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The power sector is one of the largest contributors to carbon emissions in China. In 2010, it accounted for nearly 50% of the country's total CO₂ emissions. As a key area for emission reduction, the sector achieved over 1 billion tons of cumulative CO₂ reductions during the Eleventh Five-Year Plan period. With the establishment of China’s carbon trading market, the power industry is set to become a central player in this emerging system. However, its development requires careful planning and attention to several critical factors.
First, the growth of carbon trading in the power sector must support continued electricity demand to sustain economic and social development. As China’s economy expands and living standards rise, electricity consumption is expected to keep increasing in the near and long term. Therefore, carbon trading should not hinder the industry’s growth but rather promote a healthy and sustainable path. This means setting reasonable overall emission targets, creating policies that encourage emission reductions, and ensuring that the power industry can develop while meeting environmental goals.
Second, the design of carbon trading mechanisms must take into account China’s unique energy resource endowments. Coal still dominates the power generation mix, and coal-fired plants play a crucial role in maintaining national energy security. During the early stages of the carbon market, regions or companies reliant on coal should not be assigned overly strict emission targets. Their ability to operate sustainably must be preserved. Moreover, the allocation of carbon quotas should reflect regional differences in energy resources, helping to optimize the national energy layout. For instance, more carbon allowances could be directed toward the northwestern region, where energy resources are abundant, to support power transmission from west to east.
Third, the development of carbon trading in the power sector must align with ongoing reforms in the electricity market and pricing mechanisms. Currently, electricity prices in China are not fully liberalized, and power generation is largely allocated by the government—contrary to practices in many other countries. Given this context, carbon emission allocations should be integrated with electricity usage indicators. At the same time, authorities should explore ways to link electricity prices with carbon market prices, enabling the transfer of carbon costs to consumers and encouraging energy efficiency and emission cuts. As China continues to reform its electricity market, the carbon trading system must evolve in tandem with these changes to ensure a smooth transition toward a more market-driven and environmentally responsible power sector.