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Chinese government officials announced that 16 July marked the
debut of the country's long-awaited national carbon emissions
trading scheme (ETS) for the power sector, and that more than 4.1
million mt of carbon allowances changed hands.
The ETS is being managed by the Shanghai Environment and Energy
Exchange.
Given China's economic size and status as the world's largest
emitter of carbon, the Chinese ETS is expected to quickly expand to
become the world's largest carbon market, surpassing the EU ETS in terms of carbon emissions covered.
Tracking media outlets in China, OPIS (the price reporting
agency owned by IHS Markit) reported that trading began at $7.42/mt
for credits that can be used through 31 December 2021.
Originally scheduled for spring 2021, the date for the ETS
launch had been pushed back to 30 June. Progress was being made,
such as the exchange announcing its operating hours. But on 1 July,
the exchange confirmed a second delay, adding that it would be
brief, according to analysts.
"We believe that the national carbon ETS market is an integral
part of China's climate change efforts," said Lara Dong, IHS Markit
director, research and power analysis. "The Chinese Premier Li
Keqian indicated [7 July] that the trading will begin in July 2021.
The one-month delay will have minimal impact on the current
compliance cycle, or the future pace of the ETS market
development."
China took the biggest steps towards enacting the carbon ETS in
February and March 2021 with the release by the Ministry of Ecology
and Environment (MEE) of the rules for allocation of allowances and
"trial" emissions trading. This enabled the creation of the
registry of allowances and development of the trading
platform—the necessary parts of the ETS that have been delayed
to later this month.
Initially, the ETS will cover the nation's 2,225
power plants that reported at least 26,000 mt/year of
CO2-equivalent emissions for any calendar year from 2013 through
2019. These include power plants serving residential and commercial
customers, as well as those dedicated to industrial sites.
The covered facilities account for about 40% of China's annual
emissions, or nearly 4.4 gigatons/year of CO2-e, according to the
International Carbon Action
Partnership (ICAP), a coalition of 32 governments that share
best practices on running trading schemes.
Expansion plans
As far back as 2016, MEE announced that eight industrial sectors
eventually will be included under China's ETS: power generation,
refining and petrochemicals, chemicals, building materials, steel,
nonferrous metals, paper, and aviation. On 7 July, MEE confirmed
that the refining and petrochemicals sectors are next in line after
power generation, and that they represent about 14% of the nation's
CO2-e emissions.
ICAP estimates that more than 72% of the nation's emissions will
be covered at the point that all eight sectors are added.
In the spring, when the administrative rules for China's ETS
were announced, Zhang Jianyu, vice president of EDF's China
Program, expressed optimism they would help to guide China towards
achieving its emissions goals. "The ETS will become an effective
tool to help China achieve carbon peaking before 2030 and carbon
neutrality by 2060—goals that Chinese President Xi Jinping
pledged in 2020," he said.
EDF, an international nonprofit with expertise in emissions and
climate change, provided technical advice to China on creation of
the program.
No emissions hard cap ... yet
However, critics of China's ETS point out that it does not
impose a hard cap on carbon emissions, in contrast to most national
or regional trading programs in effect today. China's ETS gives
each affected facility an allowance per year. This is calculated
according to the expected output and carbon intensity of its
operations (carbon emissions per unit of output). If an operator
produces less power or produces more efficiently, it generates
credits that it can sell. If it exceeds its allowance, it must buy
allowances or pay a penalty.
But without a hard cap, the entire ETS structure can be adjusted
each year to allow total national emissions to rise. And until a
hard cap is installed—which is expected in the future—the
program's effectiveness could be limited in terms of reducing
emissions and encouraging the closure of coal-fired power
capacity.
In fact, China keeps moving in the other direction. Greenpeace
East Asia released a report in March that said 46.1 GW of new
coal-fired capacity was approved by China in 2020, or more than in
the three previous years combined.
"With an influx of new coal approvals, China's coal country
provinces are falling farther behind," said Zhang Kai, deputy
program director for Greenpeace East Asia in Beijing. "While one
[region] lays the groundwork for new tech and energy, the other
digs deeper into the coal pit. Provincial governments will struggle
to close this gap on their own. They need policy support and
financial support. Low-carbon transition funds should be on the
political agenda as soon as possible."
China's National Energy Administration (NEA) rates each province
on its potential for coal power overcapacity, and the related
financial risks for new installations. Greenpeace noted that the
NEA rated 27 provinces at high or moderate risk of overcapacity in
2017, but only six in 2020, despite the increase in power plant
approvals last year.
This is a mistake, Zhang said. "Coal overcapacity is a drag on
renewable energy development and a ticking time bomb for provincial
economies. As China's energy transition accelerates into 2060, coal
plants will see more excess capacity and more competition. Already
shrinking rates of return will flop. They'll become stranded
assets," he said.