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China ramps up advance toward February carbon market launch
06 January 2021Karin Rives
China issued regulations for its long-delayed carbon emissions
trading system 5 January, ramping up preparations for the 1
February launch of what will be the world's largest such market.
The initial compliance phase, which is scheduled to kick off 1
February, will cover carbon dioxide pollution from 2,225 power
plants that each emit more than 26,000 mt/year.
Once the power sector is enrolled, the market will gradually be
extended to cement, steel, and other carbon-heavy industries. The
emissions trading scheme (ETS) is expected to eventually cover some
7,000 companies—all of which will be required to buy and trade
allowances, and ensure they do not exceed government-set
limits.
But unlike other emissions trading systems that set hard and
increasingly stringent caps on total emissions, China will limit
how much carbon plants may emit for each kilowatt-hour of
electricity they produce. Some critics say such carbon intensity
limits won't guarantee pollution reductions at fossil fuel-fired
plants that meet the new requirements by becoming more
efficient.
Initial phase covers 4 gigatons/year of carbon
Still, the sheer scale of China's emissions provides a huge
stage for market-based carbon reductions. The country's power
sector-consisting of coal and natural gas-fired plants that
generate heat and electricity-accounts for over 4 gigatons of
carbon dioxide equivalent annually. That alone surpasses the size
of other carbon markets around the world, according to the
Environmental Defense Fund (EDF), which provided technical support
to China on the development of the trading system.
"The ETS is essential in reducing emissions and the associated
costs, while also formulating an effective carbon pricing signal,
which lays a solid foundation for the low-carbon transition of
society as a whole," Zhang Jianyu, vice president of EDF's China
program, said in a statement Tuesday. "As a result, 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."
As the world's largest greenhouse gas emitter, China is under
pressure to reduce carbon pollution as countries update their
national greenhouse gas targets in the hope of slowing climate
change. Of the 197 nations that signed the 2015 Paris Climate
Agreement, all but seven have ratified the agreement, according to
the United Nations.
The US, the world's second-largest emitter, is expected to
rejoin the global pact under President-elect Joe Biden.
With the Chinese ETS an important part of the country's climate
strategy, officials there say they want to get the market rolling
as quickly as possible after several years of delays.
"We will allocate the carbon emission allowances to the
companies within a short time...and will carry out the first online
emission trading as soon as possible," Huang Runqiu, head of
China's Ministry of Ecology and Environment, told state television
Sunday according to a Reuters report.
The carbon market was initially held up by technical problems,
along with data accuracy and transparency concerns, which took
several years to resolve. The launch had finally been planned for
spring 2020, but was delayed again when the COVID-19 pandemic
brought emissions data collection and other preparations to a halt,
according to EDF.
Power plant operators will retroactively receive allowances
covering emissions in 2019 and 2020. Those allowances will be
issued by local environmental agencies based on emissions quotas
that the national Ministry of Ecology and Environment sets for each
province. They will take into account factors such as "economic
growth, industrial structure adjustment, energy structure
optimization, and [a] coordinated control of air pollutant
emissions," according to the market rules.
Critics: China may prolong life of some coal plants
Exactly what impact, and how soon, the market will have on
China's emissions trajectory remains to be seen.
A report issued by the UN Environment Programme in December said
the country's rapid build-out of coal plants in recent years
contributed to a 3.1% emissions increase in 2019. In all, China
released a record 14 gigatons of greenhouse gases that year.
Some observers remain concerned, however, over China's decision
to sidestep emissions caps in favor of setting a carbon intensity
benchmark for each power plant.
This gives operators an incentive to make their plants more
efficient so they can sell excess quotas to those who
don't—without encouraging investment in cleaner energy.
"It doesn't create any incentive to reduce coal-fired power
generation, and doesn't even create any incentive to close coal
plants in the higher-emission categories-sub-critical plants which
tend to be older and smaller-since plants are benchmarked against
other plants in the same category," Lauri Myllyvirta, a lead
analyst with the Centre for Research on Energy and Clean Air, wrote
in an email 5 January.
"In the short term," he added, "the scheme might even increase
the profitability of new coal plants as they will be slightly more
efficient than existing ones in the same category."
But Ranping Song with the World Resources Institute, who focuses
on climate strategies for developing nations, said in an interview
that China still lacks the capacity markets and regional
transmission infrastructure needed to push for a swift
decarbonization of its power sector.
While the current design of China's carbon market may have a
more limited impact on emissions than a traditional cap-and-trade
market would, it is a good start, he said. It will be complemented
with other strategies, such as continued heavy investment in
renewables and grid improvements, Song added.