly developing technologies such as solar,
wind and battery storage. This means that policies seeking to drive an energy transformation
must both mobilise finance to fund investments
and provide a mechanism to choose between
competing technologies and providers.
The range of options for low-carbon energy
can come with widely varying costs. These costs
will be determined by a range of different factors,
including, for instance, the development of
technology, the geographic location of different
energy technologies, and network and learning
effects associated with the roll-out of these
technologies. This means that while there are
many different ways in which an energy transformation can be pursued, these options may
come with very different costs.
Achieving
climate
change
mitigation
cost-effectively frees resources for alternative
uses and enables society to pursue a broader
range of opportunities to increase well-being.
Climate change mitigation is only one of many
outcomes that society seeks to achieve; other
outcomes include greater material well-being,
higher rates of employment and an engaged and
content population. However, these outcomes all
have some degree of cost associated with them.
Special Report 4: China’s Energy System Revolution
521
three key questions: how many units to create, how to distribute them, and how to
govern their trade;
• the supply of emission units should reflect the
nature of the climate policy problem in the
longer term. This requires movement to caps
and targets that reflect the absolute global
emission reductions required;
• some auctioning is important for price formation early on, but movement to full auctioning may be gradual;
• allocating free permits may be necessary, but
costs can be reduced through benchmarking
and limiting allocations to cost pass-through
in constrained industries; this requires
addressing data constraints as a priority;
• the early learning phase of an ETS brings a
risk of price shocks, so that price controls
may be needed;
• broad coverage increases market efficiency
and stability, and should be sought as rapidly
as politically feasible;
• full banking is preferable to support investment from the outset, so long as caps do not
create hot air;
• designing an ETS that is robust to shocks is
essential for success. ETSs to date have suffered from fragility, with poor design interacting with cyclical, technological and/or
supply shocks to undermine their effectiveness; and
• investing in early data collection can help
improve policy outcomes and better ETS design.
Overall, China has an important opportunity
to learn from international experience and deliver
a robust carbon market. While the design of
China’s forthcoming ETS is largely finalised,
revisions are expected by 2020. Therefore the
next few years provide an important opportunity
to learn from the initial stage of China’s ETS and
determine which path, evolutionary or revolutionary, China should take in the next phase of its
ETS, drawing on the best practice of international experience to ensure a robust design and
taking into account the competing objectives and
shocks the ETS is likely to face.
8.2 Introduction
8.2.1 Policy Objectives, Market Failures
and Trade-Offs
Responding to climate change requires a transformation of energy systems. The world’s
fossil-fuel-dependent energy mix is not consistent with the Paris Agreement objective to limit
global temperature rise to well below 2°C above
pre-industrial levels. If this objective is to be
achieved, it means that all countries must take
action to ensure that their future energy needs are
provided by low-emission energy sources.
This transformation requires significant
investment in the development and deployment
of low-emission technologies and practices. The
energy sector is capital-intensive, relying heavily
on long-lived assets with high upfront costs.
Further, there are multiple technologies that can
deliver low-carbon energy. These include mature
technologies like nuclear and hydropower, and
rapidly developing technologies such as solar,
wind and battery storage. This means that policies seeking to drive an energy transformation
must both mobilise finance to fund investments
and provide a mechanism to choose between
competing technologies and providers.
The range of options for low-carbon energy
can come with widely varying costs. These costs
will be determined by a range of different factors,
including, for instance, the development of
technology, the geographic location of different
energy technologies, and network and learning
effects associated with the roll-out of these
technologies. This means that while there are
many different ways in which an energy transformation can be pursued, these options may
come with very different costs.
Achieving
climate
change
mitigation
cost-effectively frees resources for alternative
uses and enables society to pursue a broader
range of opportunities to increase well-being.
Climate change mitigation is only one of many
outcomes that society seeks to achieve; other
outcomes include greater material well-being,
higher rates of employment and an engaged and
content population. However, these outcomes all
have some degree of cost associated with them.
Special Report 4: China’s Energy System Revolution
521