The priority of industrial sector coverage in China's national emission trading system: an application of the LASSO model

This paper estimates the influences of different industries on the carbon prices and selects the industries with high market power in the carbon market. To realize price discovery in the carbon market and improve the market efficiency, we suggest that industries with higher market power should be included in the market prior to other industries. Using the LASSO regression to analyze the data from the pilot markets of China's ETS and related industrial product outputs, we find that among all related industries, the petrochemical and chemical industries affect the carbon price the most and hence should be included in China's ETS with priority. The power generation industry, though regarded as the major entity of emission control, imposes weaker influences on the carbon price. Industries that may be incorporated in China's ETS later include the transportation equipment manufacturing and the mining and metal industries.