J. Service Science & Management, 2009, 2: 270-275
doi:10.4236/jssm.2009.24032 Published Online December 2009 (www.SciRP.org/journal/jssm)
Copyright © 2009 SciRes JSSM
The Exploration of Implementation of Emissions
Trading System in China1
Min HU
Economics and management school of Sichuan Normal University, Chengdu, China.
Email: humin998@yahoo.com.cn
Received June 10, 2009; revised July 23, 2009; accepted September 1, 2009.
This paper studies the route, steps and measures of the implementation of the emissions trading system in China. It
combines desk research and case study. The desk research aims to explore the inherent disciplin e of emissions trading
system, so as to disclose its nature and features while the case study involves the one-year field research conducted by
he author, and pro vides the pilot emission systems in some provinces, together with the difficulties in its implementa-
tion. There are possibilities of comprehensive coverage of emission trading system, which can only be protected by a
law relevant to environmental property protection (issued by the Standing Committee of National People’s Congress).
And there is necessity for China to set up a quota system for different pollutions. After the initial allocation among
provinces, the quota will be divided among enterprises, partia l paid and par tial for free, under the princip le of “Giving
priority to efficiency with due consideration to fairn ess”. It is useful to establish an efficien t secondary market of emis-
sion trading system.
Keywords: Emissions Tradi ng, System Innovation, Sustainable Development
1. Introduction
China's economic and social development, resources
saving and ecological environment protection have be-
come increasingly sharp, as a constraint of the bottlen eck
in achieving sustainable development. Exploring envi-
ronmental tools for the conservation of resources, envi-
ronmental protection and effective achievement of the
economic and social comprehensive development, is a
significant major for China right now. Theoretical analy-
sis and international experience have shown that emis-
sions trading system as a system of market-based incen-
tives designed to effectively achieve these objectives, it
is worth drawing on the use of China. Howev er, it is also
necessary to fully integrate the implementation of China's
emissions trading system with China’s economic and
social reality, We need to do some research in the spe-
cific systematic construction and operate mechanism as
well as make adaptive adjustments, so can we ensure to
turn it into the emissions trading system which suitable
for the national needs, as well as a powerful tools to pre-
vent pollutions .This article seeks to make some explora-
2. The Inspirations of China’s Experience in
the Emissions Trading Pilot Areas
In recent years, Tianjin, Jiangsu, Zhejiang, Shanghai,
Shanxi, Henan, Guangxi and other provinces and mu-
nicipalities of China have launched a pilot emissions
trading, Jiaxing Zhejiang in November 10, 2007 estab-
lished the first national emissions trading reserves center,
indicating that China has taken a substantive step for
implementation of the right of sewage system. We can
draw some experience in the following inspiration by
summing up the experience of the pilot areas.
2.1 Legal Matter
The thought of “Total Control” has not been embodied in
laws, the property of environmental resources are still
lacking the evidence, and the entire emission trading
system is extremely fragile. In September, 2002, Xiu
Zhou district of Jia Xing began the emission trading sys-
tem pilot, but the outcome wasn’t that good, one of the
most crucial reasons is the “Total Control” doesn’t have
1Fund Project: This article is the project “Sustainable Development o
the Sichuan-based emissions trading mechanisms research” of Phi-
losophy and Social Planning of “Eleventh Five” in Sichuan Province,
“211 Project” features three research projects of Southwest University
of Finance and Economics, the results of “the implementation o
health-intensive countries consumption patterns and promoting the
study of ecological civilization” (item number: 211D3T10).
The Exploration of Implementation of Emissions Trading System in China271
any bottom lines. For example, Shen Yue-ping, the dep-
uty director of the Environmental Protection Agency of
Jia Xing pointed out:” The rights of Sewage emission
means add more administrative permit, if there is no re-
quirement for the volume. It is not the scarcity of re-
sources, so there is no need for transactions [1].Wh en the
total control becoming a rigid target, the environment
capacity is able to become a scarce resource, the market
pricing mechanism for emissions trading have the condi-
tions. However, the thought of “total control” must be
established in the law before it can authoritative. In re-
cent years, although China has made significant
achievements in environmental protection legislation and
building several levels of environmental legal systems,
the trading legislation in national level is still empty.
Under the existing environmental protection laws and
regulations, only the individual provisions for special
pollutants embodied in the “total control”, the main laws
and regulations do not have the specific rules for “total
control”, which directly led to the shortage of legal rules
for the property rights of environmental resources, so that
the emissions trading system itself is very fragile.
