After years of planning, China officially launched its national carbon emissions trading system (ETS) last month. With this move, China officially becomes home to the largest carbon market in the world covering more than 4 billion tons of CO2 emissions from over 2,000 power plants.[i]
The path to this moment spans almost a decade. Taking inspiration from the European ETS and California’s Cap and Trade Program, China announced their intention to deploy seven regional ETS pilots in 2011, which were then rolled out in five cities (Beijing, Shanghai, Tianjin, Chongqing, and Shenzhen) and two provinces (Guangdong and Hubei) a couple years later. In 2016, an eighth and final pilot was launched in Fujian, a province located on the southeast coast of China.[ii]
Given this was an opportunity to build a successful system for the entire country, China allowed each pilot to be governed slightly differently in parameters such as scope, allowances, and price. Together, the experiences and data collected by these pilots helped to inform the Chinese government in their planning for a national system. And in 2017, that became reality as China announced they would begin the process of launching an ETS across the country.[iii]
Despite best efforts to learn from the pilots, the development of the Chinese National ETS was met with several delays and was significantly cut back from its initial scope. Originally, it was intended to cover steel production, cement, and power plants throughout China, but that was reduced to only coal and gas plants that supply power and heat. The reason for this was due to the ability to monitor these specific industries.[iv]
In a cap-and-trade system, data is everything. Without the ability to accurately monitor emissions and allowances, the impact of the entire system can come into question. Within the first month of the launch of the China National ETS, a company in Northern China was fined for altering their carbon emissions data.[v] There is hope that regulation and data quality will improve and soon, other industries will join.
However, price remains an underlying issue. At launch, allowances were sold near $8 USD per ton and most recently, the market reached a low of $7.55 USD per ton.[vi] In contrast, the EU ETS is trading around $60/ton, while California’s Cap and Trade Program is around $20/ton.[vii] Though carbon pricing varies greatly around the world, a 2017 report by the High-Level Commission on Carbon Prices estimated that carbon pricing should have reached $40-80 per ton by 2020 for the world to achieve the goals of the Paris Agreement.[viii]
Analysts have argued that the low price is due to the many allowances handed out by the Chinese government at launch to ease industry into the new system, which, in addition to the lack of a hard cap on the total number of allowances that can be allocated, has flooded the market.[ix] Until more regulation is introduced, the price will likely remain low.
Though the China National ETS still has a lot of room for improvement, the launch continues a trend of strong climate action in the past year by China. Last year, President Xi committed to China reaching peak emissions before 2030, with a long-term goal of being carbon neutral by 2060.[x] Part of these efforts will include phasing out coal power plants by 2026.[xi]
However, with the recent IPCC report, we know how little time is left to act to avoid the worst outcomes of climate change. If China aims to lead on climate action, ramping up the strength of its National ETS will be crucial to do so. And as the world’s largest emitter of greenhouse gases, China’s actions will have a profound impact for the rest of the world.
[i] https://www.reuters.com/business/sustainable-business/chinas-national-carbon-emission-trading-opens-48-yuant-chinese-media-2021-07-16/
[ii] https://ets-china.org/ets-in-china/
[iii] ibid
[iv] https://www.nytimes.com/2021/07/16/business/energy-environment/china-carbon-market.html
[v] ibid
[vi] https://qz.com/2050774/chinas-new-carbon-trading-market-isnt-working/
[vii] https://carbonpricingdashboard.worldbank.org/map_data
[viii] https://www.worldbank.org/en/results/2017/12/01/carbon-pricing
[ix] https://qz.com/2050774/chinas-new-carbon-trading-market-isnt-working/
[x] https://www.nytimes.com/2020/09/23/world/asia/china-climate-change.html