China has indicated that it intends to rely on emissions trading to curb its growing greenhouse gas emissions. This paper explores how China could use an emissions trading system (ETS) to control CO2 emissions from its power generation sector, which is the single largest emitter of the country’s energy-related emissions. The paper presents the contextual elements of China’s power generation (trends, regulations and challenges); a primer on emissions trading in electricity; how a price on emissions could affect electricity in the near term; and illustrates the implications for generation cost and prices. It also identifies the key parameters of an ETS fit for implementation in the electricity sector and concludes on the interplay of the ETS and electricity regulation in China. The report is based on discussions with various stakeholders and observers of the electricity sector in China, as well as quantitative analyses of the impact of a CO2 ETS at plant, company and provincial levels.