Fixing the emissions trading scheme: Carbon price stability in the EU and China

AuthorHao Zhang,Anatole Boute
Published date01 May 2019
Date01 May 2019
Fixing the emissions trading scheme: Carbon price
stability in the EU and China
Anatole Boute* |Hao Zhang*
This paper critically questions the legal and economic foundation of price regulation in environmen-
tal markets, with a focus on the European Union (EU) and Chinese Emissions Trading Schemes
(ETSs). In 2018, the EU adopted a structural reform of its own ETS with the objective of increasing
and stabilising carbon prices. This reform raises fundamental questions concerning the free market
nature of the ETS and its function as a driver of lowcarbon investments. On the one hand, regula-
tory adjustments are necessary to address the large surplus of allowances that can result from exog-
enous shocks (e.g. economic downturn). On the other hand, the risk of regulatory intervention in the
market undermines investor certainty. In China, limited regulatory independence and more stringent
government control over the market exacerbates the threat posed by price control measures to the
integrity of China's ETS and its role as a driver of investments in environmental protection.
The creation of markets is an increasingly common approach to environmental protection, and in particular to climate
change mitigation.
By contrast to traditional command and control regulation (e.g. requirements to use certain tech-
nologies), environmental markets have been advocated as a more flexible and costefficient alternative for reducing
polluting emissions and managing scarce natural resources.
For climate change mitigation, emissions trading has
become the leading marketbased instrument for reducing greenhouse gas (GHG) emissions. In 2017, 21 Emissions
Trading Schemes (ETSs) were in place, covering almost 15% of global GHG emissions.
The European Union (EU)
Respectively Associate Professor and Assistant Professor at Faculty of Law, The Chinese University of Hong Kong (email: and This research project benefited from funding under Research Grant Committee of Hong Kong (General Research Fund) No.
CUHK14634116. A first draft of this article was presented at theTenth Annual Meeting of the Society for Environmental Law and Economics (SELE), Notre
Dame Law School in Chicago, 1516 June 2018, and benefited from the participants' useful feedback. The authors are also grateful to William Acworth,
Banban Wang and two anonymous referees for most useful comments on a previous draft of this paper.
R. Zechter et al, State and Trends of Carbon Pricing (World Bank Group, 2017), available at:
468881509601753549/Stateandtrendsofcarbonpricing2017 (accessed 5 June 2018). See also S. Bogojević,Market Mechanisms, in J. Viñuales and
E. Lees (eds), The Oxford Handbook of Comparative Environmental Law (Oxford University Press (OUP), forthcoming).
See e.g., S. Bell et al., Environmental Law (OUP, 9th edn, 2013) 232; D. Driesen, Alternatives to Regulation? Market Mechanisms and the Environment,inR.
Baldwin, M. Cave and M. Lodge (eds), The Oxford Handbook of Regulation (OUP 2010) 203, at 204205.
Zechter et al, n 1 supra; J. Ackva et al, Emissions Trading Worldwide: Status Report 2018 (International Carbon Action Partnership (ICAP), 2018), available at: (accessed 9 September 2018).
Received: 6 June 2018 Revised: 19 December 2018 Accepted: 18 January 2019
DOI: 10.1111/eulj.12307
Eur Law J. 2019;25:333347. © 2019 John Wiley & Sons 333

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