Institutions and Emissions Trading in China

Abstract

Institutions—the formal rules and informal norms that shape human interaction ( North 1991 )—have the potential to influence the oper - ation of an emissions trading system ( ETS ). For instance, preexisting economic regulation has been shown to affect firms’ abatement decisions and costs (Fowlie 2010). Transaction costs can also interfere with cost-effective operation by reducing trading levels and increasing abatement costs (Stavins 1995). As China develops a national ETS for carbon dioxide (CO₂) covering multiple energy-intensive sectors, it is important to consider how its design will interact with prevailing institutional features of the country’s economy. This paper focuses specifically on the role of state control of industry, one source of heterogeneity that will affect efforts to establish an ETS in China’s vast and diverse economic system.