The statement by President Xi Jinping in September 2020 that The People’s Republic of China (hereinafter, “China”) will “aim to have CO₂ emissions peak before 2030 and achieve carbon neutrality before 2060” sets out a clear vision and timeline for a profound transformation of the country’s socio-economic development. The pace of China’s emissions reductions over the coming decades will be an important factor in global efforts to limit global warming to 1.5°C. The power sector, responsible for nearly half of the country’s energy sector CO₂ emissions,1 is central to achieving China’s climate ambition. Policy makers need to set the incentives and market structures which ensure that power sector actors can capture the dynamic development and rapid cost reduction of low-carbon technologies, and improve the management of the existing fleet of fossil-based generation through retrofitting, repurposing and retirement.

Accelerating power sector decarbonisation in support of the carbon neutrality goal requires an effectively co-ordinated policy mix. This report responds to the Chinese government’s invitation to the IEA to co-operate on carbon emissions trading systems (ETS) and synergies across energy and climate policies. It explores the interactions and effects of China’s national ETS with its renewable energy policy in the electricity sector, namely renewable portfolio standards (RPS). The report demonstrates how the policy mix could be better co-ordinated and explores possible pathways that an enhanced ETS could lead the electricity sector toward an emissions trajectory that is in line with China’s carbon neutrality target.

China’s national ETS came into operation in 2021 and is the world’s largest ETS, covering annual power sector emissions of around 4.5 Gt CO₂. It currently employs an intensity-based design with free allocation. This means that allowances are allocated to covered entities for free according to actual production levels of coal- and gas-fired power plants (e.g. kWh of electricity generated) and predetermined emissions intensity benchmarks (e.g. in g CO₂/kWh) covering only coal- and gas-fired power plants. This is different from most ETS systems such as the EU ETS, which set a predetermined absolute cap on covered emissions. Four emissions intensity benchmarks are currently defined in China’s national ETS for coal- and gas-fired power plants, and are differentiated based on fuel, sub-technology and plant size.

Against this backdrop, this report analyses five policy scenarios for the electricity sector for 2020 to 2035, consistent with China’s 14th Five-Year Plan (2021-2025) and the Long-Range Objectives through the Year 2035 (China, State Council, 2021a). In order to test the impact of different ETS designs, assumptions regarding electricity demand growth, exogenous technology cost evolutions and the current RPS policy set-up are kept identical across all scenarios. Taking into account China’s ongoing electricity market reform, all scenarios assume economic dispatch from 2025 – an important element to effectively integrate the CO₂ price signal in operational, investment and consumption decisions.

Source: IEA