Institutions-the formal rules and informal norms that shape human interaction (North 1991)-have the potential to influence the operation of an emissions trading system (ETS). For instance, preexisting economic regulation has been shown to affect firms' abatement decisions and costs (Fowlie 2010). Transaction costs can also interfere with cost-effective operation by reducing trading levels and increasing abatement costs (Stavins 1995). As China develops a national ETS for carbon dioxide (CO_2) covering multiple energy-intensive sectors, it is important to consider how its design will interact with prevailing institutional features of the country's economy. This paper focuses specifically on the role of state control of industry, one source of heterogeneity that will affect efforts to establish an ETS in China's vast and diverse economic system.The role of the state and its channels of influence over firm behavior in China differ from the economies where emissions trading has been previously introduced. This paper describes several key features of state influence in China, and examines the potential for interactions with the country's proposed national ETS for CO_2. The system was formally announced in December 2017 and is expected to develop in stages through 2030, supporting national goals to reduce CO_2 emissions intensity by 60-65 percent relative to 2005 levels over the same period.
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