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China light dragon
Credit: Mauvries/Shutterstock
REST OF WORLD POLICY
5 February 2015 13:05

National carbon market on the horizon for China

Mat Hope

Mat Hope

02.05.15
Mat Hope

Mat Hope

05.02.2015 | 1:05pm
Rest of world policyNational carbon market on the horizon for China

China has been experimenting with provincial  carbon-market schemes over the past four years. Government officials are now suitably convinced that a national market could begin in mid-2016, Reuters reports.

But progress will likely be slow as China seeks to avoid the problems currently hobbling the EU’s scheme. Carbon Brief looks at how China’s pilot schemes are progressing, and what the next steps are to creating the world’s largest carbon market.

Current schemes

China has pledged to ensure its emissions peak in 2030 as part of an historic deal with the US, signed in November last year. It will implement a range of regulations and schemes to make that happen, including a national carbon market.

In preparation, China’s government established seven pilot programmes in 2011 to see if carbon markets could work in a Chinese context. The government plans to expand and link these markets to form large regional schemes, before converting those into a national market in 2016.

China has been relatively slow to jump on the carbon-market bandwagon. The EU’s emissions trading scheme (ETS) – currently, the world’s largest – was set up in 2005. There are now 46 carbon markets operating worldwide.

Seven of those are in China. It has schemes in the cities of Beijing, Tianjin, Shanghai and Shenzhen and the three in the Chongqing, Guangdong, and Hubei provinces. Together, the schemes cover companies’ emissions totalling just over a billion tonnes of carbon dioxide.

Each market was established with slightly different characteristics. Some require companies to reduce emissions by a set amount, while others aim to improve companies’ carbon intensity. The schemes also cover different sectors.

This table summarises the key differences:

China's carbon markets

The different designs mean the carbon price varies quite a lot between the schemes. Current prices are between ¥20 and ¥55 per tonne of carbon dioxide, the equivalent of about �2 to �8. By way of comparison, the beleaguered EU ETS currently has a price of around �7 per tonne.

Screen Shot 2015-02-05 at 11.51.16.pngSource: Data from China Carbon. Graph by Carbon Brief.

Mridul Chadha, analyst at Climate Connect Limited, tells Carbon Brief he expects prices to rise in the next couple of months as companies rush to meet the government’s compliance deadline, as they did in 2014.

Some schemes trade a lot more permits than others, which has a knock-on effect on the price. There’s also a big difference in how often the permits are traded on a day-to-day basis, known as market liquidity.

Screen Shot 2015-02-05 at 12.52.27.png
Source: Data from China Carbon. Graph by Carbon Brief.

China’s government also doesn’t allow futures trading, where participants buy and sell permits in advance in order to try and get the best price, which further restricts the markets.

Next steps

As the markets expand and link, the government will explore ways to remove some of the restrictions and make the schemes more like the EU’s ETS. But China is determined to avoid the pitfalls that have made the EU’s scheme ineffective in recent years, as the market became oversupplied.

The government agency responsible for the schemes, the National Development and Reform Commission (NDRC), has laid out how it expects to expand the markets in the coming year. It plans to link the Beijing, Tianjin, and Hubei schemes, while the Shanghai scheme may expand into the neighboring provinces of Hebei, Zhejiang and Jiangsu. This week, the Guangdong scheme expanded into Hong Kong.

The NDRC will continue to watch how lifting the various restrictions impacts the carbon price and each region’s emissions before deciding on the final design of a nationwide scheme.

So a national market is on the horizon. But, as far as the government is concerned, there’s still a lot of experimenting to do.

Main image: China light dragon.
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