What are the main factors affecting carbon price in Emission Trading Scheme? A case study in China.

Emission Trading Scheme (ETS) has the potential to influence energy consumption, environmental quality and economy directly and ETS price is the key of ETS market. On December 27, 2017, China's carbon trading market was officially launched, which may be the largest platform of ETS in the world. Therefore, this paper seeks to assess the influencing factors of emission trading price (industry coverage, the annual decline factor, and free allowance rate) and analyzes the impact mechanism in detail by applying computable general equilibrium model. The results show that ETS price and emission reduction have a significant positive correlation; key factors can impact the price significantly. Fewer industries, higher annual decline factor, and higher free allowance rate will push ETS price up. The paper also found that ETS prices are unpredictable when the mechanism is not yet fully determined. It further, argues that ETS prices are unpredictable when the mechanism is not yet fully determined because of the high relationship between ETS price and the mechanism of ETS. These findings will assist policymakers to build a healthy ETS market. The important implication is that we can adjust the market price by adjusting these mechanisms.