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Emission trading systems (ETSs) was introduced in 2011 in China due to the problem of growing gas emission and ecological conditions deterioration. China launched pilot programs based on the cap and trade theory in seven regions of the country: Beijing, Tianjin, Shanghai, Chongqing, Hubei, Guangdong, and Shenzhen (Tang et al. 152). China plans to transform these separate pilot ETSs into the nationwide program by 2020 (Cui et al. 1044).
Shenzhen’s ETS was the first urban-level cap-and-trade pilot program. It was launched on 18 June 2013. The program was adapted to the city’s economic features. The ETS covered four categories of carbon emission: industry emission, public building, transport, and energy consumption. The ETS covered direct and indirect emissions. The ETS’s regulatory system leads to both improving energy efficiency and decreasing energy demands (Jiang et al. “The Construction of Shenzhen׳s ETS” 18).
Ecological and Economic Effects of the Program
The Shenzhen’s target is to decrease the total level of gas emission by 21% (“The Construction of Shenzhen׳sETS” 18). Shenzhen is a developing city with high living standards and a growing industry. During 2005-2010 the total level of carbon emission was increased with the annual average rate of 4.9%. After the ETS introduction, the level of emission continues to grow. However, the annual rate of the process has been gradually slowing down. The structure of emission also changed. Nowadays, the city is characterized by a small number of significant direct emission sources and a large number of small sources of emission (Ye et al. 20). Therefore, a positive ecological effect of the ETS introduction could be stated.
It could be stated that this scheme affected the economy on the enterprise, regional, and national levels. On the enterprise level, the system leads to optimization of emission purification and allowance trading. Besides, on the regional and national levels, the general tendency of low-carbon production promotion over high-carbon production was predicted. Potentially, the electricity price and carbon price might increase which could result in the promotion of environmentally friendly sources of energy development (Jiang et al. “Research on China’s Cap-and-trade” 909).
In Shenzhen, the negative correlation between expected risk and the rate of return was discovered. Besides, the high level of market distortions was caused by ETS regulation. In particular, the negative effect of state control of the market development and emission allowance allocation was stated which affected the allowance price. Thus, to make the program efficient and to turn it into a mature market, more work is needed to be done (Cong and Lo 423).
Analysis of the Cap-and-trade Theory Introduction in China
The purpose of this program is to decrease the level of carbon emission flexibly, using the market mechanisms instead of strict taxes providing. The cap-and-trade theory is based on the following principle: each region, in particular, Shenzhen city is allowed to produce a certain amount of gas emission. The whole amount is divided into allowances and allocated among all enterprises that emit carbon dioxide.
The crucial component of the cap-and-trade theory is cup setting. Two possible ways of emission cup setting exist: set the absolute cup with the possibility of its increase or set the intensity-based cup. Shenzhen is the city with a high rate of economic development. It is difficult to predict the fluctuation of carbon emission rate due to the Shenzhen’s economic growth. Therefore, the intensity-based cup was preferred for the ETS. The level of carbon emission will be growing for a long time. However, the intensity-based cup introduction allowed decreasing the rate of annual emission growing (“Research on China’s Cap-and-trade” 913).
Another important moment of cap-and-trade theory introduction is the process of allowance allocation. In the city’s ETS, allowance is allocated by benchmarking for the enterprises in the power and water-supply sectors. For the manufacturing sector, the innovative approach of the competitive game theory was used. The reason for it is that this segment demonstrates the fluctuating growth. It is difficult for the government to predict the emission level changes due to the lack of information. The competitive game theory provides an opportunity to switch “allowance allocation from a game between government and enterprises into a game between enterprises and enterprises” (“The Construction of Shenzhen׳s ETS” 19). Therefore, the government sets the cap for a sector and organizes the competition procedure. The main rule of the game theory is the following: enterprises compete for free allowance allocation. In this competition, the historical level of emission is also considered: the higher emission demonstrated an enterprise, the higher decrease it should achieve. Therefore, enterprises with a historically low level of carbon emission might gain benefits over those with a high emission level (“The Construction of Shenzhen׳s ETS” 19).
The third important characteristic of the system is a carbon price. The ETS allows the carbon price regulation. Among factors that influence carbon pricing, energy demand, economic output, and the level of technology development and enterprise modernization could be cited. All these factors are directly or indirectly affected by the ETS launching (“Research on China’s Cap-and-trade” 913).
Therefore it could be stated that the cap-and-trade theory is an effective approach for the carbon emission regulation. It is currently used in the seven Chinese regions. By the example of Shenzhen, it was shown that the theory used market approaches to control the level of carbon emission. The annual rate of emission has decreased after the scheme was launched which could be considered as the success of the cap-and-trade theory application.
Cong, Ren, and Alex Y. Lo. “Emission Trading and Carbon Market Performance in Shenzhen, China.” Applied Energy, vol. 193, 2017, pp. 414-425. Web.
Cui, Lian-Biao, et al. “How Will the Emissions Trading Scheme Save Cost for Achieving China’s 2020 Carbon Intensity Reduction Target?” Applied Energy, vol. 136, 2014, pp. 1043-1052. Web.
Jiang, Jing Jing, et al. “The Construction of Shenzhen׳s Carbon Emission Trading Scheme.” Energy Policy, vol. 75, 2014, pp. 17-21. Web.
“Research on China’s Cap-and-trade Carbon Emission Trading Scheme: Overview and Outlook.” Applied Energy, vol. 178, 2016, pp. 902-917. Web.
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