1. What’s the plan?
China announced its Emissions Trading Scheme (ETS) in 2017 as a way to help deliver on its goals for combating climate change. Those have since become loftier, including a plan for annual emissions to stop rising by 2030 and President Xi Jinping’s signature pledge of a carbon-neutral economy by 2060. The carbon market’s initial focus is on more than 2,200 electricity giants powered by fossil fuels. That industry as a whole accounts for almost half of the carbon China spews into the atmosphere and 14% of the world’s total, according to BloombergNEF.
2. How is it supposed to work?
Fairly simply. The Chinese government gives every power plant the right to a certain amount of pollution in a given year. Pollute less than that, and you can sell excess pollution rights, or allowances. If you want to pollute more, you have to buy extra allowances. Listed transactions will be for 100,000 metric tons of carbon dioxide equivalent or less, and price moves will be within 10% of the prior day’s close, according to the Shanghai Environment and Energy Exchange, which is hosting trading. Larger block trades are possible within 30% of the last closing price. China’s first transaction after the July 16 launch was at a price of 52.78 yuan ($8.16) a metric ton.
3. Who’s covered?
Shanghai Environment and Energy Exchange Chairman Lai Xiaoming expects eight industries to be included during China’s current five-year plan, which runs through 2025, and that the ETS would eventually cover as many as 10,000 emitters accounting for about 5 billion tons of carbon. After power generation, steel, cement and aluminum production are among those sectors expected to be next in line. Vice Minister of Ecology and Environment Zhao Yingmin said China would work quickly on regulations and standards to expand the market.
4. What’s the strategy?
China seems to be trying to strike a balance between its environmental and economic goals by prioritizing participation in the ETS over more stringent goals on reducing emissions. While it’s uncertain how rapidly trading will take off, the program is expected to have limited real-world impact at its outset. Officials may be doling out so many allowances that power generators won’t need to buy extra to burn coal, according to an April study from TransitionZero, a financial analytics group focused on decarbonization.
5. What about longer term?
The market as currently designed won’t accelerate China’s decarbonization, according to BNEF. But having a working mechanism in place offers the government a powerful climate-policy tool that it can employ in the future. It’ll also help participants begin integrating emissions goals into their longer-term planning.
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