Methods for Evaluating the Performance of Emission Trading Schemes

Robust analysis of emissions trading schemes (ETS) and their design is crucial for improving performance, and learning lessons from pilot exercises. It has been a vital component in the evolution of maturing programmes such as the European Union Emissions Trading Scheme (EU ETS). A range of options is available to conduct evidence based ex-post analysis, drawing on methodologies from a range of fields. This report provides a short summary of assessment methodologies that have been used to evaluate different operational aspects and outcomes of existing trading schemes, a literature which to date draws primarily from the EU ETS experience. We also discuss the applicability of these different methods for evaluating the performance and design aspects of the Chinese pilot schemes.
In Section 2, we review literature evaluating the operational aspects (e.g. prices, market activity, transaction costs) of emissions trading. These aspects are key to understanding the functioning of ETS as a trading market, and can be assessed from the very inception of the schemes and throughout their lifetime. Section 3 reviews the literature evaluating the outcomes (e.g. emissions reductions, innovation activity, trade effects and employment) of ETS schemes. These evaluations tend to be conditionial on the availability of panel data, hence can be conducted once the trading scheme has become more established. This review is focused on the areas identified to be of key interest for evaluating Chinese pilot schemes and where empirical evaluation has already been conducted.

Sections 2 and 3 give a synthesis of how empirical assessment of these operational aspects and outcomes has been conducted to date, by focusing on the following key questions:
• Why is it an important dimension for evaluation?
• What methods and metrics have been used for assessment?
• What data are required?

Section 4 provides key recommendations for evaluating the Chinese pilot schemes. Overall recommendations are made in light of timings and availability of data, as well as specific recommendations for each dimension of assessment discussed in this report.

This paper was prepared as part of the project “Evaluation of Emissions Trading Scheme Pilots in China” funded by CIFF and executed by the Tsinghua University

Author: M. Sato, T. Laing. S. Cooper & L. Wang
Year: 2015
Type: Final paper