FEATURE: Carbon trading market to lay foundation for China's zero-emission future

Hong Kong — To achieve its carbon neutrality goal by 2060, China recently pushed forward the establishment of a national carbon market by setting trial rules regarding trading allowances for greenhouse gas emissions among enterprises.

The trial rules governing China's national emissions trading came into effect Feb. 1, according to a statement from the Ministry of Ecology and Environment, or MEE. Under the rules, a total of 2,225 companies whose power plants emit more than 26,000 mt of carbon dioxide equivalent per year are obligated to take part and are allowed to trade their emission permits when they have extra allowances or need more quotas after their emissions reach the limit.

The MEE's statement said consuming around 10,000 mt of standard coal per year emits 26,000 mt of carbon dioxide equivalent, while the country's carbon dioxide emissions stemming from energy use were around 9.57 billion mt in 2018, according to data from the International Energy Agency.

The quota allocations are not yet assigned to companies and will be determined based on past emissions. Experts believe it will take months for the government to complete the process before trading starts, but they said the launch of an operational carbon market will lay the foundation for China's climate goals of peaking emissions before 2030 and cutting carbon dioxide emissions to net-zero by 2060.

"If China wants to achieve its carbon-neutral goal, building a carbon emission market is a must," Lin Boqiang, a professor and dean at the China Institute for Energy Policy Studies in Xiamen University, said in an interview.

Lin said carbon emission trading is a market-based instrument that will make companies able to cut their emissions more competitively, whereas the Chinese government mainly paid for subsidies to support the energy transition in the past.

Building up data and monitoring

In addition to enhancing the awareness of emissions abatement among the energy-intensive enterprises, Refinitiv's lead carbon analyst Qin Yan said the establishment of a carbon trading market will help the authorities collect emissions data and build up an effective monitoring system in the meantime.

"These capability building will lay a solid foundation for the country's emissions reduction goals. We have already seen an increasing number of Chinese utilities announcing emission cut goals since President Xi Jinping's pledge last year. All of the companies mentioned the importance of the national carbon market," Qin said.

China has developed pilot regional trading platforms for carbon emissions across different cities since 2011, but the construction of a nationwide market has been delayed for years.

Consultancy firm ICF's lead climate specialist Huw Slater said the hardest part of the carbon market is getting the trading started, adding that many Chinese companies outside of the pilot regions are not yet familiar with carbon emission trading, although its importance has been addressed through capacity-building efforts across the country over the last two years.

China, EU cooperation

"European companies conceive of the carbon price as a signal to modernize and increase the efficiency of their operations over the long term, while many Chinese companies still see the carbon price as a short-term cost that must be absorbed," Slater told S&P Global Market Intelligence.

China has been cooperating with the European Union, which has the world's largest carbon market, on the development of its emission trading scheme for many years. Slater expects the Chinese carbon market can gradually improve with the mechanism of the emission trading finally in place and the increasing momentum following President Xi's climate pledge last year.

Refinitiv's Qin noted that the European carbon market benefited a lot from its well-established power and fuel trading market and a variety of financial instruments facilitating both energy and carbon trading, while Chinese power companies, the biggest group of participants for now included in the national scheme, might not have a large appetite for trading carbon allowances at the beginning of the launch.

Bringing in steel, metals

Although the trial scheme now mainly applies to power companies, a few steel companies are covered as well. Experts believe that steelmakers, the largest industrial source of air pollution in the country, will be included in the scheme over the next few years.

Lai Xiaoming, chairman of Shanghai Environment and Energy Exchange, last month said that as many as 10,000 emitters from energy-consuming industries, including steel, petrochemical and non-ferrous metals, will be included in the scheme by 2025, state-run Securities Times reported.

Qin said the wide inclusion of steel companies will push the steelmakers to be more aware of carbon costs and abatement technologies, including reuse and recycling.

"Bringing in the steel companies into the scheme will set the bar higher for them. It requires strict monitoring and reporting of fuel and emission data. This means they have to use cleaner fuel or take other measures to reduce emission intensity in line with the emission trading benchmarks," Qin said.

Wang Guoqing, research director at the Beijing Lange Steel Information Research Center, said it is expected that the emission quotas assigned to companies will be relatively generous at the beginning, but the policy will be gradually tightened going forward to push enterprises to find new ways to save energy and cut emissions.