A photovoltaic power station in Ningbo, Zhejiang Province

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China launched a nationwide carbon trading system at the end of 2017. Its first phase of implementation will focus on the energy sector.

A carbon market relies heavily on policymaking. The government has drafted compelling regulations in terms of implementation scope, total emissions and each corporation’s cap. The system is driven by the marketplace. Involved companies can sell unused carbon credits to those who have exceeded their allocated emissions. These transactions will provide an incentive to companies to improve production efficiency, transform business models and cut emissions at a minimum cost.

The preparation work for the carbon trading system started as early as 2011. Five cities and two provinces, represented by Beijing, Shanghai and Shenzhen, launched regional carbon market pilots. Shenzhen became the first to engage in real trade in 2013. At present, the market involves nearly 3,000 enterprises. By November 2017, 200 million tons of carbon credits had been traded and transactions totaled more than 4.6 billion yuan.

The market will develop incrementally. It will start with the energy sector first and then expand to other industries and new trade varieties mainly for four reasons. China has well-rounded statistical regulations on the power generation because of the single variety of products and advanced equipment for data measurement. In light of this, carbon allowance allocation will be relatively easy and convenient. It will set a good example for emission reductions because China generates 65 percent of its electricity from coal. The trading system now covers 1,700 enterprises across the sector. They collectively produce about one-third of the country’s emissions, with each exceeding 26,000 tons of carbon dioxide. Also, emitters in the electricity sector are usually large-scale enterprises with sound regulation mechanisms. The management will be simple and easy. In addition, the carbon trading systems worldwide will choose to cover electricity generation from coal at first.

China has also unveiled a schedule for the national carbon market. It will take about a year to draft regulations and build systems for registration, transaction and nationwide statistics. The trial period will run for another year, with a focus on mock trading of carbon allowance across the energy sector, overall examination of the market’s effectiveness and reliability as well as strengthening the risk alarm and prevention system. After that, real transactions of carbon allowances among enterprises in the energy sector will start. The market may expand to cover more industries and increase product varieties and trading methods if the carbon market can operate stably in the energy sector.

 “It is a crucial mission for China to set up a nationwide carbon market to tackle climate change and promote low-carbon development,” said Li Gao, director of the Climate Change Division at the NDRC. The trading system will be driven by market forces while government staff will provide related services. It will develop incrementally and emphasize coordinated cooperation, inclusive participation, consistent standards as well as fairness and openness, Li said.

Huaxin Cement was one of the companies included in the carbon emission management regime of Hubei Province in 2014. The company spent more than 30 million yuan to purchase carbon allowances in order to meet the carbon cap. The cost equaled their annual net profit in the Central China region. Huaxin established a department of climate protection in 2015 to independently explore substitutes for coal. It successfully found ways to process domestic and factory waste into environmentally friendly fuel. The company reversed the situation and had a surplus carbon allowance of 423,800 tons in 2015, generating more than 9 million yuan in total profit. A series of companies followed a similar trajectory. In the past three years, the involved companies in Hubei Province earned 300 million yuan in carbon trade thanks to their efforts to conserve energy and cut emissions.
 

 

Also, the carbon market provides excellent opportunities for the entire electricity sector to achieve green development. Jiang Zhaoli, deputy director of the Climate Change Division at the NDRC, said that the carbon market holds back the companies with poor energy efficiency while expanding production capacity of those that can use energy efficiently. Wang Zhixuan, secretary-general of the China Electricity Council, pointed out that the market will boost clean-energy industry by restricting carbon emissions, thus making renewable power generation more economically competitive. In circumstances like this, renewable sources of energy may be substituted for high-carbon sources. “Companies and industries need to actively participate in carbon trading and seize favorable opportunities,” Wang added.

The general public will also benefit because the market underpins the fight against air pollution. “Under the framework of the carbon market, corporations need to optimize energy structure, use low-carbon and clean energy, and reform management, thus improving energy efficiency and reducing carbon emissions. Such measures are bound to cut pollution sources,” Jiang said.

Top-level design is complicated. In addition to the scope, the proposed national carbon market should work out detailed targets for the coming years and decide how to allocate carbon allowances. For example, it will prove challenging to cap overall emissions. The sustainability and competitiveness of industries and companies also deserve attention.

Market stimulation is another difficulty. Beijing, one of the seven pilot regions, covers nearly 1,000 enterprises and is the largest in terms of the number of firms as well as the trading variety. However, the limited market scale holds back the establishment of a mature carbon-pricing mechanism despite the fact that the trading scale and involvement is improving, said a staff member from the Beijing Environment Exchange. Most companies make carbon transactions to honor the agreement. It leads to the passive involvement of enterprises in the market and hinders the trading scale.

Effective management is difficult to achieve as well. The central government and local departments should make a collective effort to ensure companies submit accurate statistics and receive a fair allowance. They also need to clarify punishments and set up a risk alarm and prevention mechanism.

China is expected to operate the world’s largest carbon market. A lot more difficulties and challenges are awaiting China to tackle with its experience and wisdom, Wang added.

 

The article was translated from People’s Daily.

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Link：Introduction to regional carbon market pilots

 

The seven pilots cover more than 3,000 enterprises with total annual emissions of 1.4 gigatons of carbon dioxide. The average price on carbon across these seven markets in 2017 was between $3 to $10 per ton of carbon dioxide, equal to roughly $680 million in total transactions, according to Forbes.

 

Beijing
Beijing’s carbon market opened in November 2013. It currently covers 945 enterprises across the region, the biggest in terms of number and trading variety among the seven pilots. To tighten the restrictions on greenhouse gas emissions, the Beijing market almost doubled the number of enterprises covered by the market in 2016 by decreasing the threshold from 10,000 tons of emissions to 5,000. It covers an array of sectors with great openness. Also, it is the first pilot market to allow cross-regional transactions.

 

Shanghai
The Shanghai carbon trading system also started in 2013. All of its participating companies honored the agreement for four consecutive years. It currently involves 310 enterprises, covering such 27 industrial and non-industrial sectors as iron and steel, power generation, chemical engineering, aviation, shipping and commercial hotels. To date, the trading volume in Shanghai carbon market has hit 87.5 million tons with more than 900 million yuan in total transactions. The pilot program in Shanghai is characterized by clarified institutions, a regulated and orderly market, and effective emissions reduction. Compared with 2013, the total participating enterprises have reduced carbon emissions by about seven percent.

 

Hubei Province
Established in April 2014, the Hubei provincial carbon trading center currently covers 236 companies. In the past three years, emitters in the system have increased their investment in saving energy and cutting emissions by 38 percent and their total emissions have reduced by 26.9 million tons. Each of them consumes at least 60,000 tons of coal every year. The involved emitters now produce 43 percent of the province’s total emissions, a 4 percent decrease compared with 2014. The threshold for admission is high and the number of companies is relatively small, but the system covers most giant emitters and emphasizes flexible distribution of carbon allowances. It conducts distribution and clearance work once a year. Idle permits will be reclaimed and cancelled.