The encyclopedia · Strategy & Leadership · Operational decision · 2021–2023
China built the world's biggest carbon market on benchmarks, not handouts
The national ETS covered 2,000+ power plants and used output-based benchmarks rather than free historical grandfathering to allocate allowances.
People's Republic of China · power-sector companies · Shanghai Environment and Energy Exchange
the move
China launched its long-awaited national carbon emissions trading scheme in July 2021 at the Shanghai Environment and Energy Exchange. The first phase covered the power sector: more than 2,000 plants responsible for over 4 billion tonnes of CO2 a year, about 40% of national emissions.
The design choice that matters is how allowances were allocated. Rather than handing each plant a bundle based on how much it had emitted historically, the final allocation plan adopted benchmarking as the main approach, with pre-allocation and ex-post adjustments.
Under benchmarking, an allowance is calculated from a benchmark value of emissions intensity per unit of output times the plant's actual output, with correction factors. So a plant that produces each unit of electricity more cleanly than the benchmark ends up with surplus allowances to sell, while a dirtier plant must buy or pay. The carbon price therefore falls on relative inefficiency, not on a plant's own history.
why it works
- Benchmarking prices inefficiency relative to the sector standard, not a plant's own past, so the market rewards the plants that improve the most.
- It avoids the moral-hazard of grandfathering, where a plant that emitted more gets more free allowances.
- Benchmarks can be tightened over time to ratchet down the cap as the sector becomes cleaner.
- It delivered real scale: about 40% of China's annual emissions were put under a price signal at launch.
what transfers
When allocating pollution rights, benchmark against a target intensity per unit of output, not a plant's own history: the cheapest reductions get priced and no one is rewarded for polluting more.
what came after
The scheme began trading in July 2021 and became the world's largest carbon market by volume. Its benchmark-based allocation was refined in later compliance periods, and the government signalled plans to expand coverage beyond the power sector.
references
- China celebrates formal start of emissions trading
- China's National Carbon Emissions Trading Scheme Officially Launched
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