Too little too late? Nationwide carbon trading in China

Abstract

China launched a nationwide, rate-based carbon market in 2021. Covering the world’s top CO₂ emitter, compliance depends on the intensity of carbon emissions rather than an absolute cap. We draw on the theoretical literature of rate-based systems to provide the first empirical evidence on an early adopter. Using plant-level data from satellite imagery and machine learning methods, we find that high-efficiency power plants increased electricity generation and CO₂ emissions by approximately 5% relative to low-efficiency plants. Because its carbon market regulates nearly all coal plants in China, we focus on the differential responses by plant efficiency, finding no evidence of a differential reduction in emission intensity (though these estimates are imprecise). Relative to coal plants in Indonesia and the Philippines, which had no carbon market, China’s high-efficiency plants also increased emissions, while the estimate for its low-efficiency plants is small and insignificant. This pattern of responses suggests that emissions increases of high-efficiency plants exceeded substitution away from low-efficiency plants. Underscoring the production stimulus to more efficient Chinese plants, air quality worsened downwind of high efficiency plants relative to low-efficiency plants, compromising air quality in relatively clean areas of China. To curb the level of China’s carbon emissions and thereby slow climate change, benchmarks need to be tightened within the existing system or an alternative system adopted that does not simultaneously incentivize electricity production.