China began trading carbon emissions for the first time on 16 July in what will become the world’s largest emissions trading market by volume.
As the world’s largest greenhouse-gas emitter, China’s climate actions are critical to the planet’s net-zero future. President Xi Jinping pledged to the UN General Assembly in September 2020 to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060. The carbon trading market is a move to turn the country's Five-Year Plan into reality through domestic policies.
The official Xinhua News Agency said the experimental first phase of carbon trading includes more than 2,000 companies in the power industry that produce about 40% of China’s—and 14% of the world’s—energy-related emissions.
The trading program was announced more than 3 years ago, according to Bloomberg, and takes over from regional pilot projects that have been around even longer. Xinhua said China’s central government is working with industrial associations to collect data from the steel, nonferrous metals, chemicals, cement, and other sectors with the aim of expanding carbon trading.
Simple Scheme
The carbon market, whose goal is to create financial incentives for companies to reduce emissions, works fairly simply, according to the Chinese Xinhua News Agency. The Chinese government gives every power plant an emissions quota for a given year. Plants whose output comes in under the quota can sell their surplus pollution rights, or allowances. If they want to emit more, they must buy extra allowances.
Listed transactions will be for 100,000 tons of CO2 equivalent or less, and price moves will be within 10% of the prior day’s close, according to the Shanghai Environment and Energy Exchange, which will host the trading. Larger block trades will be possible within 30% above or below the previous closing price.
Slow Start, Then “Huge Player”
There was a "soft launch" of the Chinese scheme in late 2017, but no transactions took place, and plans for a full launch encountered several delays, the most recent launch having been scheduled for 30 June.
While it’s uncertain how rapidly trading will take off, China’s program is expected to have limited real-world impact at its outset. Officials may be doling out so many allowances that power generators won’t need to buy extra in order to burn coal, according to an April study from TransitionZero, a financial analytics group focused on decarbonization.
Roman Kramarchuk, head of Future Energy Analytics at S&P Global Platts, said, "China will be launching the largest carbon-trading program in the world and will look to more cautiously gain experience with its operations before relying on it as the primary mechanism to drive decarbonization. The fact that clean energy policy targets through 2030 should largely be met, aligns with China's desire for more modest and stable carbon prices in the near to medium term—particularly given current price strength across commodities sectors. Carbon pricing can be among the more important tools China can employ to the daunting challenge of bending the curve after 2030."
Expectations are for carbon prices to trade at around 40 yuan ($6.19) per metric ton in 2021 before rising to 160 yuan a ton in 2030, data provider Refinitiv said last month. The rise will come from increasingly stringent green policies in China, and as additional industries join the market.
Cory Combs, an analyst with consultancy Trivium China, agreed with the forecast. “The carbon market is unlikely to deliver immediate reductions,“ he said.
“This first year is about getting the process working,” Combs said in a recent webinar. “The goal is to get this thing right, because, if they get it right, then for the next 40, 50 … years to come, this can be a huge player.”
