Evaluating various choices of sector coverage in China's national emissions trading system (ETS)

Sector coverage matters greatly in designing China's national emissions trading system (ETS), with issues to be considered including impacts on emission reduction, economic and social welfare change, and carbon leakage to uncovered sectors. In this article, we evaluate various policy choices by setting up six scenarios in a China computable general equilibrium model. To investigate the optimal choice determining which sectors should be covered, criteria such as emission scale, trade intensity, emission intensity and complex indicators of optimal carbon revenue are compared. In addition, double counting of electricity production- and consumption-related carbon emissions is also included as a specific scenario, as it might be utilized to deal with the problem of price regulation of the electricity sector in China. The simulation result shows that the emissions intensity scenario can achieve the best emissions reduction effect, and the optimal carbon revenue scenario can achieve the best economic and welfare effect. All scenarios show that partial coverage will not lead to significant inter-sectoral carbon leakage in the current construction of the national ETS. Although the double counting of emissions from the electricity sector can lead to the lowest inter-sectoral carbon leakage rate, its emissions reduction effect, economic effect and welfare effect are all inferior to the other scenarios.Key policy insights Sector coverage matters significantly in the design of an emissions trading system.Effects on emission reduction, welfare change and carbon leakage are key issues to consider in determining the sector coverage.Coverage of sectors with high emissions and emission intensities will lead to the highest emission reduction effects and will also moderate economic and welfare lossesDouble counting of electricity-related emissions will lead to efficiency loss but lower carbon leakage