China Sets Up National Carbon Trading Center in Shanghai

The Chinese government is planning to set up the national carbon emission right trading center in Shanghai, and the carbon quota registration center in Wuhan, as reported by Sina on March 18, citing people familiar with the matter. Currently, the Wuhan registration center is opening accounts for the first batch of 2,225 enterprises in the electricity industry. Meanwhile, the national carbon market is scheduled to start online operations before the end of June. 

Since 2011, China has piloted carbon trading in seven cities and provinces, with 2,837 emission entities, 1,082 non-emission entities, and around 10,000 individuals involved. As of November 2021, the total trading scale has reached above 430m tons of carbon dioxide equivalent and over RMB10bn. In December 2020, the Ministry of Ecology and Environment (MEE) issued trial regulations for a national carbon emissions trading scheme (ETS), as part of the country’s effort to fulfill the climate pledge proposed by President Xi Jinping to peak carbon emissions by 2030 and achieve carbon neutrality by 2060. The ETS will first focus on the power generation sector, which accounted for around 40% of the country’s carbon emissions in 2020, and will gradually expand to the steel, concrete, chemistry, aluminum, and paper industries. Under the new ETS, enterprises that exceed the government-set caps for carbon intensity will have to purchase emission quotas from other firms, or they will need to pay fines for not complying. According to calculations from UBS [UBS:US], in the early stage of the launch of the national ETS, fossil fuel-fired plants will potentially face a 9% drop in profits due to the tightened regulations, while the profits for hydropower firms could grow by 7%.

As market analysts point out, the current national ETS still contains certain uncertainties. One issue worthy of note is the potential over-allocation of permits, which means that carbon prices may be too low to incentivize enterprises to take carbon reduction actions. Citing a report from China Carbon Forum, the average carbon price should be at around RMB49 per tons at the outset of the ETS, and will grow to RMB167 per tons by 2050. However, the actual carbon price could go down to below RMB6 per tons in some pilot ETS markets previously. Besides, entities with an annual greenhouse gas emission of below 26,000 tons of carbon dioxide equivalent are not yet included in the ETS, although voluntary participation is encouraged.

Sources:

https://finance.sina.com.cn/china/gncj/2021-03-18/doc-ikknscsi7602515.shtml

https://www.jdsupra.com/legalnews/annual-review-of-china-s-ets-2020-1081920/

http://www.xinhuanet.com/fortune/2021-03/18/c_1127224269.htm

https://finance.sina.com.cn/roll/2021-03-18/doc-ikkntiam4218955.shtml

https://qz.com/1971281/the-problem-with-chinas-new-carbon-trading-market/

https://www.lexology.com/library/detail.aspx?g=a3271089-906e-42bd-8bdd-e443f39ea858