LAUSR

China is on the verge of launching what is expected to be the world’s largest carbon dioxide (CO2) emissions trading system (ETS). When fully implemented, this program will likely double the share of the world’s greenhouse gases covered by cap and trade.1 Under current plans, the facilities covered by the program will eventually account for over 50 percent of China’s GHG emissions. Internationally, much seems to be riding on this program. If perceived as successful, it could serve as a model for other countries wishing to implement an ETS. If viewed as a failure, it could impede the adoption of emissions trading programs in many parts of the world. China has learned a great deal from its experience with the seven pilot emissions trading programs it implemented starting in 2013 in major cities and provinces. At the same time, developing and operating an effective nationwide program is a huge challenge, given the country’s sheer size, industrial and geographic heterogeneity, income disparities, and diverse institutional characteristics. The significant presence of state-owned entities in the Chinese economy poses additional challenges. While market transactions have become increasingly prevalent in China in recent decades, state-owned enterprises are far more important in China than in the Western economies that have introduced emissions trading. These enterprises are especially important in the natural gas and electricity industries, where they have significant market power and where prices are administered rather than market-determined. Both monopolistic behavior and administered pricing can reduce the efficiency of the ETS by limiting the extent to which the costs of emissions abatement are reflected in the prices of goods and services. These features make the implementation of an effective ETS especially challenging. This volume examines the goals, structure, and challenges of emissions trading in China. It is the product of a two-day workshop held in Palo Alto in January 2017, a gathering co-spon-