China Signals Plans to Expand Carbon Market Scope

9 September 2015

China is reportedly considering bringing emissions generated by automakers and paper manufacturers into a national carbon trading scheme due to be launched in late 2016 or early 2017.

Officials in Beijing last February already tentatively identified six sectors as main candidates for carbon emissions cuts including power generation, metal and nonferrous-related metal production, building materials, chemicals, and aviation. (See BioRes, 16 February 2015)

Some commentators have hailed this possible expansion of sectoral scope in the planned national scheme as an indication of China’s recent push towards using market-based mechanisms as a way to meet planned mitigation goals. The nation is also considering deploying other tools such as creating a legal framework to cap coal consumption.

China has said it will peak carbon dioxide emissions by 2030 or sooner, lower emissions per unit of GDP by 60 to 65 percent from 2005 levels by the same year, as well as increase the share of non-fossil fuels in the energy mix from 15 percent in 2020 to 20 percent. Details on the country’s climate ambition were unveiled in a contribution submitted to the UN Framework Convention on Climate Change (UNFCCC) as part of a global effort to curb climate-warming emissions. (See BioRes, 2 July 2015)

Timeframes

The Asian giant became the first developing country to utilise a cap and trade programme when it initiated a process to build seven regional pilot schemes four years ago. Over the next few months officials will continue working on rules aimed at transitioning to a national market.

The National Development and Reform Commission (NDRC), China’s top policy body, has been charged with the task. According to recent reports, the detailed rules of the national carbon market should be decided by the end of this year, with trading to start no later than early 2017.

"There is a lot of work to be done if we are to get the market running by 2016, and the launch date depends on the progress we make," said Wang Shu, a climate change official with the NDRC, when asked about when the national scheme will be in place.

Many government representatives and international observers are hoping for a fully functioning Chinese national market by 2019, according to sources, which might also then expand to cover more companies and polluting industries. A potential carbon tax might also be considered for implementation at the end of the decade, though no further specifics have been revealed to date.

Some studies suggest that carbon permits in the national scheme when launched might initially trade around US$6.12 equivalent and rise to US$8.7 equivalent in 2020.

From regional to national

Once launched, China’s national scheme would be the world’s largest, surpassing the EU’s carbon market, regulating some three to four billion tonnes of carbon dioxide a year by the end of the decade. Some analysts estimate that China’s scheme would create a domestic carbon trade worth up to 400 billion yuan (US$65 billion).

As of last March, approximately 17 million allowances worth US$100 million had been traded in all seven pilot schemes combined, according to a World Bank report.

There are still many hurdles to overcome before the creation of a national market, several experts have cautioned, given that the seven pilot schemes currently in operation act independently of one another. This has resulted in differences with regard to, among others, the number of sectors included, the methods for allowance allocation, the means for monitoring, reporting, and verification (MRV), and compliance.

For example, the pilot scheme in the Guangdong region covers four sectors, compared to 26 sectors and 197 buildings covered in Shenzhen. In order to foster credible climate action, China must ensure that each unit of emissions reductions is reliable and comparable among sectors and across regions, among other challenges.

Another area of concern among several observers is the weak demand for permits resulting from China’s recent economic slowdown driven by slackening demand, overcapacity, and falling investment. A surplus of emissions permits has hit the regional markets leading many experts to speculate if, and how, these extra allowances would be incorporated into the national scheme.

If banned from the national market these millions of surplus allowances may become worthless, however, if allowed high-carbon emitters within pilot regions would be given a competitive advantage over emitters in regions without pilot markets.

The national government has also announced that new centralised rules for the eligibility of offset credits would be launched at the same time as the national carbon market, given that the pilot markets currently have different rules regarding the types of climate action eligible for a Chinese Certified Emissions Reductions (CCERs), as these are formally dubbed.

The pilot markets are set to continue trading until mid-2016; however, government officials have said that if the national market is delayed until early 2017 then the pilot markets would be allowed to continue for another year.

International carbon pricing

The deployment and functioning of market mechanisms to cut emissions has been a point of contention in the UNFCCC talks geared towards developing a post-2020 climate architecture. At a recent meeting in Bonn, Germany several countries supported explicitly mentioning the possibility of using market mechanisms that allow for the transfer of mitigation units internationally, but remain divided on how this would work in practice. (See related story, this edition)

Some countries argue that international rules are needed in the event that domestic markets might start to trade internationally in order to avoid double counting and ensure environmental integrity. 

Beyond the formal UN process, data from the World Bank highlights the increasing prevalence of unilateral carbon pricing across developed and developing countries alike. As of 2014, a total of 40 national and 20 subnational jurisdictions, representing over a quarter of global greenhouse gas emissions, had put in place or were scheduled to put in place either an emissions trading scheme or carbon tax. The total value of carbon pricing mechanisms is now estimated to be just under US$50 billion.

Experts suggest that linking various domestic carbon trading schemes could ease competiveness concerns for energy-intensive domestic industries, since this would create a convergence of carbon price across multiple countries and allow for the most cost-effective mitigation cuts.

Linking enables firms covered by a carbon market in one system to use allowances from another system to meet domestic compliance obligations. Some experts also argue that linking creates a larger allowance market that increases competition while lowering the risk of market manipulation.

Some countries openly support the possibility of linking emissions schemes. Switzerland, for example, is in talks to link its market to the EU’s Emissions Trading System from next year or 2017. The US’ newest climate policy tool to reduce emissions from power plants is also designed for the future possibility of linking domestic emissions trading schemes with international sources. (See BioRes, 14 August 2015)

China, however, has hinted that its national scheme is just a domestic tool to peak its emissions by 2030 and is not looking to link its market.

Other experts have made the case for a club of carbon markets (CCM) that could see the linking of schemes outside, but in parallel to, the UNFCCC process to enable concrete and faster climate action. Members in a CCM would only accept emission credits from, or allow the transfer of credits to, other club members. They would therefore benefit from exclusive market access. 

ICTSD reporting; “China to include automakers, paper mills in national carbon market,” ECONOMIC TIMES, 28 August 2015; “China's national CO2 market seen starting late 2016, early 2017,” REUTERS, 17 June 2015; “China to streamline offset market with central eligibility rules,” CARBON PULSE, 17 August 2015.

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