2.2 Inadequate Liquidity
Emissions trading market does not have much of the at-
tractiveness of business, which result in the limitation of
trading volume and liquidity shortage. For instance, the
establishment of the first national emissions trading re-
serve center in Jiaxing, Zhejiang, the annual emissions of
COD was about 118,000 tons, sulfur dioxide emissions
was 273,000 tons in 2007,but the transaction into the
trading center was only hundreds of tons of the emission
reductions in scale, which is still minimal; And in 2004,
emissions of sulfur dioxide and a pilot of emissions trad-
ing permit system of sulfur dioxide had been carried ou
in Henan Province for 4 years, and suffered from the
embarrassment of a zero-transaction [2].
2.3 The Market Risk of “Bad Money Drives out
Good Money”
Now the emissions trading mainly carried out in the pilot
areas, and this may have the market risk of “bad money
drives out good”. Sewage emission enterprises in the
emissions trading pilot need to spend a huge amount of
money to spend in buying emission rights, which will
result in increased operating costs of enterprises, busi-
ness competitions in the surrounding areas without the
rights of emissions trading is in a “cost disadvantage”,
brought abou t unfair competition objectively. As a result,
the full implementation of China's emissions trading sys-
tem is imperative.
2.4 The Uncontrolled Situation in the Market
Economic system is still in the transition period, the
market economy is not that perfect, which result in low
efficiency of market of emission rights, and even the
market failure. Emissions trading system is a policy in-
struments to control pollution and protect the environ-
ment by market-based instruments, nature is the product
of the full development of market economy. However,
the time for establishing Chinese socialist market eco-
nomic system is still short. We have made great achie-
vements in all aspects, but as a whole we are still in the
transition period, we are not perfect and mature enough
in many ways, including well-defined property rights, the
effective transfer of property rights and the details in the
legal protection of property rights. Such an Imperfect
market system will inevitably have an adverse effect on
the emissions trading system.
2.5 A Awareness of Environmental Protection
People do not have a strong awareness of environmental
protection, emissions trading system still lack of social
supervision. The economic development of China in re-
cently years proves that, whether it is the national or lo-
cal government, they just chase the economic interests
but ignore the environmental protection, people lack of
environmental awareness in general. The environmental
awareness, however, as a non-governmental social force,
has supervised, supported and promoted the making and
practicing of laws concerning environmental protection.
However, with the weak public awareness of environ-
mental protection, it’s difficult to keep a firm hand on the
supervision of t rade on the dis posal of waste.
2.6 Social Credit System
The unsound social credit system increases the possibil-
ity of emissions trading market failure. Social credit sys-
tem is the fundamental basis of th e effective operation of
the market economy. If this system collapses, a small
part of people will benefit a little from it temporarily.
However, if lack legal sanctions and public condemna-
tion, it may make some impacts on other economic enti-
ties, so that more companies can benefit from the col-
lapse of the credit system, then, finally, the government's
regulatory system and the rules of the market become
useless, which will lead to an immeasurable loss.
3. The Difficulties of Implementation of
Emissions Trading System in China
3.1 A Vast Territory
A vast territory, the ecological environment and the level
of economic development have shown significant re-
gional characteristics, the national conditions in China
result in the complexity of emissions trading.
3.1.1 Regional Characteristics of the Environment
Regional characteristics of the environment are quite
significant. Ecologically speaking, human activities are
Copyright © 2009 SciRes JSSM
The Exploration of Implementation of Emissions Trading System in China
affected by geographical location, atmospheric circula-
tion, landscape, China can be divided into three nature
zone macroscopically. The existence of three nature
zones decide the diversities of the climate resources, wild
flora and fauna resources, and agriculture materials, so
that it further decide the nature of environmental capacity,
amount and differences of protection. Due to the unique
characteristics of Chinese ecological environment, the
regional pollutants needed to be control is quite different,
and there is also some differences in pollutants control
standards, the subject of emissions trading, measure-
ments and supervision of the actual emissions. Thus, it is
quite difficult for China to implement the emission trad-
ing syst em compr eh en sively.
3.1.2 The Clear Differences in the Level of Economy
The clear differences in the level of economy. Economi-
cally speaking, due to the differences between the nature
resources and opportunities of the historical development,
China has formed the economic and technological de-
velopment level of the gradient distribution of the three
major economic areas in central and western. The exis-
tence of the three economic zones reflect the diversities
of the market economic development and people’s in-
come as well as the diverse demands of economic means
in the future and the level of environmental quality. In
economically developed areas of eastern and central ar-
eas, with the improvements of people’s requirements to
the environmental quality, there is a trend that the
high-polluted enterprises are becoming less, this reflects
the implementation of the “total control” is more easily.
