China’s Polluters Will Have To Pay A Price

A coal-fired power plant in Shuozhou, Shanxi province, China. Licensed under the Creative Commons Attribution 3.0 Unported license. Photo credit: Kleinolive.

CHINA IS NO climate denier, although the connections between climate change and the Henan flooding have been only lightly made in state media. However, reaching peak carbon before 2030 and going carbon neutral by 2060 have been policy since last year and are incorporated into the 14th Five Year Plan (2021-25). 

Specifics are sketchy beyond a 13.5% reduction in energy consumption per unit of GDP, an 18% reduction of carbon dioxide emissions per unit of GDP and an increase in the share of non-fossil-fuel energy in total energy consumption to around 20% from 15.8% over the life of the plan. The country’s new carbon trading market will have to play a significant role if those targets are to be achieved.

The long gestated national market finally launched on July 16 on the Shanghai Environment and Energy Exchange, becoming the world’s largest trading scheme for greenhouse gas emissions from the getgo.

Progress will likely be cautious. For now, only some 2,225 firms in the thermal power generation sector can participate. They emit more than 4 billion tonnes of greenhouse gases a year, contributing about 40% of China’s total carbon dioxide emissions and 15% of the world’s total. 

Other emissions-intensive sectors such, steel, cement and civil aviation are expected to join the market later. 

The initial round of carbon permits was allocated for free. The price per tonne of carbon dioxide equivalent was 48 yuan ($7.42) when the market opened. The first bulk deal — Sinopec’s agreement on July 21 to buy 100,000 tonnes of carbon quota from China Resources Group — was priced at 52.92 yuan per tonne.

By way of comparison, the price in the EU’s emissions trading scheme is around 60 euros ($70.80). 

However, China’s power generation industry is far from being a market-driven world and not well placed to shoulder the added cost of carbon. The lack of market-priced electricity — local and regional governments set prices — means there is no way for power generators to raise prices and induce lower and more efficient energy consumption by consumers. 

In the meantime, the price of coal is no longer regulated, leaving the power generators squeezed. The hope is that this will make them jettison their most outdated and inefficient power generation plants — and turn to renewable sources of energy.

The Shanghai price will inevitably rise as the government expands the number of participants, begins auctioning permits and reducing their supply. At present, there is effectively no cap on carbon credits. It will not be until then that market will significantly affect China’s capacity to meet its goal of net-zero carbon emissions by 2060.

China will probably reach peak carbon sometime this decade, come what may, as the industrial structure of the economy changes, although quite when will depend on a mix of the economic growth rate and the vigour with which authorities pursue policy enforcement of emissions reduction.

If anything, early recovery from the pandemic last year put the country on the back foot in pursuit of its goal. Energy consumption and emissions rose in China in 2020, whereas they declined almost everywhere else.

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