Carbon Markets with Chinese Characteristics: From Design to Consequences 

This paper studies the design and consequences of China’s national rate-based carbon market. Under this system, emission‑intensity benchmarks create implicit subsidies for cleaner plants and taxes for dirtier ones, rotating the supply curve without changing the merit order. A theoretical model shows that, combined with strategic bidding and relatively loose benchmarks, this design weakens incentives to pass carbon costs through to electricity prices. Using detailed data from power plants and wholesale prices, we confirm that fluctuations in carbon prices have no measurable impact on electricity prices. Evidence of benchmark design and penalties suggests potential regulatory capture, so China's ETS currently operates mainly as an intra-sectoral profit transfer rather than a strong decarbonization instrument.

Bio

Guojun He is the Hong Kong Jockey Club Professor in Economics at the University of Hong Kong. He is also the founding director of the HKU-Jockey Club Enterprise Sustainability Global Research Institute. His research examines the benefits and costs of environmental and development policies, with particular focus on how governance structures affect policy outcomes in China. Currently, he serves as a co-editor of the Journal of Environmental Economics and Management, an associate editor of Management Science, and a member of the board of editors of the American Economic Journal: Economic Policy.