However, in the western areas, the companies with pol-
luted emission account for a large proportion of the eco-
nomic development and the employments, the promotion
of emission trading system is harder.
3.2 A Balance between the Pollutants Control
and Further Development of the Economy
In the unchanged situation of the traditionally extensive
economic development means, how to find a balance
between the pollutants control and further development
of the economy is another difficult in establishing emis-
sion trading system.
The population of China, trend of the economy, the
level of the technology and management are the three
basic factors for damaging the environment. According
to the forecast of related departments, among those three
reasons, the zero increase in China’s future population
will need 30 to 40 years, the rapid increase in the future
economy will continue its tren d in the nex t 10 to 20 years,
the level of tech nology and manag ement still need a long
time, so that it is impossible for China’s economic
growth means transferring from extensive one to inten-
sive one in a short term [3–7]. The existence of the ex-
tensive growth will give an obvious impact on the emis-
sion trading policy with the goal of “total control”.
3.3 China’s Small Sized Companies
The number of China’s small sized companies is great,
and the spread of them is wild. However, the pollutants
they produced account for half of the total pollutants.
The basic national situation decide that on one hand, the
cost of information collection is quite expensive in
China’s emission trading market, the cost of supervision
and implementation of the environmental protection de-
partment is also expensive, so that it decreases its effi-
ciency and results in market failure. On the other hand, if
it is quite common for companies with heavy pollutants
can’t effectively deal with it in a short time because of
the limitation of fund and technology , it will do harm on
the practice of this system.
3.4 The Goal of the Solution of Environment
There is a difference between the goal of local govern-
ment and central government in the solution of environ-
ment pollution, and those differences will add some dif-
ficulties in the promotion of the emission trading system.
Pollutants can’t be eliminated totally, so any companies
will produce pollutants during its production. The local
government will focus on the economy, including the
development of local economy, the unemployment and
the GDP which is a measure of the political performance,
rather than the impact on the environment. However, by
the “total control”, it will definitely make more difficul-
ties in the promotion of emission trading system. Ac-
cording to the report from the XinHua news agency, on
29th of May 2007, the explorations of Cyan bacteria
caused shortage of water which make the habitants’ lives
becoming more difficult. More ironically, the “iro n solu-
tion” caused hundreds enterprises with high consumption,
high pollution, high danger and low efficiency shut down.
Unexpectedly, this news attracted lots of organ izations to
make investment, including the towns nearby in Subei, as
well as eastern-west, Sichuan and Jiangxi. The essence of
this phenomenon reflects that in the eyes of some local
governments in China, the basic policy still remains the
pursuit of increase of GDP, lacking of recognition of the
limitation of resources, and haven’t pay attention on the
environmental protection on mind, so that it continuously
creates hidden obstacles to the emission trading system.
3.5 The Power of Deciding the Total Emission
Due to the characteristics of the China’s ecological and
economic zones, the power of deciding the total emission
controlled by the central government or the local gov-
ernment still play a significant role in the effectiv eness of
the emission trading system. If the power belongs to the
local government, the environment can’t take the total
emission finally due to the differences between the goals
Copyright © 2009 SciRes JSSM
The Exploration of Implementation of Emissions Trading System in China
Copyright © 2009 SciRes JSSM
of central government and local gov ernment; if it belongs
to the central government, it will have a fierce competi-
tion with the local government.
3.6 The Market Participates
It is a tough question for the market participates to reach
the goal of guaranteeing the vitality of the market, as
well as upgrade the format of production by emission
trading system. Therefore, how to choose formats, such
as: involving in this program compulsively, volunteer,
opening comprehensively and directly, etc, is another
problem facing China.
4. Discussion and Conclusions
4.1 The Path of Emission Trading System in
The emission trading system derived from the United
States, widely used in the western countries, and some
part of China. As the most effective way of treating
emission, China will put this system in a general manner
in future. So, in essence, it is a problem of transplant
system. According to the experience of developed coun-
tries, and combination of the social situation of China,
the means of establishing emission trading system can be
showed in the Figure 1.
