Price on Carbon: Will China’s emissions trading scheme help tackle climate change?
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- Published on June 30th, 2021
After a decade of preparation, China’s national emissions trading scheme (ETS) officially enters the operational phase in 2021, with trading due to start by the end of this month.
Despite only including the power sector in its initial phase this year, it is already the world’s largest ETS, overtaking the European Union’s ETS and covering 12% of global carbon dioxide (CO2) emissions.
China’s leadership has high expectations for the trading system. They hope it can help the nation accelerate its energy transition at “lower cost” on the way to achieving its “dual carbon” climate goals of peaking emissions by 2030 and reaching “carbon neutrality” by 2060.
But a “benchmark”-based design, limited coverage and the lack of a firm cap on emissions raise question marks over whether the ETS, in its current form, will help China achieve its climate goals.
Carbon Brief has taken a deep dive into the new scheme by analysing government documents and speaking to a wide range of experts.
This in-depth Q&A aims to answer some of the most pressing questions about China’s ETS and what it means for tackling climate change.
Why is China introducing a national emissions trading scheme?
China is currently the world’s largest emitter of greenhouse gases, accounting for more than a quarter of the global total in 2019, according to US thinktank the Rhodium Group.
‘DUAL CARBON’ GOALS:
“Dual carbon” goals refer to China’s two climate goals announced by president Xi Jinping at the 75th session of the United Nations General Assembly in September 2020. President Xi announced that China… Read More
Its emissions are dominated by the power sector and manufacturing, with electricity (40%) and industry (29%) alone making up more than two-thirds of the nation’s total.
Since 2010, China has been saying it would introduce an ETS to help regulate these emissions. In 2015, China confirmed its firm commitment to do so.
Put simply, an ETS is a way to put a price on carbon. Designated CO2-emitting sites, such as factories or power plants, are given the right to release a certain amount of carbon in the form of “permits” or “allowances”, which can be traded. At the end of each cycle, participants must submit permits equal to their actual emissions.
Over the intervening years, the launch of China’s ETS has been repeatedly delayed. A deadline of “within the 12th five-year plan period” (2011-2015) was postponed to 2016, then to 2017.
A “three-phase development plan” for 2017-2019 anticipated a “rapid operation phase with maturity” and an ETS that would “play a central role in greenhouse gas emissions control” by 2019.
The launch was later delayed again to 2021.
Stian Reklev, Beijing-based director of Carbon Pulse, a news and intelligence website focused on carbon markets, tells Carbon Brief that the challenge of collecting reliable emissions data, “political infighting” and a government reshuffle in 2018 are the principal reasons for the delays.
The State Council of China is the highest executive organ of state power and the highest organ of state administration. It is composed of a premier, vice-premiers, state councillors, ministers in charge… Read More
He suspects the initial market design, prepared by mid-level government officials, was considered too ambitious and “got watered-down” by higher-level officials in the State Council and those from other ministries, who are concerned more with the “overall shape of the economy”.
Along the way, China launched a series of ETS pilots (see Carbon Brief’s 2018 article) and also continuously adjusted the design, policy framework and regulatory authority for the national scheme.
Then, in September 2020, China’s president Xi Jinping announced a new target to reach carbon neutrality by 2060. And, in December 2020, he reaffirmed China’s “Nationally Determined Contribution” (NDC) commitment to peak its carbon dioxide (CO2) emissions “as soon as possible before 2030”.
This lent new significance to the national ETS, with Xi repeatedly referring to the scheme in the context of achieving his nation’s “dual carbon” goals for 2030 and 2060.
The first annual “implementation cycle” of China’s national ETS kicked off on 1 January 2021 and online trading of emissions permits is due to begin by the end of June.
Reporting the news of its opening in January, Xinwen Lianbo, a prime time news programme aired by state broadcaster CCTV, emphasised the significance of the national ETS starting to operate.
The daily news show is one of the most important mouthpieces of the Communist Party of China (CPC). The programme said:
“It is the first time that China has pressed the responsibility of controlling greenhouse gas emissions onto enterprises from the national level and promoted the upgrading of industrial technology through a market-pushing mechanism.”
Crucially, China’s ETS will not operate in the same way as other “cap-and-trade” schemes, which use a declining “cap” to ensure CO2 emissions fall each year. (See: How will China’s ETS work?).
In the first implementation cycle, permits will be given for free, based on the output of each site and “benchmarks” of emissions per unit of output, as well as other adjustments. (See: How will ETS permits be allocated?).
In general, the current design means a regulated power plant will receive more permits if it generates more electricity.
As a result, the ETS should – in theory, at least – encourage more efficient operations, but it is not guaranteed to reduce emissions overall. (See: Will the ETS cut emissions?).
The scheme could be tightened in the future by adjusting the benchmarks over time, or by introducing an absolute cap on the emissions that can be released under the ETS.
The regulatory and legislative structure underpinning the ETS is relatively weak and fines for breaches are low, but these too could be strengthened over time. (See: What comes next for China’s ETS?).
Initially, it only covers the electricity generation sector and “captive” power plants that directly serve industrial sites, but this still amounts to nearly nearly 40% of China’s CO2 emissions, as shown in the chart below (red). This alone amounts to around 15% of global CO2 emissions.
The ETS is expected to expand to other sectors later, which would bring 72% of China’s carbon emissions into the scheme (See: When will the ETS be expanded?).
China’s national ETS will initially cover nearly 40% of the country’s CO2 emissions in the power generation sector (red). It could cover more than two-thirds of the national total CO2 emissions when expanding to cover industrial sectors (pink). CO2 emissions from other sectors, including aviation, are shown in grey (MtCO2). Source: Joint Research Centre EDGAR dataset, not including CO2 emissions from LULUCF. Chart by Carbon Brief using Highcharts.
China’s national ETS is already the world’s largest, eclipsing the EU ETS and nearly doubling the share of global emissions covered by carbon trading from 9 to 17%.
The initial phase is a compromise, designed to ensure buy-in and avoid conflict, says Chen Zhibin, a senior consultant at Sino-Carbon Innovation & Investment, a Beijing-based private consulting firm.
There has been widespread concern that if the national ETS were to advance too aggressively, Chen explains, then leading companies from the industrial sectors might boycott it and refuse to comply.
He adds: “Today’s market design is a relatively safe solution. It’s a result of years of negotiation between regulators, industry associations and big enterprises.”
(Coming tomorrow: How will China’s ETS work?)
