Carbon Trading In China Is A Slow Burn

A coal-fired power plant in Shuozhou, Shanxi province, China. Licensed under the Creative Commons Attribution 3.0 Unported license. Photo credit: Kleinolive.CHINA, THE WORLD’S biggest polluter, is taking the slow road to market-based initiatives to tackle climate change.

As far back as June 2011, Wang Shu of the National Development Reform Commission (NRDC)’s Climate Change office said, “The initial plan is to establish carbon emissions trading schemes in some pilot regions, and try to establish a unified national system in 2015.”  By 2015, the deadline for a national carbon market had been pushed back to 2017, though pilot markets had started running in seven cities from 2013.

On December 19, the NRDC finally announced a nationwide carbon emission trading system. That sort of met the delayed deadline. But only sort of.  It will cover only the power generation industry — such as the coal-fired power-generation plant in Shuozhou seen above — and not the total of eight heavy industries originally proposed.

Also, implementation details are still to be worked out. The start of trading is probably at least a year away.

Nonetheless, the announcement marks a milestone on the way to establishing a what will be by some distance the world’s largest national carbon market. With more than 1,700 power-generating firms with aggregate carbon-dioxide emissions of 3.3 billion tonnes — about one-third of China’s greenhouse gas emission — the new market will surpass the EU’s Emissions Trading System (EU-ETS) in size to become the world’s largest.

By comparison, the seven pilot markets traded emission quotas covering 200 million tonnes of carbon dioxide (with a traded value of 4.6 billion yuan, or $700 million).

Both the EU and China’s are cap-and-trade markets. In these, governments set a cap on allowable emissions and then issue companies with emissions credits adding up to that cap. The market incentive is for companies to cut their emissions so they can sell unused allocations to corporate polluters who are exceeding their share of the cap; and for the heaviest polluters to reduce their emissions to cut their costs. In a perfect world, carbon pricing drives innovation in low-carbon technologies and promotes a shift to a clean energy economy.

Environmental economists have a rule of thumb that a price of at least $35 for a tonne of carbon is needed to make companies change their behaviour. In the EU-ETS, carbon is trading at around $7 a tonne and has done for several years.

That is likely to be the initial price when China’s national market starts. The challenge will be to steer the market, so it gets the price to above $35 a tonne.

Plenty of details still have to be worked out.  National systems for reporting data, registration and trading will have to be set up. Once trading starts, there is also likely to be a phase of free trading so companies can get used to market. That could last as long as a year.

Only then will the market be able to be expanded beyond electricity generators. There are some 7,000 companies in industries from cement making to paper production that are likely eventually to be brought under the carbon market regime.

A successful cap-and-trade scheme relies on a strict but feasible cap that decreases emissions over time. China at least has a starting point in that regard. In its voluntary targets submitted to the UN’s climate talks in Paris in 2015, Beijing said it aimed to cut carbon dioxide emissions per unit of GDP by 60-65% from the 2005’s level by 2030, the year in which it is expected to hit peak emissions.

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