4.2 The Steps and Specific Measures of
Establishing Emission Trading
System in China
4.2.1 Legal Framework
Firstly to confirm the regulation of environmental re-
source priority system by the NPC to better the laws and
to embody the “overall control” of the intension of envi-
ronmental protection and prevention with a view to es-
tablishing such system on China’s environment in legal
framework.. there is no specific rules of “total control” in
the laws and legislations in China, the shortage can de-
cide the fragility of emission trading system, and diffi-
culties in the emission control, the extensive growth of
the economy hasn’t changed. Therefore, the first step of
establishing emission trading system in China is to con-
firm the environmental resource system that it can em-
body the intension of “total control”.
4.2.2 The Initiative Distribution
In the level of a state, it confirms the initiative distribu-
tion of the total control of emission. Because China is a
country with wide areas, distinguished ecological envi-
ronment, the huge economic gap among different areas,
and the different goals of local government and central
government, that means local government have the trend
of focusing the speed of economic growth but ignoring
the environmental protection. If the power of confirming
the total emission belongs to the central government, it
will reduce the welfare of the society, so the power
should belongs to th e central government. one reasonable
choice for the national overall emission of pollutants as
well as for provincial and municipal levels is that the
central government confirms national emission of certain
pollutants in a given period of time in accordance with
domestic development, and that local governments en-
force local standards in accordance with relevant princi-
ples; that the central government confirms the overall
emissions in different regions and regulates them with
respective standards in accordance with provincial and
municipal economic and social development and in the
principle of keeping the balance between national de-
mand and local features.
The initiative d istribution of every single prov ince and
area. Under the guidance of “efficiency combine with
justice”, and in the background of China’s economic and
social situation, the initiative distribution of emission
trades need to combine with two modes: distribute for
free, and distribute for charge. The key of this mode is: in
the given amount of emission, how to confirm the pro-
portion of free distribution and charged distribution, and
Determine the total amount of em-
ission rights and the initial distri-
bution of municipalities, and re-
gions at na t iona l level
Property right s as legal
recognition of environ-
mental resources
Municipalities, and regi-
ons of the initial distribu-
tion of the sewage busi-
The establishment
of emissions trad-
NPC Standing Com-
mittee to make laws Establish and improve all-round, effective, three-dimensional network-based monitoring system
Figure 1. The path of emission trading system in china
The Exploration of Implementation of Emissions Trading System in China
how to distribute it to different corporations in accorda-
nce with standard allocation after the confirmation of the
total amount. Free distribution of the sewage is the main
reason for the contribution of enterprises and the em-
ployment created by a net increase of new value- added,
therefore, the ratio of free distribution of the main con-
siderations are the impact of these two indicators. Envi-
ronmental protection department of the provinces and
municipalities can trade th e remaining parts with sewag e
companies through auctions, bidding and pricing, after
free allocation to sewage companies. And local govern-
ments can preserve part of the emission permits in ac-
cordance with their own needs, in an attempt to provide
support for the future companies with high-efficiency.
4.2.3 The Secondary Market
The establishment of effective transfer of ownership of
emissio n rights in the seco ndary market. S econdary mar-
ket for emissions trading as a supplier of emission rights
and the right to demand of sewage through the use of
tools for trading emission rights trading and financing
market of production factors, in a sense, to cultivate, de-
velop and standardize the emission trading market, is
more important than the well-defined administrative
powers sewage.
4.3 The Relevant Recommendations of China's
Emissions Trading System
4.3.1 Environmental Protection Consciousness
Cultivate national awaren ess of environmental protection,
strengthening the right of the sewage system of external
oversight. National environmental awareness as non-gov-
ernmental social forces, which play an important role in
the oversight, support and promote of the formulation
and implementation of environmental policies. Therefore,
we must cultivate national awareness of environmental
protection, strengthening the right of the sewage system
of external oversight.
4.3.2 Integrity of Social Environment
Establishing integrity of social environment and enhanc-
ing the development and implementation of emissions
trading system. Establishing trust system is the public
goods provided by the government. Firstly, the govern-
ment should maintain absolute authority of national
credit as well as break local protectionism. After emis-
sions trading system is in place, the government should
strongly give a guidance and expectation in accordance
with the amount of sewage, time, space, and trading rules.
Instead of change so fast that companies feel that this is a
short-term policy, passively wait and see. At the same
time, establish and improve the credit system and the
relevant legal system to ensure that after emissions trad-
ing, the normal performance of the contract. Through the
establishment of integrity of society, guide these busi-
nesses to abide by the laws, and can discharge the sew-
age consciously.
