ABSTRACT
This chapter examines the potential effects of emission trading systems (ETS) design with respect to effectiveness and economic efficiency. It discusses ETS design properties: Ambition level, Sector coverage, Allocation mechanism, and Offsets. The chapter compares the effects of ETS design in China with corresponding effects in the European Union. It shows that adding the energy-intensive trade-exposed (EITE) sectors has greater effects on domestic emissions in China than in the EU. The chapter considers access to domestic offsets: whether and to what degree the regulated firms can pay for emission reductions in non-regulated firms instead of reducing their own emissions or buying allowances from other regulated firms. It utilizes a multi-region, multi-sector computable general equilibrium (CGE) model of the world economy for quantitative analysis of the potential effects of ETS design in China and comparison with corresponding effects in the EU. Expanding the ETS to include motor vehicles has negligible effects on domestic emissions, due to its low share of emissions.
