China Policy Journal Volume 1, Number 1, Fall 2018 | Page 53

China Policy Journal
es in coal price lead to greater changes
in emissions and the CEA price. No
Granger causality was found between
LNG price and CEA price.
Additionally, we found a Granger
causality from stock index changes to
CEA price changes in Beijing, Shanghai,
and Shenzhen. In Shenzhen, the Shanghai
Shenzhen 300 stock index displayed
a positive short-run effect on CEA
price with a two-week lag. The same
with Beijing. Therefore, the CEA price
would increase at the times of economic
prosperity, because the larger industrial
outputs and the associated emissions
can raise the demand for CEA. Further,
the coefficients on break dummies
show that all ETSs experienced a higher-level
CEA price at the initial stage
of operation but a decrease of the price
after the compliance break in the next
calendar year. The decrease in the CEA
price could be because the demand for
CEA decreased over time. So, policymakers
need to consider strengthening
the CEA allocation to reduce the CEA
supply and increase the CEA demand,
in order to keep a high-level CEA price.
Overall, this study contributes
to our understanding of ETS (or other
tradable permit policies) by adding empirical
evidence in the context of China.
The local ETSs set good examples of institutional
innovations when adopting
ETS and their performances show how
ETS works in regions under different
development stages. Our econometric
analyses highlight that energy prices
have significant influences on CEA
prices, but the influences are different
across local ETSs. In future, for either
local ETSs or the national ETS, policymakers
and investors should be aware
of the dynamic relationships between
the energy markets and CEA markets to
reduce the CEA price volatility caused
by the fluctuations of energy prices. A
big problem of the ETSs is that the CEA
price is too low. So, when coal price increase,
or when LNG price and oil price
decrease, the regulators can somehow
buy in allowances to prevent CEA price
from dropping, especially if the CEA
price is low. Another implication is that
policies promoting the use of cleaner
energies (e.g. natural gas) or general
energy efficiency programs may reduce
CEA price. Such policies should be followed
by methods to shorten CEA supply
or increase CEA demand.
China’s National Development
and Reform Commission (NDRC) has
announced its Plan for Building the National
Carbon Emission Trading Market
for Power Generation Industry on 18
December 2017. It says China will take
about one year to complete the emission
exchange system and take another
one year to try out the allowance allocation
and trading before it officially operates
the national ETS. We can expect
that it will be very challenging for China
to operate ETS at the national level,
considering the performance diversity
of the local ETSs at the piloting stage.
The differences in CEA prices between
local ETSs, to some extent, reflect the
differences in local marginal abatement
costs. It is practical to start with a single
industry sector and brings in more
sectors when the institutional design is
more mature and the measurement, reporting
and verification (MRV) system
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