4.3.3 Relevant Laws and Provide Adequate Legal Basis
Establish and improve relevant laws and provide ade-
quate legal basis for the emission trading system. With
the legal basis, the nation al environmental administration
departments should be issued the specific rules and regu-
lations relating to emissions trading, Emissions trading a
clear approval to the transaction from the uniform stan-
dard, in order to facilitate the actual operation of China's
emissions trading. Make sure the uniform standard from
approval to trade, in order to facilitate the actual opera-
tion of China's emissions trading.
4.3.4 The Power of Rent-Seeking
Strengthen the initial allocation of emission rights in the
management of the power of rent-seeking. Initial alloca-
tion of emission rights for the rental of power - the
mainly two causes of the phenomenon of rent-seeking is,
on the one hand, “soft power,” on the other hand is the
space rent-seeking in the design of allocation mechanism.
One of the performances of the previous reason for gov-
ernment officials to determine the total amount of sew-
age, to control the randomness in the initial distribution
in municipalities. Therefore, it is necessary to establish a
complete set of evaluation systems, to define the total
target scientifically and reasonably, instead of free deci-
sion by the officials. Enterprises in all the initial emission
rights on the specific share, in strict accordance with the
principle of “open, fair, just and transparent”, and the
method of calculation in advance. Finally, to further im-
prove the legal system, strengthen supervision, to estab-
lish a high degree of integrity and efficiency as the hall-
mark of the political and admin istrative system. From the
second reason which has caused rent-seeking --- power-
renting, in the model of free allocation of emission rights,
government officials have greater rights of discretion,
which has left a space for rent-seeking. Therefore, with a
large scale of emission trading system, the initial model
of allocation of emission rights, transition to paid transfer
should be gradually put into practice. As result --- rela-
tively speaking --- rent-seeking scales of auctions, bid-
ding, pricing and trading can be reduced in system
-designing. Thus more rent-seeking activities can be
4.3.5 Take Proactive Measures to Tackle the Problem
of the Market failure
Take proactive measures to tackle the problem of the
failure on emissions trading market. With a view to pre-
venting the inefficiency on emissions trading market,
greater-forced policies ought to be put in place, in order
to heavily punish opportunism activities such as exceed-
ing and hiding emissions; regulate monopolizing activi-
ties; create a fully competitive market; for those compa-
nies who actively reduce the overall emissions and sell
credits on reduction of emissions, the government should
Copyright © 2009 SciRes JSSM
The Exploration of Implementation of Emissions Trading System in China275
support them in tax, technology and capitals and guaran-
tee them with price priority, in an attempt to activate the
market; confirm the deadlines on emission rights to re-
duce the uncertainty of emission rights; break barriers on
emission trading market, and take actions to eliminate
local protectionism.
4.3.6 Enhance the Construction of Supervision
Enhance the construction of supervision on the emission
permits market and the legal force on environmental
protection. In the construction of supervision on the
emission permits market, we should establish the “three
systems” in pollution reductio n; establish effective, over-
all and comprehensive supervision network to create a
new type of supervision model; promote managerial,
scientific and technological standards, in order to create
preferential conditions for the emission permits trade
4.3.7 Reform the Cou nti ng System of Envi ronmental
Reform the counting system of environmental costs. The
newly published Counting Principles requests that com-
panies should include costs such as disposal of pollution,
in an attempt to make themselves accountable, thus to
inspire other companies to reduce pollution, and thus to
have them strike a balance between profit making and
environmental protection and take part in the emission
permits trade system.
4.3.8 Put Green GDP into Practice
Better local performance checking index system; put
Green GDP into practice; and to those areas which have
a weak eco-system, the government should allow zero
growth in local GDP in a given period of time.
[1] Zhang Yue, “Jiaxing, Zhejiang, the first test of emissions
trading, the initial allocation of fair,” China Environment
News,” November 13, 2007.
[2] http://paper.people.com.cn/scb/html/2007-12/28/content_
[3] http://www.cas.ac.cn/html/Books/O61BG/c1/2002/1/5/1.
[4] S. D. Li, “A research on china’s establishment of an
emission permits trading system,” China Soft Science
Magazine, Vol. 8, pp. 19–23, 2002.
[5] J. Xu and W. W. Wan, “Designing of trading cost and
emission permits trading system,” China Soft Science
Magazine, Vol. 7, pp. 38–41, 2002.
[6] D. H. Chen and F. Jiang, “Theory and practice on china’s
emission permits,” Soft Science Magazine, Vol. 2, pp.
12–15, 2004.
[7] D. Pierce, “There is no end of the world: Economics,
environment and sustainable development,” Beijing,
China Finance and Economy Press, pp. 116–118, 1996.
Copyright © 2009 SciRes JSSM