Construction and Progress of China’s Carbon Market

China began carbon emission permit trading pilots in 2011, gathering experience for its future national carbon market

Early before the official construction of a national carbon market, China began exploring carbon emission permit trading in seven pilot provinces and cities in late 2011, including Beijing, Tianjin, Shanghai, Shenzhen, Guangdong, Hubei, and Chongqing. Among these regions, Shenzhen first started trading in June 2013.

Carbon emission permit trading refers to setting a gross quota of carbon emissions in a defined area within a certain period, then distributing allowances of carbon emissions to entities, and allowing them to trade such permits with their combined amount limited to the total carbon emission quota. Currently, the allowances are distributed to enterprises for free. Companies can reduce emissions and sell their spare allowances to others that have higher emission reduction costs via the carbon market, while firms that report carbon emissions exceeding their distributed allowances have to purchase additional quotas from governments. Rules will push companies to reduce greenhouse gas (GHG) emissions and impacts on climate.

For example, Huaxin Cement [600801:CH], included in the pilot scheme in Hubei province, reported its actual emission surpassed its allowance by 1.15m tons in 2014, and paid over RMB30m for the surplus. After strengthening internal emission management and reduction in the following year, it ended up significantly reducing its emissions. Moreover, the company gained net proceeds of RMB9m by selling its spare 424,000 tons of carbon emission allowances.

After trialing for several years, by August 2020, carbon markets in these pilot regions have involved over 20 industries, such as power generation, iron, cement, and more, and nearly 3,000 enterprises. Meanwhile, cumulative transaction volumes have exceeded 400m tons with the gross transaction amount over RMB9bn. In addition to these pilot regions, the country has also arranged trainings for the distribution and management of carbon emission allowances in 31 provinces, preparing the national carbon market for the future.

China’s national carbon market construction began in the electricity sector in 2017

Crucial points to building up a national carbon market include nation-level regulations, a unified information platform, accurate carbon emission data and related MRV (monitoring, reporting, and verification) measures, and more. Nevertheless, those pilot regions each have their local regulations. For instance, their carbon prices are different and local allowances cannot be used or circulated in other areas.

Based on trialing efforts, NDRC released its first implementation plan for the national carbon emission trading system (ETS) in December 2017, with the power generation industry as a starting point. The main reasoning for choosing to begin with the electricity sector is because this sector has a single product, relatively standardized management, accessible emissions data, and large emission amounts. The first batch included more than 1,700 electricity companies, of which, total annual emissions exceeded 3bn tons of carbon dioxide equivalent (tCO2e), accounting for around one third of GHG emissions across the country. Although preparatory work began in 2017, including trading system testing and relative personnel training, due to reforms within national departments in 2018 and the COVID-19 pandemic this year, the official operating time of the national ETS is currently on hold.

China is in the very preliminary stages of a carbon ETS and may consider setting up a carbon tax system along with the national ETS

Most recently, the Ministry of Ecological Environment (MEE), newly formed in 2018 among the central department reform, issued two national measures to solicit public opinions in early November 2020, for the administration of national carbon emission permit registration, trading, and settlement. Moreover, MEE also released an implementation plan on November 22 for the 2019-2020 national carbon emission permits trading cap and allowance distribution in the power generation industry. These marked further progress in accelerating national ETS construction. After revisions based on expert advice, the department will start construction of registration and trading systems. Even so, the final policies for the national ETS operations fall under State Council. Citing insiders, State Council now is working on such stipulations, and they are expected to be issued in 2021.

As a reference, according to the 2020 China Carbon Pricing Survey by China Carbon Forum, 50% of the interviewees expect a national carbon market for the electricity industry in 2021, and 72% forecasted an overall carbon market in 2025. In addition, cement, steel, non-ferrous metals, chemical, electrolytic aluminum, and petrochemical industries are considered as the most likely to be included following the power generation sector.

In essence, the carbon market is a market-oriented policy designed to reduce GHG emissions with Cap-and-Trade as its basic principle. The European Union (EU) established the first global carbon market in 2005. According to World Bank Group’s report, State and Trends of Carbon Pricing 2020, there are 61 carbon pricing initiatives implemented or scheduled worldwide, including 31 ETSs and 30 carbon tax schemes, which cover 22% of the global GHG emission, or 12bn tCO2e. China is among the 31 ETSs.

According to nominal prices on April 1, 2020, collected by the World Bank, the highest carbon tax is in Sweden, at USD119 per tCO2e, while most carbon taxes and ETSs are below USD35 per tCO2e. Specifically, the carbon price in the Beijing pilot ETS is USD12 per tCO2e with that of other pilot regions standing at no more than USD5 per tCO2e. Under estimations from the High-Level Commission on Carbon Prices, carbon prices should reach at least USD40-80 per tCO2e by 2020 and USD50-100 per tCO2e by 2030, to achieve temperature goals of the Paris Agreement. This means there is a large room for carbon prices increases in China. The 2020 China Carbon Pricing Survey anticipates that the average carbon price would rise from RMB49 per tCO2e in 2020 to RMB93 in 2030 and surpass RMB167 by the mid-century.

A national ETS would support efforts to attain China’s 2060 carbon neutrality target, which could in turn speed up the launch of the national carbon market

As a member of the Paris Agreement, China has engaged in efforts to reduce carbon emissions and address the increase of global temperatures. In 2019, China’s CO2 emissions per unit of GDP decreased by 18.2% and 48.1% from 2015 and 2005, respectively, which has completed the national target of lowering emissions by 40% 45% in 2020 in advance. In the meantime, non-fossil fuels accounted for 15.3% of the country’s primary energy consumption, an increase of 7.9 percentage points over 2005, which also met a 15% goal set for 2020.

Notably, Chinese President Xi Jinping pledged for carbon neutrality in 2060 this September. The undergoing national ETS construction would be an important tool to achieve the target, though China has yet to come up with a specific goal of carbon emissions reduction for its carbon market. In turn, the carbon neutrality target would also accelerate the formulation and implementation of national ETS related policies and services, as part of China’s efforts to reach it.

In addition, Kurt Van Dender, Head of the Tax and Environment Unit at the OECD’s Centre for Tax Policy and Administration, presented data showing that the average carbon price increased from EUR6 to EUR25 in Europe from 2018 to 2019, resulting in lower carbon emissions. Thus, Kurt believes that raising carbon prices by around 10% could lead to pronounced decreases in carbon emissions. With regard to reaching China’s 2060 carbon neutrality target, it is anticipated that China’s future carbon prices will be higher than the results of the 2020 China Carbon Pricing Survey in order to curb company emissions.

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