LONDON: China will launch its eagerly awaited national Emissions Trading Scheme (ETS) in 2016, an official anticipated to Reuters last Sunday. Once implemented, this market for carbon permit trading will become the biggest in the world, helping the largest greenhouse emitting nation to axe pollution.
China is already experimenting with seven regional carbon market pilots, which were announced in 2011 and operative over the last two years. Each pilot covers a large city - Beijing, Tianjin, Shanghai and Shenzhen - or a province - Chongqing, Guangdong, and Hubei.
Together the projects have accounted for almost 4 million tons of carbon emission quotas so far, according to the National Development and Reform Commission, making China the world's second largest carbon trading market following the European Union's EU-ETS.
Carbon emissions are a serious problem in China. Just considering those related to energy consumption, emissions have risen from almost 1,500 million metric tons in 1980 to over 8,700 in 2011. The Emissions Database for Global Atmospheric Research also indicates China's total CO2 emissions increased from over 2.5 gigatons in 1990 to almost 10 gigatons in 2012. By comparison, in the same period the US - the second largest emitter - went from 2.3 gigatons to just over 5 gigatons.
Adopting a national ETS could provide an effective relief for China's polluted big cities and is one way of helping the Government reach its ambitious climate goals.
An ETS - also called a ‘cap and trade’ system - is an economic mechanism to put a limit, or ‘cap’, on the carbon emissions that every company is allowed to produce in a year. In the EU, every nation has a set amount of free allowances relating to its needs. Every firm can then ‘trade’ these permits in a central market. If a company needs to emit more pollutants, it can buy allowances from those which haven't used them at all because they have been able to reduce emissions.
The final goal is to incentivize firms to be far below this limit, achieving a double result: they not only avoid buying new allowances, but can also sell their own. Moreover, the total number of permits - the volume of pollutants every firm can emit in the air - is lowered over time.
But the system also has some critical issues. The biggest one is that if the central authority overestimates the emission cap, then the market price of the carbon credits becomes too low. This weakens the trade itself, which is based on a demand/offer base; if the offer is not proportional to the demand, the cost of the permits drops near to zero. This happened in Europe in 2007, when the central authority based its market on the exaggerated carbon estimates of the firms.
While the carbon prices of China's pilots score quite well, with a range of around CNY120 per tCO2e (US$20) in Shenzhen to CNY22per tCO2e (US$3.6) in Hubei, the country's pricing mechanism is "quite opaque,” according to a leading carbon market analyst in the Financial Times. For the market to be effective, transparency of emissions data and traded allowances is fundamental.
However, the seven pilot schemes were only fully launched in 2013 - Chongqing just last June - and so Chinese operators urge the market to be patient and look at the many steps China is taking to effectively set an emission cap. “The progresses in this sense are impressive,” points out Changhua Wu, Greater China Director, The Climate Group. "The seven pilots have many different goals and patterns, and of course this is a trial and error pathway. But what is truly remarkable is that the Government is showing how political commitments can be followed by bold actions. China can be an inspiring example for every nation that is willing to maintain high levels of productivity while looking at citizens’ need for healthier, cleaner air.”
The announcement of the new Chinese ETS will be one of the topics that government leaders, experts and CEOs will discuss from September 11-12 at the Global Cleantech Summit 2014 in Beijing. This international platform will bring together the worlds of politics, academia, finance and business to consolidate the opportunities of low carbon markets.
By Ilario D'Amato
For further information on attending the event, please contact Rita Zhang on firstname.lastname@example.org.