Can the Enforcement Regime of China’s Emissions Trading Schemes Effectively Ensure Compliance? A Law and Economics Study

To control Greenhouse Gas (GHG) emissions, China has been exploring emissions trading schemes (ETSs) for more than a decade. For example, seven pilot ETSs, including the Shenzhen, Shanghai, Beijing, Guangdong, Tianjin, Hubei, and Chongqing pilot ETSs, were operational between 2013 and 2014; a national ETS began functioning in 2021. In general, whether an ETS can harness its strengths to reduce emissions depends on the compliance behaviour of its covered entities, which is influenced by its enforcement regime. This research aims to evaluate the effectiveness of the enforcement strategies of the seven pilot ETSs and the national ETS in China (China’s ETSs) in ensuring compliance from a law and economics perspective.

To achieve this purpose, this research first explores how effective enforcement strategies for an ETS can be derived from the law and economics literature. Subsequently, this research systematically describes the current compliance requirements and enforcement regimes of China’s ETSs and assesses the extent to which the enforcement regimes align with/deviate from the effective ETS enforcement strategies in theory. Finally, this study examines the data from the first compliance period of China’s national ETS to empirically evaluate the extent to which actual enforcement of China’s ETSs aligns with/deviates from the theoretical strategies.

This thesis concludes that, from a law and economics perspective, the designed enforcement strategies of China’s pilot ETSs and the designed and actual enforcement strategies of China’s national ETS do not always appear to be effective in incentivising the regulated entities to comply with ETS regulations.