beset by stage fright, carbon trading is expected to become a major climate policy actor

Fast-tracked in late 2020, a PRC carbon market is hastened by Beijing’s pledge to peak emissions before 2030 and reach neutrality by 2060, both deemed imperative to fulfill its Paris Agreement obligations.

Trading is expected to start by end June. Trading and registration agencies are to start up in Shanghai and Hubei respectively; a voluntary CCER (Chinese Certified Emission Reduction) market is to be housed in Beijing. Instead of the ‘cap-and-trade’ approach, popular in advanced markets, carbon intensity (amount per unit of production) will be regulated.

modest start to ambitious plan

Trading will begin timidly: price volatility is a concern, making a smooth rollout highly desirable. Coal will not be eliminated by renewables or emissions reined in abruptly. Yet, as the rules tighten and new market players and products emerge, trading may well enable emissions to be managed down, with investment channeled to low-carbon production.

Accounting for some 40 percent of total emissions, the power sector, which includes over 2,000 coal-fired producers, will be the prime market player in the initial stage. Each plant will be assigned a carbon intensity benchmark, linked to scale and fuel type.

Firms falling under regulation are unlikely to face high costs. Expected to be generous at first, emission allowances will reward larger, more efficient plants. Smaller, dirtier ones will be harder hit, adding to curbs on obsolete capacity. Allowances will be free at first, with firms only paying for up to 20 percent of excess emissions.

Trading will benefit plants operating at low capacity. Coal-fired plants averaged below half capacity in 2019. A regional adjustment provision, enabling localities to tighten benchmarks, was abandoned in the final text of the allocation rollout plan.

Given the abundant allowances and limits on participation, trading is unlikely to be vigorous early on. Regulated entities (initially power producers) will form the advance party, with other actors waiting in the wings. Prices, according to major market projections, will thus be held in the range of 40–60 per tonne. Power firms may opt to bank excess allowances, rather than sell them. Corporations will likely move allowances around internally before resorting to the market.

Voluntary CCER projects can be used to offset up to 5 percent of emissions. Approvals for such projects were suspended in 2017; the rules were up for amendment. With the application process restarted, approvals may be hard to come by: cheap offsets flooding the market is a worry.

As rules are gradually tightened and loopholes fixed, trading should become more robust.

scaling up

A second set of ‘Interim regulations’ for carbon trading was issued 30 March. A State Council-level initiative, it has more clout than do the trial measures issued in December 2020 that presently govern the national market. The final regulations are expected to be released before 2022.

The new rules are tougher on non-compliance, fraud and market manipulation. Absent in the first draft, issued in 2019, central agencies (market, finance, energy, industry and economic authorities) have been brought in to work with MEE (Ministry of Ecology and Environment), pointing to more active trading and stricter rules down the road.

Auctions will eventually be introduced. The proportion sold this way will rise over time, as free allocations fall. A national carbon emission trading fund will manage the use of auction revenues.

MEE intends to incorporate more sectors and products, and expand market participation. Over 5 bn tonnes of annual emissions will be added by the national market as all eight sectors join over the period of the 5-year plan: petrochemicals, chemicals, building materials, steel, non-ferrous, papermaking, power and aviation. The average carbon market price will rise, estimates the China Carbon Forum, from 49 per tonne in 2020 to 93 in 2030.

Cement and aluminium, causing 13.5 and 5 percent of emissions respectively, are slated to be the next industries brought into the market. Both are highly liberalised compared to the power sector, enabling costs to be passed on. They are also less concentrated; the power sector is dominated by a small number of central SOEs (state-owned enterprises).

Steel is also high on the list. Its complex manufacturing processes, however, make it harder to calculate emissions.

Regulators hint that eligibility is to widen. International investors may be welcome, says MEE, with compliant investment actors made eligible when conditions are ready. PBoC (People’s Bank of China) encourages RMB cross-border settlement for carbon emission trading.

part of a bigger picture

Success rests on the carbon market’s interaction with broader policies, not least reform in the energy and power sectors. Emissions have to date been reduced mainly via administrative campaigns aimed at phasing out inefficient capacity, improving energy efficiency and capping coal consumption, for example.

Provinces have in the past been tasked with achieving targets set by Beijing. This approach may clash with a centralised carbon market. State-regulated power prices, meanwhile, make it difficult for producers to pass costs on to end users. Cost issues are further amplified by Beijing’s continued campaigns to cut prices for end users.

National carbon trading will need to operate in concert with other climate policies to help steer China towards its climate goals. An action plan to peak emissions before 2030 is forthcoming. A draft action plan for the steel sector has been completed, aiming to peak its emissions before 2025.

Getting the carbon market up and running has been far from trouble free, yet despite limited short-term impact, it should come to play a major role in the PRC’s low-carbon transition.


Zhou Xiaochuan 周小川 International Finance Forum chair, former PBoC governor

A cap on total CO2 emissions is essential for the carbon market to function properly, insists Zhou. Playing a crucial role in financial markets, a cap will integrate much more easily than a carbon tax, hence should be ambitiously set. The power sector must, he argues, shift away from fossil fuels. Carbon capture and storage are also in order, reducing emissions from hard-to-abate sectors.

Duan Maosheng 段茂盛 Tsinghua University Institute of Energy, Environment and Economy vice director

Carbon caps are necessary for industries slated to join the national carbon market, warns Duan. Intensity limits are inappropriate, as major emitters need to peak emissions early. Allowance allocations are based on firms’ current output, unlike the EU’s historic-output-based approach. Carbon taxes and markets need not conflict, argues Duan; Beijing might well adopt both.

Zhang Xiliang 张希良 | Tsinghua University Institute of Energy, Environment and Economy director

Zhang was a contributing author to the Intergovernmental Panel on Climate Change reports and is an architect of the national carbon market and the Renewable Energy Law. He supports the role of both environmental departments and regulators in building a carbon market. But this effort is not helped, he warns, by the shortage of skilled professionals.


30 Mar 2021: second draft of ‘Interim regulations for carbon trading management’ issued

31 Dec 2020: ‘Carbon trading management measures (trial)’ issued

30 Dec 2020: ‘2019–20 carbon trading quotas allocation implementation plan (power sector)’ issued

26 Oct 2020: ‘Guiding opinions on green finance’ issued

2017: CCER approval suspended; NDRC revising rules

2014: seven local carbon pilots (Shanghai, Beijing, Guangdong, Tianjin, Hubei, Chongqing and Fujian) rolled out

2013: first carbon exchange centre launched in Shenzhen

2011: NDRC approved seven local pilots

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