Can China find a market solution to its outsize carbon emissions?

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The sun sets near a coal-fired power plant on the Yangtze River in Nantong in China's Jiangsu province on Dec. 12, 2018. Chinese power companies have begun trading credits to emit carbon dioxide on China's first national carbon exchange that launched in July 2021.

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Carbon markets allow participants to buy and sell credits to emit carbon dioxide, the most prevalent greenhouse gas. The number of credits that are available to trade is determined by regulators; over time the demand for credits pushes up the price of carbon. This provides an incentive for industries to emit less carbon, either by increasing their efficiency or switching to fossil fuel alternatives. 

In July, China launched its emissions trading market, which currently applies only to Chinese power companies that use oil and gas to generate electricity. Nonetheless, it’s the world’s largest such market in terms of the amount of carbon emissions covered. China has said its goal is for emissions of carbon and other greenhouse gases to peak by 2030 and subsequently decline. 

By itself, the carbon market isn’t expected to brake the growth in industrial emissions that has made China the world’s largest producer of carbon. For one thing, the credits are linked not to absolute levels of carbon emissions but to the intensity of carbon that is used to generate power. But the direction of travel is positive, says Ma Jun, director of the Institute of Public and Environmental Affairs in Beijing. “This will send a clear signal that the free emission of carbon will … end,” says Mr. Ma.

Why We Wrote This

Carbon markets can be a powerful tool for policymakers. China’s new emissions trading market, the world’s largest, shows how Beijing is approaching the challenge of climate mitigation.

China has launched a national carbon emissions trading market to put a price on the most prevalent greenhouse gas. As the world’s largest emitter of carbon, China has drawn global attention for its long-awaited efforts to curb carbon emissions. It has set a goal of reaching peak carbon emissions by 2030 followed by declines in subsequent decades. Its market-based approach to controlling emissions differs from that of other countries in its focus on energy efficiency. 

What are carbon trading markets?

Carbon trading markets and carbon taxes are two primary tools governments are increasingly using to reduce carbon dioxide emissions, which constitute 80% of the greenhouse gases that cause global warming. The 2015 Paris Agreement, endorsed by nearly all countries, set a goal of world carbon neutrality by the mid-21st century and limiting global warming to 1.5 degrees Celsius (2.7 degrees Fahrenheit).

Why We Wrote This

Carbon markets can be a powerful tool for policymakers. China’s new emissions trading market, the world’s largest, shows how Beijing is approaching the challenge of climate mitigation.

On a carbon market (also known as an emission trading system, or ETS), emissions credits are bought and sold at market prices. Governments authorize the number of credits that are available to trade. By decreasing the number of credits, regulators push up the price of carbon and incentivize polluters to emit less.

The world’s 64 carbon trading markets and carbon taxes combined cover 21.5% of global greenhouse gas emissions, up from 15.1% in 2020, according to World Bank data. Much of the increase is due to China’s launch in July of its national ETS, now the world’s largest carbon market.

How does China’s carbon market compare?

China’s ETS – nearly a decade in the making – covers about 30% of its annual greenhouse gas emissions, or 4 billion tons of carbon, spread across more than 2,000 power companies. The market is a step forward for Chinese leader Xi Jinping’s goals of reaching peak carbon emissions in 2030 and net neutrality by 2060. China produces about 28% of global emissions of carbon dioxide, more than any other country.

China’s ETS market differs from other countries’ in scope and design. It initially covers only coal- and gas-fired energy plants, with a plan to expand to other industries. More mature markets such as that in the European Union include industries such as construction, steel, and transportation.

Crucially, it puts a price on carbon intensity – how much is emitted per unit of energy generated – not the absolute level of emissions that regulators use in Europe, Canada, and other jurisdictions. This means overall levels can still continue to rise in China. 

“China’s market is still mostly about carbon intensity rather than a real cap,” says Ma Jun, director of the Institute of Public and Environmental Affairs in Beijing. This reflects Beijing’s priority of maintaining economic growth, while laying the groundwork for future overall carbon cuts. “This will send a clear signal that the free emission of carbon will … end,” says Mr. Ma.

Are China’s goals achievable?

As with other carbon trading markets, China’s new national ETS opened in July with a relatively low trading volume and price level – only $7.4 per ton – that is not likely to have a significant impact on its short-term emissions, say Chinese environmental experts. Prices are significantly higher in more developed ETS markets – from $57 per ton in the European Union to a high of $126 in Sweden. The Paris accord recommends a price above $40 per ton to achieve carbon reduction goals.

China’s ETS has other weaknesses. Many carbon-intensive industries are not yet covered, fines for non-compliance are low, and reporting and enforcement have been problematic in pilot programs. “All this needs to be improved. It’s going to take time,” says Mr. Ma.

And while Mr. Xi has shown a top-down commitment to tackling climate change, “big power plants continue to be part of China’s development,” says Yanzhong Huang, author of “Toxic Politics: China’s Environmental Health Crisis and its Challenge to the Chinese State.” Still, as more extreme weather hits China, growing public awareness of the causes and impact of global warming could generate pressure for change, as it did with air pollution, he says.

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