divergence in prices between markets can lead to
perverse effects. Fully linked jurisdictions will
also need to agree to principles and rules for
determining the minimum ambition of targets
appropriate for each jurisdiction.
Price controls should apply from the outset to
ensure that credible prices are maintained while
the market is fragile. As the market develops, the
price should be allowed to vary more freely, as
market forces will be better able to identify the
appropriate price. Direct price controls may need
to be removed when jurisdictions fully link their
carbon markets. At this point, linking partners
may choose to empower an independent institution, like a carbon central bank, to manage caps
in a manner that achieves targets while maintaining a credible price trajectory.
The development of the secondary market
should proceed rapidly to increase costeffectiveness and enable liable entities to hedge
their risks. In the learning phase of an ETS, some
market institutions, like the system of registry
units, may not have the degree of functionality
they would require as the ETS expands. Price
discovery in the secondary market may be less
important at this stage if a tight price corridor is
in place. However, as the market expands and
prices float more freely, providing the necessary
institutions and market rules to support the secondary market becomes of vital importance.
A revolutionary approach to the governance of
carbon markets would rapidly move to more
advanced market designs and target higher prices
through price controls and caps. Such an approach
would have no learning phase but would instead
start with robust design and rules. Banking would
be allowed from the outset and coverage would be
maximised. There would be more rapid movement to trade in domestic offsets and international
units, with full linking occurring in the medium
term. A rapid transition to a low-carbon economy
would be supported initially by a high price floor
or similarly robust quantity-based instrument, and
by rapidly declining emission caps. The design of
institutions and market rules would ensure efficient secondary market functioning, supported by
exchange-based trading and liquid futures
markets.
8.5 Challenges in Establishing
a National Carbon Market
Establishing a carbon market is a complex and
systematic task, especially the unification of
China’s carbon markets. Impeccable systems and
institutions are needed, including determining the
scope of the market, allocating allowances,
choosing the allowance allocation method,
building sophisticated monitoring, report and
supervisory systems, and establishing a market
control mechanism.
28 The design and implementation of each element has an impact on the
emissions reduction outcome of the carbon
market, and will have a wide and profound
influence on the regional economy’s development and the evolution of industry.
29
However, due to insufficient time to prepare
and gain experience, the creation of China’s
carbon markets is faced with some challenges:
regulated tariffs, poor regulatory ability, a
defective trading mechanism and poor market
fluidity. Most regions are constructing carbon
exchanges in accordance with administrative
regulations. Total allowances in pilot regions are
high, which decrease the allowance price significantly. The markets are not active enough,
leading to limited trading volumes. The market
supervisory and regulatory system needs further
improvement. The awareness and skills of market participants need to be strengthened.
30
Pilot regions face more difficulties than
non-pilot regions as they are integrated into the
national carbon market. The pilot regions have
gained a lot of experience, but their existing
trading systems need to be aligned with the
national carbon market. They also face transitional obstacles related to the enterprises controlled, the allowance allocation methods used
28
Zhang Xin, Challenges in Integrating Local Carbon
Markets into the National Carbon Market, in China
Economic & Trade Herald, 2015, (16), pp. 74–76.
29
Zhang Xin, Sun Zheng, Meng Tianyu and Wang Ying,
Reflections on and Suggestions for Regional Disparity in
the Construction of a National Carbon Market, in China
Economic & Trade Herald, 2017, (20), pp. 30–31.
30
Zou Chunlei, The National Carbon Market is Emerging,
in China Electric Power News, 2016.
Special Report 4: China’s Energy System Revolution
551
perverse effects. Fully linked jurisdictions will
also need to agree to principles and rules for
determining the minimum ambition of targets
appropriate for each jurisdiction.
Price controls should apply from the outset to
ensure that credible prices are maintained while
the market is fragile. As the market develops, the
price should be allowed to vary more freely, as
market forces will be better able to identify the
appropriate price. Direct price controls may need
to be removed when jurisdictions fully link their
carbon markets. At this point, linking partners
may choose to empower an independent institution, like a carbon central bank, to manage caps
in a manner that achieves targets while maintaining a credible price trajectory.
The development of the secondary market
should proceed rapidly to increase costeffectiveness and enable liable entities to hedge
their risks. In the learning phase of an ETS, some
market institutions, like the system of registry
units, may not have the degree of functionality
they would require as the ETS expands. Price
discovery in the secondary market may be less
important at this stage if a tight price corridor is
in place. However, as the market expands and
prices float more freely, providing the necessary
institutions and market rules to support the secondary market becomes of vital importance.
A revolutionary approach to the governance of
carbon markets would rapidly move to more
advanced market designs and target higher prices
through price controls and caps. Such an approach
would have no learning phase but would instead
start with robust design and rules. Banking would
be allowed from the outset and coverage would be
maximised. There would be more rapid movement to trade in domestic offsets and international
units, with full linking occurring in the medium
term. A rapid transition to a low-carbon economy
would be supported initially by a high price floor
or similarly robust quantity-based instrument, and
by rapidly declining emission caps. The design of
institutions and market rules would ensure efficient secondary market functioning, supported by
exchange-based trading and liquid futures
markets.
8.5 Challenges in Establishing
a National Carbon Market
Establishing a carbon market is a complex and
systematic task, especially the unification of
China’s carbon markets. Impeccable systems and
institutions are needed, including determining the
scope of the market, allocating allowances,
choosing the allowance allocation method,
building sophisticated monitoring, report and
supervisory systems, and establishing a market
control mechanism.
28 The design and implementation of each element has an impact on the
emissions reduction outcome of the carbon
market, and will have a wide and profound
influence on the regional economy’s development and the evolution of industry.
29
However, due to insufficient time to prepare
and gain experience, the creation of China’s
carbon markets is faced with some challenges:
regulated tariffs, poor regulatory ability, a
defective trading mechanism and poor market
fluidity. Most regions are constructing carbon
exchanges in accordance with administrative
regulations. Total allowances in pilot regions are
high, which decrease the allowance price significantly. The markets are not active enough,
leading to limited trading volumes. The market
supervisory and regulatory system needs further
improvement. The awareness and skills of market participants need to be strengthened.
30
Pilot regions face more difficulties than
non-pilot regions as they are integrated into the
national carbon market. The pilot regions have
gained a lot of experience, but their existing
trading systems need to be aligned with the
national carbon market. They also face transitional obstacles related to the enterprises controlled, the allowance allocation methods used
28
Zhang Xin, Challenges in Integrating Local Carbon
Markets into the National Carbon Market, in China
Economic & Trade Herald, 2015, (16), pp. 74–76.
29
Zhang Xin, Sun Zheng, Meng Tianyu and Wang Ying,
Reflections on and Suggestions for Regional Disparity in
the Construction of a National Carbon Market, in China
Economic & Trade Herald, 2017, (20), pp. 30–31.
30
Zou Chunlei, The National Carbon Market is Emerging,
in China Electric Power News, 2016.
Special Report 4: China’s Energy System Revolution
551