China Looks Towards Next Steps For Implementing National Carbon Market

18 January 2018

The world’s biggest emitter of greenhouse gas emissions announced the start of its long-awaited emissions trading scheme (ETS) one month ago, on 19 December. As the new year begins, how the world’s largest carbon market will operate in practice and when trading might begin will be a closely-watched subject in climate and energy circles, given the various details which remain to be hammered out.

The launch of the carbon market came later than originally envisioned. Design problems were credited with the delay, with the kick-off initially planned for 2016.

Under the carbon market, covered companies will have to reduce emissions below a certain limit, which will contract gradually. Trading will allow companies with higher reduction costs to purchase additional permits to account for higher pollution, while those with lower reduction costs will be able to sell their surplus allowances.

The ETS is a key tool in China’s efforts to meet its pledge under the UN’s Paris Agreement on climate change. Under its nationally determined contribution, China has committed to peak its emissions by 2030 and raise the share of renewables in its energy supply to 20 percent by the same year.

“The ETS will push industrial plants to eliminate outdated capacity and improve their production,” said Jiang Zhaoli, vice director at the climate change department of China’s National Development and Reform Commission, in comments reported by Reuters last month upon the market’s launch.

Initial scope

The Chinese ETS will initially cover the power sector only. Under earlier plans, companies from eight sectors were meant to take part in the scheme, including petrochemicals, chemicals, building materials, iron and steel, non-ferrous metals, paper, power, and aviation.

According to Chinese officials and experts, the change is due to the fact that the power sector has the most credible and transparent emissions data, which makes it a suitable sector for starting the scheme, while other sectors lack strong enough statistical foundations.

Under the initial scope, the ETS will cover 3.5 billion tonnes of carbon dioxide from 1700 installations, accounting for over a third of China’s total carbon emissions. This means that China will overtake the EU, which covers 1.4 billion tonnes, as the world’s largest carbon market.

Nine regions and cities, including the seven which have piloted regional carbon markets over the past few years, will coordinate to set up the national ETS.

Pending design elements

Many details about the Chinese ETS are yet to be decided and announced. This includes the initial level of the emissions cap and its planned trajectory over time.

China also has to announce how permits will be allocated. Authorities will need to specify both the share of permits to be allocated for free and those to be auctioned, as well as how auctions will operate.

The provisions for monitoring and enforcement, as well as details about penalties for non-compliance, are other features which need to be developed.

Given the list of pending tasks, it is not yet known when trading will begin. Experts expect the set-up of the ETS to take at least one year, with 2020 likely to mark the launch of actual trading and broader sectoral coverage. This would coincide with the publication of China’s next Five-Year Plan and the submission of its new climate pledge under the Paris Agreement.

Climate leadership

The move to a national carbon market in the world’s second largest economy and largest CO2 emitter has been welcomed in the climate community as a significant development.

“With the top global polluter enacting policies to support the Paris Agreement and transition to a low carbon economy, it is clear that we’re at a tipping point in the climate crisis,” said former US Vice president Al Gore, who is a vocal advocate for climate action and won the Nobel Peace Prize for his efforts just over one decade ago.

Once fully implemented, the Chinese ETS is expected to cover around five billion metric tonnes of carbon dioxide. According to a report by the International Carbon Action Partnership (ICAP), this means that 15 percent of total global emissions will be covered by carbon markets. Experts argue that China’s national ETS can spur wider climate action around the world.

The news is a step that “could have global ramifications,” Jonathan Grant, director of climate change at advisory firm PWC UK said, according to GreenBiz. “China’s actions could reduce concerns about competitiveness which is often a barrier to implementing climate policy in other countries.”

The launch of China’s national ETS came almost immediately after US President Donald Trump removed a description of climate change as a national security threat from a new national security strategy plan and several months after he announced his intention to withdraw from the Paris Agreement. (See Bridges Weekly, 8 June 2017)

Various policymakers have praised China for stepping up its climate leadership at a time when the US has scaled back its role at the federal level.

"As the US government turns its back on the fight against climate change, China, the EU and many others are forging ahead with robust climate policies and measures,” said EU Climate Action and Energy Commissioner Miguel Arias Cañete in a statement. “This announcement sends a very strong signal: the world is changing with new, broad climate leadership. With both the EU and China committed to emissions trading, two major international players are championing carbon markets to meet their commitments under the Paris Agreement and curb emissions cost-effectively."

A strong year for carbon markets

China’s announcement follows a year of positive carbon market developments around the world. In November, the EU clinched a reform deal to strengthen its ETS and together with the US state of California announced their intention to ramp up carbon market cooperation. (See Bridges Weekly, 16 November 2017)

In New Zealand, Prime Minister Jacinda Ardern proposed incorporating agriculture into the ETS, moving towards a scheme that covers “all gases, all sectors.” (see Bridges Weekly, 26 October 2017)

Closing the year, national and sub-national leaders from North and Central America released the Carbon Pricing in the Americas declaration on 12 December at the One Planet Summit, pledging to deepen carbon market cooperation. The statement was signed by Canada, Chile, Colombia, Costa Rica, Mexico, the Governors of California and Washington state, and the Premiers of Alberta, British Columbia, Nova Scotia, Ontario, and Québec.

ICTSD reporting; “China to launch nationwide carbon market next week: officials,” CLIMATE HOME NEWS, 14 December 2017; “China aims for emissions trading scheme in big step vs. global warming,” REUTERS, 19 December 2017; “China's 'monumental' new emissions trading scheme,” GREENBIZ, 21 December 2017; “What to Make of China’s Announcement of a National Cap-and-Trade System?,” HUFFINGTON POST, 5 January 2018.

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