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Seven emissions trading scheme (ETS) pilots have been established in China. They have introduced some unique methods to set emissions caps and allocate allowances, different from textbook models and their counterparts in the EU, California, and many other regions. This article provides a detailed introduction to the methods for cap setting and allowance allocation adopted by the pilots, and presents detailed comparisons of these methods. In terms of cap setting, the pilots adopt flexible caps that can be adjusted where necessary, which primarily depends on the outcomes of the bottom-up approach, namely aggregating the allowances allocated to participants. As for allowance allocation, the pilots not only adopt such methods as grandfathering and benchmarking, which are also widely applied in other existing schemes, but also some special methods that require ex post adjustment, such as those based on enterprises’ historical emissions intensity (including both physical quantity and added-value intensity) and current production/output. The factors influencing the design are further analysed, including the impacts of theory and experience from foreign systems, concerns about economic development, traditions regarding intensity targets and policy, constraints from data availability and preparation time, tight regulation of the electricity and heat generation sector, and concerns regarding price stability. The practice of pilots presents an improvement opportunity and a challenge for China to further balance the theoretical and practical requirements in ETS design in establishing its national system.
