China Launches Carbon Trading Scheme to Meet Climate Goals

China has finally launched its much-anticipated carbon trading system on February 1st, 2021, as part of its efforts to keep its pledges under the Paris Agreement and prevent climate change. The scheme, also known as the Emission Trading Scheme (ETS), will be under the administration of the Ministry of Environment and Ecology and will oversee over 2,000 coal and gas power plants. Later on, companies emitting a minimum of 24,000 tonnes of carbon equivalent will be able to join the carbon trading market. According to the Ministry of Ecology and Environment (MEE), “for the first time, the responsibility for greenhouse gas emission control at the national level is consolidated to the enterprise, which is of great significance to promoting supply-side structural reform and high-quality economic development.”

However, the scheme is smaller in scope than it was initially envisioned in 2015. It covered a lot of economic sectors at the time, but it now only focuses on the power sector, which produces around 30% of the country's emissions. It will also be fully operational in three to five years, but there is a worry that the industry will already have built various coal power generation stations by then.

The ETS goes into detail about what carbon emissions “allowances” are and how they will be allocated, how trading must be carried out, and how measurement and verification will be conducted. All emissions allowances will be allocated for free in the beginning, and the auctioning of allowances will be introduced later at a more appropriate time, which is a change from the original suggestion that the auctioned shares increase over time. This is mainly because while free allocation makes it harder for businesses to think of the price as representative of the true cost, the ratio of paid allowances is a significant factor for financial institutions.

However, the biggest change will be the requirement of the disclosure of verified company-level emissions to the public. This will help boost transparency of the system, improve compliance, supply vital information to financial markets, and even allow the public to challenge non-compliance.

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