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Digging into the details of China’s national carbon trading market | Morning Briefing Ep 9

Written by KrASIA Morning Briefing and Decoded Published on     3 mins read

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China’s carbon trading market is still in its infancy, but policymakers’ iterative approach points to evolution over time.

KrASIA’s Morning Briefing is a closed-door presentation that delves into an important topic every first and third Tuesday of the month. This is a recap of our ninth episode held on September 14.

In July, the Chinese government rolled out its national carbon emissions trading system (ETS), which creates tradeable commodities based on companies’ carbon emissions to provide financial incentives for reducing carbon emissions output.

Participating firms, which are currently limited to mostly state-owned enterprises in the power generation sector, will receive an annual carbon emissions quota from the government. Companies that emit less carbon than their allowance can sell their excess allotment on the ETS in the form of carbon emissions credits, while companies that emit more than their allocation will be penalized and forced to purchase additional credits.

China’s ETS, which covers more emissions than any other carbon trading scheme in the world, is an integral component in the country’s plan to reach peak carbon emissions by 2030, and carbon neutrality by 2060. With only two months of operations under its belt, the national ETS is still fairly immature, with significantly lower trading volumes and carbon prices than more established markets like the European Union’s ETS.

While China’s national ETS is still in its infancy, it will evolve over time. Regulators are taking an iterative approach, prioritizing market stability in the early stages, before eventually introducing more market participants, like companies from other industrial sectors and institutional investors, to boost trading volumes.

Before the national ETS was established, China had been running pilot ETS projects in eight major cities in China since 2011, experimenting with various carbon trading activities at a smaller scale. For example, Hubei province’s ETS was the first in China to use a Chinese Certified Emissions Reduction (CCER) program, which created a standardized system for certifying carbon emissions reduction projects in poor rural areas. Meanwhile, Shanghai’s ETS demonstrated investors’ appetite for a host of carbon-based financial products, which made up 66% of the market’s trading volume.

Most of the participants in China’s carbon trading markets are larger industrial firms, but in another pilot program, electric vehicle company Nio showcased the market’s potential to impact customers directly. In January 2021, the company introduced its “Blue Point” program to provide Nio users with the material benefits of low-carbon driving, turning emissions reductions into points that can be redeemed for rewards via the Nio app.

Compared with the EU’s more robust ETS, the structure of China’s scheme differs in a few key ways. First, the EU’s ETS implements an absolute cap on emissions that declines over time, ensuring that overall emissions go down. China adopted an intensity-based approach that aims to target major emitters, but doesn’t guarantee there is a reduction in absolute emissions.

Meanwhile, the total carbon emissions quotas released by the Chinese government are bountiful, totaling 4.5 billion tons of emissions, a surplus of 200 million tons compared to actual output. These generous quotas are accompanied by lightweight financial penalties for non-compliance, with fines capped at RMB 30,000 (USD 4,700) compared to the EU’s penalties which can reach more than USD 100,000 for major breaches.

In the long term, China’s ETS is more flexible than the EU’s carbon market, lending more weight to the decisions of Chinese policymakers about when and how to update the system. Chinese carbon trading ambitions are not limited within its borders, as the country aims to build a Green Belt and Road to introduce transnational carbon trading markets. Although these efforts are still a ways from coming to fruition, governing carbon trading across country borders poses unique challenges, as EU policymakers know firsthand. Regardless, Chinese regulators are adopting a long-term outlook for the success of their national ETS, and short-term results are unlikely to be indicative of the system’s sustainability or resilience.

Check out Morning Briefing’s recaps here.

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