This report, a joint effort by SEI and FORES, examines China’s efforts to develop domestic carbon markets, what is at stake, and key challenges that lie ahead.

China has embarked on one of the largest endeavours in climate economics ever, to establish a national carbon emission trading system by 2015. As a first step, carbon-trading pilots have been initiated in seven provinces and cities. The success or failure of those experiments will to a large extent determine the future of climate policies in China. This report evaluates the progress so far and examines the key challenges ahead. While the attempts to develop a domestic carbon trading are sincere and ambitious, there are considerable difficulties. Many of the challenges are not particular to China, but common to any emission trading system. But there are also more profound worries about how to operate a market-based instrument given the current shortcomings of the Chinese market system in general.