Last month, China announced the initial details of its much-anticipated emissions trading scheme (ETS). The launch confirmed China's plans to move to a national carbon market, following several years of regional pilots projects. The new scheme will have a more cautious rollout than set out in initial draft plans, starting with the power sector alone in a national pilot phase. However, it will still be by far the world's largest carbon market. Carbon Brief takes an in-depth look at what is known about China's ETS, the remaining gaps and how it will fit in with China's wider climate policy landscape.
How did China's ETS come about?
China's greenhouse gas emissions are the highest in the world and are estimated to have risen by around 4% last year, halting several years where they flatlined. It burns more coal than the rest of the globe put together.
Alongside other policies to cut emissions, China has long had plans to create a national carbon market. First floated in the country's 12th Five-Year Plan in 2011, plans to roll out a nationwide scheme in 2017 were confirmed by Chinese President Xi Jinping in a US-China joint climate statement in the run-up to the Paris climate summit in 2015.
Initially set to cover more than 3bn tonnes of CO2 from the power sector, the carbon market will be the largest in the world and close to double the size of the next largest, the EU ETS. Once operational, it will mean around a quarter of global CO2 emissions are covered by carbon-pricing systems.
In developing its plans, China has reportedly been very conscious of the issues affecting other emissions trading schemes. It has conducted extensive discussions with representatives from schemes in California and the EU, in an effort to learn from their mistakes.
Jeff Swartz, Director of Climate Policy and Carbon Markets at South Pole and previously director of international policy at the International Emissions Trading Association (IETA), these include the need to have good emissions data and to set a conservative emissions benchmark from historical data. He tells Carbon Brief:
"The government in China has studied this clearly: there are traces in the plan to make sure the cap is set appropriately. They have understood the mistakes in Europe."
Will the ETS help China hit its climate targets?
China is already set to overachieve on its aim to peak emissions by 2030, according to Climate Action Tracker (CAT). However, CAT also notes that these targets are far from being in line with the Paris Agreement, which commits countries to limit global warming to well below 2C and pursue efforts to limit it to 1.5C.
China's trading scheme, therefore, comes in the context of a wide range of climate policies. One 2016 comparison of the potential for 35 environmental policies in China to drive down emissions found carbon pricing would be the most effective.
However, with little confirmed about how it will work, it is hard to judge its possible impact.
Li Shuo, an energy and climate policy analyst for Greenpeace East Asia, tells Carbon Brief the real question is how much the country will overachieve its goals and if the ETS plays any role. As is the case for the EU ETS, there will be debate over whether the China ETS itself drives emissions reductions, or merely mops up after all the other related policies.
For example, Swartz says coal plant closures will result from other regulations. He says:
"The ETS is a transitory policy tool that sends a market signal for companies and investors to shift away from heavily polluting sources."
What will be covered by the trading scheme?
Perhaps the most significant part of the announcement in December was that it scaled back the sectors the ETS would cover.
Early plans for the scheme, circulated in January 2016, had included firms consuming more than 10,000 tonnes of "coal equivalent" in eight sectors: petrochemicals, chemicals, building materials (including cement), iron and steel, non-ferrous metals (such as aluminium and copper), paper and civil aviation. This would have covered around 6,000 companies.
However, the December launch confirmed that only the power sector will be included at first. Plants emitting more than 26,000 tonnes of CO2 per year or more – covering almost all coal and gas-fired plants – will be included, the government plan says. This will still almost double the amount of emissions worldwide covered by emissions trading schemes.
Swartz argues this vastly diminished ETS, compared to the original plan, is the big story of the release in December, arguing it "won't have any bite in it" with the power sector alone. He tells Carbon Brief:
"After studying the market for years and conducting pilots, how much delay do you need when you know what needs to be done?"