China just launched the world’s largest carbon trading market—and it already needs reforming

July 16, 2021, 9:38 AM UTC

China launched the world’s largest carbon emissions trading scheme (ETS) on Friday, after years of delays and missed deadlines. The plan, which allocates industrial companies a quota for carbon emissions and allows greener firms to sell credits to more polluting ventures, is a step toward China’s goal of becoming carbon neutral by 2060. But the program is unlikely to produce any results this year.

“China…will look to more cautiously gain experience with its operations before relying on [the ETS] as the primary mechanism to drive decarbonization,” says Roman Kramarchuk, head of future energy analytics at S&P Global Platts.

Plans for a national ETS began in 2011 when the National Development and Reform Commission (NDRC) approved several regional trading schemes. The first pilot launched in Shenzhen in 2013, and Beijing decided to push for a national program in 2017. An earlier launch date of June 30 this year was reportedly scrapped because it was too close to the Chinese Communist Party’s centenary celebration on July 1.

In its debut phase, the ETS will hold a portfolio of 2,225 of China’s power suppliers, which, according to the International Energy Agency, account for over a seventh of fossil-fuel-related carbon emissions globally. Electricity production made up around 40% of China’s total carbon emissions last year. Roughly 57% of the country’s electricity demands are powered by coal.

Seven more industrial sectors, including petrochemicals, aluminum, and steel, will be added to the ETS before 2030, the year China has said it will reach peak carbon emissions. Zhang Xiliang, the chief architect of the ETS, told a conference last week that the market would eventually include 10,000 emitters, accountable for some 5 billion tonnes of carbon dioxide a year.

But critics of China’s ETS scheme say the project’s low penalties and loose restrictions don’t provide enough incentive for companies to reduce pollution. The maximum fine a company will pay for exceeding its quota is just $4,600—much lower than the cost of implementing emission reduction plans.

The trade price of each quota—which permits pollution equivalent to 100,000 tonnes of carbon dioxide emissions—is considerably lower than similar schemes too.

Trading on China’s ETS opened Friday with one tonne of carbon dioxide valued at around $7, which market analyst Refinitiv estimates will increase to $24 by 2030. In the European Union, which launched an ETS in 2005, a tonne of carbon is valued at close to $70. A higher price per tonne increases a company’s cost of purchasing excess capacity in the event that it exceeds its emissions allocation.

If the Ministry for Ecology and Environment (MEE), which oversees carbon regulation, allocates a company a quota of 1 million tonnes of carbon emissions, for example, and the company exceeds its limit by 100,000 tonnes, it will need to buy extra capacity through the market. At $7 per tonne, that excess will cost the company $700,000.

The higher the cost, the more incentive a company has to not exceed its emissions cap.

In an April report, U.K. think tank Transition Zero said that the volume of emissions available on China’s ETS is actually 1.9 billion tonnes larger than the volume of industrial demand, giving a “fair price” for China’s trading scheme as zero.

“The ETS in its current form will likely have no impact reducing power generation emissions,” Transition Zero says.

For the time being, Beijing’s focus appears to be on onboarding companies to the ETS and making sure it works in principle, before—hopefully—using it to tighten the screws on polluting industries.

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