China's national emissions trading scheme: integrating cap, coverage and allocation

China is expected to launch its national emissions trading scheme (ETS) in 2017. When designing an ETS, the cap, coverage and allocation are three key elements that must be considered. In general, three approaches are used to determine a scheme's cap, coverage and allocation when considering whether a cap should be set and the method of setting a cap, namely, no-cap, top-down and bottom-up approaches. However, as a multi-tiered ETS established in an emerging economy, China's national ETS faces special economic, technical and bargaining cost issues. To address these special issues, a unique approach, which is different from general approaches in theory and in major global ETSs, has been used in China's national ETS to integrate its cap, coverage and allocation. Based on a comparative analysis of general approaches in theory and practice, this article provides a detailed introduction to the method for integrating the cap, coverage and allocation in China's national ETS. It further reveals three challenges behind this unique approach and puts forward relevant policy suggestions.Key policy insights As a multi-tiered ETS established in an emerging economy, China's national ETS faces special economic, technical and bargaining cost issues.The general approaches (i.e. no-cap, top-down and bottom-up approaches) to determine a scheme's cap, coverage and allocation cannot completely address the special issues in China's national ETS.China's national ETS uses a unique approach combining top-down and bottom-up methods to integrate its cap, coverage and allocation.Three challenges remain behind this approach: the harmonization of local differences and national unified rules, the independent selection of covered sectors by local governments and the rationality underlying the selected allocation method.