Optimizing the enterprise inclusion threshold setting of China's national carbon market

In July 2021, China launched its national carbon emission trading system (ETS), initially targeting thermal power plants with annual emissions exceeding 26,000 tons of carbon dioxide (CO₂). Optimizing the inclusion thresholds within the ETS is crucial for effective carbon market policy formulation. This study introduces a threshold optimization model for ETS that evaluates carbon market benefits across varied inclusion thresholds and identifies the optimal threshold based on the cost savings per unit of emission reduction. We applied this model to determine the optimal inclusion threshold for China's national ETS and to prioritize the order of industry inclusion under the adjusted threshold. Our simulation results indicate the following: (i) For the exclusive participation of the thermal power sector in the ETS, the optimal inclusion threshold is 19,000 tons of CO₂; however, this threshold decreases to 3,000 tons of CO₂ when all major sectors are included; (ii) In the expansion phases of the ETS, the optimal sequence for industry inclusion is cement manufacturing, steel smelting, basic chemical raw materials, and aluminum smelting, which maximizes ETS benefits and reduces abatement costs by 36%; (iii) Under the optimal threshold, large-scale enterprises benefit significantly more than small and medium-sized enterprises, capturing over 70% of total ETS advantages; (iv) There exists an "inverted U-shaped" correlation between ETS benefits and carbon reduction targets.