Overcoming Obstacles to Expanded Industry Coverage Under China’s National Carbon Emissions Trading System

The report argues that expanding the CN ETS beyond the power sector to include iron and steel, aluminum, cement, chemicals, papermaking, and civil aviation is essential for China's decarbonization strategy. It identifies key obstacles including data collection challenges, industry concerns over international competitiveness (carbon leakage), and bureaucratic inertia. To address these, the authors recommend implementing a price collar to limit economic risk, simplifying allocation benchmarks to one per unique product to reduce information burdens, and highlighting the economic advantages of clean tech innovation. The report also uses green hydrogen as a case study to illustrate how CN ETS expansion can enhance the global competitiveness of Chinese enterprises.

• The CN ETS is planned to expand from its initial focus on electric power generation to include six additional sectors: iron and steel, aluminum, cement, chemicals, papermaking, and civil aviation. This expansion is expected to occur during the 14th Five-Year Plan, meaning no later than 2025, though no official timetable currently exists.
• Expansion is hindered by three primary obstacles: information challenges regarding the collection and interpretation of heterogeneous industry data, economic fears concerning international competitiveness and carbon leakage, and bureaucratic inertia resulting from a lack of strong legislative authority or State Council endorsement.
• To mitigate economic risks and competitiveness concerns, the report recommends a price collar that sets a ceiling and floor for carbon allowances. This mechanism would rule out price spikes and provide policymakers the confidence to proceed without an exhaustive characterization of every industry's market situation.
• The report suggests simplifying allocation benchmarks by aiming for one benchmark per unique product. This approach reduces the need for the Ministry of Ecology and Environment (MEE) to maintain a detailed inventory of technology and fuel use, while avoiding the cost inefficiencies associated with multiple technology-specific benchmarks.
• Carbon leakage risks for Chinese industries are moderated by the country's large domestic market and the scale of its production. For example, domestic consumers accounted for 93.8 percent of demand for China's steel in 2019. Research indicates that modest free allocations (between 15.8 percent and 17.0 percent) could neutralize leakage even at a carbon price of ¥200 per tonne.
• Expanding the CN ETS can drive economic growth by accelerating domestic innovation through 'learning curve' effects and the 'home market' effect, aligning with China's national strategy to move up the value chain in international clean tech markets.
• Green hydrogen serves as a strategic example of how CN ETS expansion could benefit Chinese firms. Global hydrogen demand is projected to potentially exceed 1,300 million tonnes by 2050, and Chinese companies like Sinopec are already investing billions in green hydrogen production facilities.

APA

Busch, C., Min, H., & Meian, C. (2022). Overcoming Obstacles to Expanded Industry Coverage Under China’s National Carbon Emissions Trading System. Energy Innovation. https://energyinnovation.org/wp-content/uploads/Overcoming-Obstacles-to-Expanded-Industry-Coverage.pdf

Chicago

Busch, Chris, Hu Min, and Chen Meian. Overcoming Obstacles to Expanded Industry Coverage Under China’s National Carbon Emissions Trading System. Energy Innovation, 2022. https://energyinnovation.org/wp-content/uploads/Overcoming-Obstacles-to-Expanded-Industry-Coverage.pdf.

Wikipedia

{{cite report |last1=Busch |first1=Chris |last2=Min |first2=Hu |last3=Meian |first3=Chen |title=Overcoming Obstacles to Expanded Industry Coverage Under China’s National Carbon Emissions Trading System |publisher=Energy Innovation |date=April 2022 |url=https://energyinnovation.org/wp-content/uploads/Overcoming-Obstacles-to-Expanded-Industry-Coverage.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{busch2022overcoming, author = {Busch, Chris and Min, Hu and Meian, Chen}, title = {{Overcoming Obstacles to Expanded Industry Coverage Under China’s National Carbon Emissions Trading System}}, institution = {Energy Innovation}, year = {2022}, month = apr, url = {https://energyinnovation.org/wp-content/uploads/Overcoming-Obstacles-to-Expanded-Industry-Coverage.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }