China launches world’s largest carbon market: What is it and how does it work?

Carbon Trading works on the cap-and-trade model where the coal-and-gas-fired energy plants are allocated a specific number of emissions allowances. If they exceed this limit, the energy plants are permitted to buy allowances from the open market.

Created On: Jul 23, 2021 13:35 IST
Carbon Market Scheme
Carbon Market Scheme

China, the largest greenhouse emitter in the world, has finally launched its first national emissions-trading scheme. The carbon market was debuted by China on July 16, 2021, with trading in Shanghai opening at a price of 48 yuan ($7.40) per ton of carbon. The first deal in the market was closed at 52.78 yuan per ton.

As per Nikkei Asia Report, roughly 1,60,000 tons of carbon worth 7.9 million yuan were traded. Some experts have also estimated that within the next 5 years, China’s carbon market can reach 7 billion tons annually, hitting a market value of 600 billion yuan.

Carbon-pricing mechanisms, as launched by China, exist in around 45 countries already. However, China’s scheme which began trading only last week is the biggest in the world.

China’s carbon market: What do we know?

The Carbon market project in China announced over three years ago, has been dodged by delays. But following its launch, the carbon market includes over 2,200 companies in the country’s power sector, which reportedly accounts for 40% of China’s total carbon footprint.

In time, the Carbon Market in China is expected to further expand to cover operators in the cement and steel sectors as well.

What is Carbon Trading?

The logic and reason behind carbon trading are very much straightforward. The scheme works on the cap-and-trade model where the coal-and-gas-fired energy plants are allocated a specific number of emissions allowances.

If they exceed this limit, the energy plants are permitted to buy allowances from the open market. In case, if they manage to stay within their prescribed limits, they can sell the remainder of their allowances to the other emitters. As allowances become stricter, prices rise, which encourages companies to become greener.

Significance:

Carbon schemes are fundamentally aimed to incentivize companies to reduce the intensity of their emissions. It means that the emitters are encouraged to develop new means for extracting greener amounts of energy while keeping their emissions low.

The total emissions can continue to increase as long as the energy output is increasing at a greater rate. The carbon scheme or market, simply put, hopes to have companies focus on reducing the volume of emissions per unit of energy output.

How does the carbon market work?

The scheme effectively puts a price on emitting carbon. It allows the governments to set pollution caps for big power companies, and let the firm buy the right to pollute from others with lower carbon footprints.

A certificate will be issued by the local governments for every tonne of carbon dioxide or other greenhouse gas equivalent which a company will be allowed to emit, and they will need to pay fines for not complying.

The Vice-President of the Environmental Defence Fund China, Zhang Jianyu said that the companies can either cut the emissions or pay to pollute, however, the latter will become pricier over time as the governments will issue fewer pollution permits.

Firms to make their Pollution data public:

In order to improve transparency, the companies involved in the trading system will have to make their pollution data public and get third parties to audit the emission records.

However, the random checks by the Ministry of environment had found that one in three companies had emitted more CO2 than their reported amount.

Will it work?

According to the experts, the Carbon trading scheme has been debuted in China simply to get the project off the ground.

However, if it remains the way it is, it is highly unlikely to have the desired impact of driving down the emissions towards achieving Chinese President Jinping’s goal of carbon neutrality by 2060.

The reason is China’s focus on reducing the intensity of emissions rather than the absolute emissions which are seen in other carbon markets such as Argentina, the European Union, and Canada.

The economy of China is expected to grow by between 4 and 5 percent every year which means that power consumption will also rise proportionately. As per some observers, maybe this is why the government has engineered its carbon market to target emissions intensity.

It has also been noted that the current allowances provided to companies are too generous, and their prices are too low. The penalties or defaulting on their pledges, some have noted, are also limited for serving as a strong deterrent.

China’s contribution towards global carbon emissions:

China, in 2019, had contributed 27% of the total global carbon emissions and over 10 billion tonnes of carbon dioxide.

The country relies on coal for 60% of its energy needs and since the year 2011 has burned more coal each year than the rest of the world combined. The capacity of the country keeps growing too, with three times more coal-power generation capacity added in China than in the rest of the world together in 2020.

However, it must be mentioned that its per capita emissions-roughly 6.8 tonnes of carbon dioxide per person-  is lower than half of those nations such as Canada, Australia, and the United States.

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