China’s 13th Five-Year Plan includes goals to establish electricity markets and deepen progress toward improving air quality. But achieving the plan’s energy and environmental targets could result in unintended consequences, including increased pollution, shifting pollution from one region to another, and falling short in the utilization of China’s renewable energy resources and new high-efficiency thermal plants.

Regulators in the European Union and the United States also faced competing policy and regulatory choices as they sought to establish or liberalize electricity markets while at the same time improving air quality and reducing greenhouse gas emissions. In those regions, successful policy implementation hinged on the answers to these questions:

• How should regulators address new thermal power plants?
• How should regulators address existing thermal power plants?
• As electricity markets are developed, what environmental standards should apply?

While the European Union and United States continue decades of progress to reform electricity markets and improve air quality, an analysis of energy and environmental principles from those regions offers insights that are relevant for China to consider today. First, air pollution must be thought of in absolute terms: tons must be removed. Intensity-based targets alone are insufficient to meet China’s goals. Second, new power plants are subject to a rigorous review and approval process. In air basins that exceed public health standards, more tons must be taken out of the basin than may be added by a new plant. Finally, existing plants are required to meet emissions standards by a certain date, or must cease operations.

Collaboration and cooperation among air and energy regulators is essential, as illustrated in this policy brief by examples from the European Union and the United States. This brief draws lessons from these experiences that may be useful in China. The paper also discusses risks to achieving China’s air quality and power sector reform goals, such as uneven implementation, silos of responsibility that impede success, the possibility that power sector reform will evolve in ways that degrade air quality, and reliance on air quality control measures that impose higher costs on businesses and consumers. Final sections recommend power sector reform policies that will improve air quality.

This paper is also available in Chinese.