2 September 2014: The International Energy Agency (IEA) has published a report, titled ‘Emissions Trading in the People’s Republic of China: A Simulation for the Power Sector,’ which presents the results of a simulated Emissions Trading Scheme (ETS) for the Chinese power sector that the IEA developed and ran in collaboration with the China Electricity Council (CEC), the China Beijing Environment Exchange (CBEEX) and the Environmental Defense Fund (EDF) to prepare to “gradually develop a carbon trading market” in accordance with China’s 12th five-year plan (2011-2015).

The report consists of seven sections, including on: the context of the simulation; reasons for running it; high-level design choices involved; and building the simulation, its results, and implications for designing a national Chinese ETS. The report also includes six annexes on: methodology; Virtual Power Company (VPC) configurations; selected parameters such as power stations, tariffs and “switching values;” trading mechanics and offset market; and scenario results.

The simulation included four scenarios to test different policy options in which power companies had to meet challenging generation and carbon requirements. The results from the four scenarios showed how ETS market design affects company behavior, market performance and ultimate outcomes, providing input for tackling ETS design choices.

The results of the simulation “bode well” for a national Chinese ETS covering the power sector. When faced with a simulation involving a fixed carbon cap, an ETS with tradable allowances and offsets, non-compliance penalties and an increasing power generation obligation, Chinese generators were able to meet their generation, carbon compliance and profit mandates. The simulation also demonstrated that ETS market design has a direct impact on company-specific and market-wide efficiencies. [Publication: Simulated ETS in Chinese Power Sector Report] [IEA Press Release]