Cap-and-trade CO2 market would cut China's emissions, boost renewables: IEA

Annual carbon emissions from generation could be cut by 38% to 2035 if a cap-and-trade carbon market model was adopted, almost double the forecast cuts under the current market design, the International Energy Agency (IEA) and Tsinghua University said in a May 25 report.

Under the existing Chinese carbon market generation companies with coal and gas units are granted free allowances based on a set of "intensity benchmarks".

These define the amount of CO2 a generation unit can emit without charge per megawatt hour of output. Different benchmarks are set for units of different types and capacities. There is no absolute cap on the number of free allowances assigned.

The IEA/Tsinghua report, Enhancing China's ETS for Carbon Neutrality, recommends "transitioning to a cap-and-trade system with a stringent cap later in the decade, to position the ETS as a key instrument in China's path to carbon neutrality, to reduce the number of additional policies targeting renewables, and to lower the cost for decarbonization."

The report shows that coal- and gas-fired power plants were responsible for around 4.5 GT/yr of CO2 emissions as of 2020, accounting for 40% of China's total emissions.

The current carbon market design would see these emissions cut by 20% by 2035 from 2020 levels, dropping to 3.6 GT/yr CO2.

If a cap-and-trade model was adopted in 2025, however, with a 3.99 GT/yr CO2 cap in 2030 falling to 2.78 GT/yr CO2 in 2035, power sector decarbonization would accelerate while total system costs would remain unchanged, the report said.

Alternative ways to realize a 38% emissions cut by 2035 included tightening the intensity benchmark and introducing auctions of allowances.

Total system costs, however, would increase by 5.2% and 1.4% respectively if these two approaches were implemented, the report said.

Boosting renewables adoption

While emission allowance quotas are only assigned to coal and gas generators in China's regulated carbon market, some renewable energy projects generate tradable voluntary carbon credits, known as China Certified Emission Reductions (CCERs).

Conventional thermal generators, however, are only allowed to purchase CCERs to offset up to 5% of their annual emissions, according to the environment ministry.

"By setting a predetermined emissions cap and moving away from technology-specific benchmarks, a cap-and-trade market allows the participation of all generation sources in achieving absolute emissions reductions," the report said.

A cap-and-trade market could help boost renewables' share in China's generation mix to 63% by 2035, of which 47% would be non-hydro renewables, 12% more than the level forecast under the current system, it said.

"Adapting to a renewable-dominant power system is a fundamental requirement for us to realize our climate targets," Zhang Jingjie, Director of the Development Planning Department with China Electricity Council (CEC), said at the report launch event.

She acknowledged, however, that "energy security is now the top priority of our nation," and squaring that with affordability and sustainability criteria was China's key challenge.

Zhang Xiliang, Director of the Institute of Energy, Environment and Economy, Tsinghua University, said China still lacked an effective power market design.

"The additional costs incurred to supply cleaner electricity cannot be effectively conveyed to end users, and thus it's hard to motivate them to save electricity and switch fuels," Zhang said.