Stockholm (NordSIP) – China’s decarbonization efforts marked another important milestone last Friday, July 16th, as the country finally launched its highly anticipated national carbon emission trading scheme (ETS). Just a few days old, the world’s largest carbon trading program has already attracted much scrutiny. Despite voicing some criticism, most market observers agree that the scheme is an essential tool if the country is to deliver on its pledges to reach peak carbon emissions before 2030 and climate neutrality by 2060.
At launch, the ETS covers only companies from China’s power sector. More industrial sectors, such as petrochemicals, aluminum, and steel, are expected to be added later. The initial focus on power suppliers is understandable. According to the International Energy Agency, the more than 2000 companies included in the scheme today account already for over one-seventh of global carbon emissions from fossil fuels. As the scope of the program expands, the number of companies included will potentially grow to 10 000, together responsible for emitting five billion tonnes of carbon dioxide per year.
For the time being, China’s ETS does not apply an absolute emissions cap, relying instead on a cap based on the total allowance allocations that adjusts over time based on actual production levels. It differs in this respect from other similar schemes, which tend to apply an absolute and gradually declining emissions cap.
China’s Ministry for Ecology and Environment allocates each in-scope company a fixed amount of carbon emissions allowances, based on its size and type of energy production. If this quota is exceeded, the company needs to buy extra capacity on the market. The opening price on Friday was not too prohibitive, at around USD 7 per tonne. Considering, however, the way prices have evolved on the more mature EU carbon emissions market, Chinese companies would be well-advised not to dismiss the cost of polluting in the future.
“For traditional polluting and energy-hungry industries, you wouldn’t say their additional economic output will definitely fall amid the carbon market because some firms would handle the challenge and make a quick shift, but those incapable will be knocked out,” commented Zou Ji, president of the Energy Foundation China in the Global Times.