Incentivizing carbon transition – a comparison of carbon trading in the EU and China

This chapter presents the international legal framework on carbon trading and tracks the development of prominent Emissions Trading Systems (ETS) at regional (EU) and at national level (China), and critically assesses their ability to incentivise transitions. The chapter pays particular attention to price support schemes, offset rules and leakage measures. With increasingly ambitious climate targets, it is expected that carbon leakage safeguards (conventionally free allocation to exposed sectors) will have to change in order to incentivize the transition towards a low carbon economy of energy-intensive and trade-exposed industry. In the alternative, border carbon adjustments are required. This chapter therefore also discusses border carbon adjustment measures under WTO rules. Our finding is that the European rules were effective in protecting industry but not in incentivising a carbon transition of the economy and that many critical design elements of the China National ETS are still unknown.