China’s Nationwide CO 2 Emissions Trading System: A

The endogeneity of the allowance allocation is an important difference from C&T—a difference with important implications for the costs of achieving the nation’s overall emission-reduction targets and the distributional impacts. [...] Although China has already introduced the first phase of the TPS, the Ministry of Environment and Ecology (MEE)—responsible for designing and implementing the program—is continuing to make important decisions about the design of later phases. [...] Rather, it will require that total emissions not exceed the level of emissions authorized by its total allowance holdings—the sum of the allowances received free as a function of the prescribed benchmark and the allowances purchased at the auction or on the trading market. [...] 20 The size of the cost-disadvantage of the TPS depends on the variation of benchmarks. [...] In each period, these requirements determine (a) the prices for the 31 sectors’ produced goods; (b) the wage rate; (c) the pretax rental prices of capital, which differ across sectors (and subsectors in the electricity, cement, aluminum, and iron and steel sectors); (d) the rental prices of the natural resources employed in the solar, wind, hydroelectric, and nuclear electricity production subsect.