China just launched the world’s largest carbon market

What’s happening? China has launched its own national emissions trading scheme (ETS). The initiative, which has registered 2,225 entities, will force power operators in the country to purchase emissions permits if their coal plants exceed designated carbon intensity levels. Initially, the market will only apply to the thermal power industry, which comprised around 40% of China’s emissions in 2020. The sector is responsible for twice the emissions of the EU carbon market, which was previously the world’s largest such system.

Why does this matter? Market-based mechanisms to put a price on carbon are growing, and China’s ETS – the world’s largest – has been some years in the making.

When it expands beyond power to cover seven other sectors in China, the scheme will cover 14% of global fossil fuel emissions. This could be by 2025, but a recent survey saw only 12% of industry stakeholders predict there would be a fully functional network nationwide in China by this date.

Why the delays? This first national phase, covering the country’s power sector, was expected to be launched last year, following multiple setbacks after an original pledge was made to develop an ETS before COP21 in Paris in 2015. The scheme’s ambition has been scaled back on numerous occasions and its most recent delay was partly a result of the Covid-19 pandemic and partly due to its sheer size and complexity.

How does it work? The facilities covered in this initial iteration are coal- and gas-fired power stations which have annual emissions of around 26,000 mt. These facilities will be given permits to emit, with the exact amount calculated based on emissions from 2013 to 2019. If their quota is exceeded they will need to purchase additional permits. It’s thought all plants over 300 MW will not need to purchase additional credits by default, with analysts describing the quotas for these facilities as “quite generous”.

A pilot ETS was launched in China in 2013 covering 3,000 industrial emitters in seven regions, which has traded around 406 million mt of CO2. Prices in these pilot markets have ranged from around CNY10 ($1.5) per mt to CNY90 ($14) per mt – significantly lower than the carbon price in the EU and other regions.

Fitting in with China’s decarbonisation plans – Along with significant low-carbon investments, the ETS is expected to provide much of the eventual foundation for China’s 2060 net-zero target. To reach carbon neutrality, Wood Mackenzie estimates around $5tn will be needed and renewable energy capacity in the country will need to grow 11 times to reach 5 TW by 2050. Perhaps most importantly for the purposes of the ETS, coal-fired power capacity needs to fall by 50% by the same date.

Will it actually reduce emissions? Perversely, some claim the ETS could act to incentivise new coal-power stations, as it operates without a total emissions cap and rewards operators that run their plants efficiently. This would then potentially favour the construction of new plants.

Despite the country’s long-term decarbonisation goal, China’s thermal coal generation is expected to grow in 2021, and around 250 GW of coal capacity is planned in the country.

Lateral thought from Curation – Pricing carbon has its uses, but it’s important the practice is accompanied by other measures. A recent studyfrom the Institute for Advanced Sustainability Studies has found putting a price on CO2 does little to advance low-carbon technology, and to do this effectively requires more targeted policy and regulatory changes to guide markets.