Editing IPCC:AR6/WGIII/Chapter-13 (section)

==== 13.6.3.2 Emission Trading Systems ====

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The most common ETS design – cap-and-trade – sets a limit on aggregate GHG emissions by specified sources, distributes tradable allowances approximately equal to the limit, and requires regulated emitters to submit allowances equal to their verified emissions. The price of allowances is determined by the market, except in cases where government determined price floors or ceilings apply.

ETSs for GHGs were in place in 38 countries as of April 2021 ( [[#World%20Bank--2021a|World Bank 2021a]] ). The EU ETS, which covers 30 countries, was recently displaced by China’s national ETS as the largest. ETSs tend to cover emissions by large industrial and electricity generating facilities. [[#footnote-003|2]] Allowance prices as of April 1, 2021 ranged from just over USD1 to USD50, and coverage between 9% and 80% of the jurisdiction’s emissions.

Multiple regional pilot ETSs with different designs have been implemented in China since 2013 to provide input to the design of a national system that is to become the world’s largest ETS ( [[#Jotzo--2018|Jotzo et al. 2018]] ; [[#Qian--2018|Qian et al. 2018]] ; [[#Stoerk--2019|Stoerk et al. 2019]] ). Assessments have identified potential improvements to emissions reporting procedures ( [[#Zhang--2019|Zhang et al. 2019]] ) and the pilot ETS designs ( [[#Deng--2018|Deng et al. 2018]] ). China’s national ETS covering over 2200 heat and power plants with annual emissions of about 4 GtCO 2 took effect in 2021 ( [[#World%20Bank--2021a|World Bank 2021a]] ).

All of the ETSs for which data are available have accumulated surplus allowances which reduces their effectiveness ( [[#Haites--2018|Haites 2018]] ). Surplus allowances indicate that the caps set earlier were not stringent relative to emissions trends. Most of those ETSs have implemented measures to reduce the surplus including removal/cancellation of allowances and more rapid reduction of the cap. Several ETSs have adopted mechanisms to remove excess allowances from the market when supply is abundant and release additional allowances into the market when the supply is limited, such as the EU ‘market stability reserve’ ( [[#Hepburn--2016|Hepburn et al. 2016]] ; [[#Bruninx--2020|Bruninx et al. 2020]] ). Initial indications are that this mechanism is at least partially successful in stabilising prices in response to short term disruptions such as the COVID-19 economic shock ( [[#Gerlagh--2020|Gerlagh et al. 2020]] ; [[#Bocklet--2019|Bocklet et al. 2019]] ).

Some ETS also include provisions to limit the range of market prices, making them ‘hybrids’ ( [[#Pizer--2002|Pizer 2002]] ). a price floor assures a minimum level of policy effect if demand for allowances is low relative to the ETS emissions cap. It is usually implemented through a minimum price at auction, as for example in California’s ETS ( [[#Borenstein--2019|Borenstein et al. 2019]] ). a price ceiling allows the government to issue unlimited additional allowances at a pre-determined price to limit the maximum cost of mitigation. Price ceilings have not been activated to date.

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