Abstract
The rapid economic growth has enriched our daily life. However, it also does great harm to our environment at the same time. Many countries have tried different ways to reduce pollution. The emission trading system, an economic-incentive tool based on the cap-and trade concept, is widely used in these countries for controlling emissions. Their trading experience shows that the system can successfully reduce a huge amount of pollution at lower costs. Encouraged by the accomplishment, China in recent years has also launched several trading programs to solve the pollution problems. However, the process of implementing these programs has revealed many problems, such as lacking a complete and unified legal system, no scientific foundation for the initial allocation of emission rights and the excessive government intervention in the secondary market. Using the trading market in China as an example, this study tries to evaluate the effectiveness of the existing trading programs based on the theoretical literatures and the trading experience abroad. Our research finds that four things are needed to facilitate the trading efficiency in China. First, the government should build a unified legal system. Second, add banking system to increase the manufacturer's elasticity of cost reduction. Third, improve initial allocation, clear the standards of initial emission share and use auctions to allocate emission rights to assure the primary market’s operations. At last, reduce administrative intervention such as canceling the reference price and transaction limits among different manufacturers to mobilize the secondary market vitality.