Singapore — China's national emissions trading system, or ETS, which launched earlier this year, will be instrumental in meeting the country's 2060 carbon neutrality goals by using market-based mechanisms, with tighter regulations allowing for more rapid decarbonization of the power sector, the International Energy Agency said in its latest report on China's ETS.
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The ETS was launched in February 2021 but is yet to begin trading. The role of emissions trading is critical due to the scale of China's electricity sector, and its coal-fired capacity.
China accounted for around 27% of global electricity generation at around 7,170 TWh in 2018, growing 7% annually between 2010 and 2018, the IEA said.
It said China's electricity demand growth is set to grow faster than the global average -- by 60%-75% by 2040 -- with the share of coal-based power falling steadily and renewables increasing. This means that China is expected to account for almost one-third of global electricity generation growth by 2040.
In 2018, more than 66% of China's electricity produced was from coal, followed by 17% from hydropower, 4% from wind and 4% from nuclear, while natural gas contributed 3% and solar accounted for 2.5%, the IEA said.
China's ETS, officially launched in 2017, is expected to start trading emissions in the power sector, before being expanded to other energy-intensive sectors and will be the world's largest ETS even in its initial phase, the report said, adding that it will initially cover coal-fired and gas-fired power plants that are responsible for over 40% of China's CO2 emissions from fossil fuel combustion.
"The effectiveness of China's ETS will depend on how well it is tailored to and co-ordinated with power market regulations and with energy and technology policies targeting the power sector," the IEA said.
Emission trading system design
China's current emissions trading system uses an "output-based and rate-based allowance allocation," which means that an entity is allowed a certain volume of emissions based on factors like its size, carbon intensity, etc.
This differs from "mass-based ETSs, such as the EU-ETS and California's Cap-and-Trade Program" that have a predetermined absolute cap on emissions levels covered, the IEA said.
The report said allowances in China's ETS are allocated based on a unit's actual generation during the compliance period and predetermined emissions intensity benchmarks for each fuel and technology, such as CO2 emissions per MWh set for each type of coal- and gas-fired power plant.
"The ETS would drive emissions reductions mainly by improving the efficiency of coal-fired power generation, particularly between 2020 and 2030, and by enlarging the deployment of carbon capture, utilisation and storage (CCUS) in the power sector from 2030," the IEA said.
It recommended that the ETS benchmarks be tightened gradually to boost effectiveness, accelerate power market reform to amplify the effects of the ETS, introduce allowance auctioning to provide stronger signals for fuel switching and to generate revenues and eventually transition to a mass-based design with a fixed cap to guarantee emissions trajectory certainty.
China aims to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060.
It has said it would enhance its Nationally Determined Contribution, or NDC, under the Paris Agreement for 2030, including reducing CO2 emissions intensity per unit of GDP by more than 65% from the 2005 level, increasing the share of non-fossil fuels in primary energy consumption to around 25% and expanding the total installed capacity of wind and solar power to over 1,200 GW, the report said.
China's 14th Five-Year Plan calls for a roadmap to peak CO2 emissions before 2030 and achieve carbon neutrality before 2060.