Carbon Pricing and Electricity Market Reforms in China

As a large emerging economy, China is exploring to establish a carbon pricing system to mitigate greenhouse gas emissions. The electricity sector which generates the greatest amount of China's carbon dioxide (CO2) emissions should be covered by such a carbon pricing system. The review of the three main stages of China's electricity market reforms shows that the degree of electricity marketization is relatively low, which might become an obstacle to carbon pricing. This paper develops theoretical and empirical models to analyze the impacts of carbon pricing on electricity supply under two scenarios, namely, marketization and regulation. It is concluded that the electricity market reform is a prerequisite for the development of carbon pricing. Without market-oriented reforms of electricity pricing in China, carbon pricing might lead to a shortage in electricity supply. Potential electricity market reforms to encourage market competition and promote market-oriented electricity-pricing are also suggested.