China sets in motion national carbon emission trading market

China’s high-profile national carbon emission trading market commenced trading on July 16. Power generation industry will be the first among all industries to try the new trading system, and the market will only allow spot trading in carbon emissions quotas among key emitters of the power generation industry during its start-up stage, according to a press briefing held on July 14.

This year marks the first implementation cycle of China’s national carbon market, which has included more than 2,000 key carbon dioxide emitters in the power generation industry in the first batch of trading, said Zhao Yingmin, vice minister of China’s Ministry of Ecology and Environment (MEE), at the press briefing held by the State Council.

The aggregate annual amount of carbon dioxide emissions of the power companies included in the first batch of trading exceeds four billion tons, which means China’s national carbon emission trading market will become the world’s largest carbon market in terms of the volume of greenhouse gases it handles.

Carbon emission trading refers to the buying and selling of the rights to emit carbon dioxide like commodities. Before trading, the government allocates carbon emissions quotas, or the rights to emit carbon dioxide, to enterprises and other key emitters of carbon dioxide.

A company that manages to keep its actual carbon emissions below its quota by increasing investment in R&D and enhancing technological innovation can sell the rest of its granted quota on the trading market. Likewise, if a company’s actual amount of carbon emissions surpasses its quota, it needs to buy carbon emissions right from other companies at market price to offset its excess carbon emissions.

The carbon emission trading market represents a major institutional innovation of China to control and reduce greenhouse gas emissions and promote green and low-carbon development by leveraging market mechanisms.

The carbon emission trading market is expected to be an important scheme for China to realize the goal of peaking carbon dioxide emissions by 2030 and achieving carbon neutrality by 2060, according to Zhao, who added that the practice of foreign countries has proven that carbon market is a policy instrument for realizing certain carbon emission reduction goals at a relatively low cost.

Compared to traditional administrative means, establishing a carbon market can not only make enterprises take responsibility for the control of greenhouse gas emissions, but provide corresponding economic incentive mechanisms for carbon emission reduction, thus lowering the cost of reducing carbon emissions for the whole society, driving innovation and investment in green technologies, and offering effective tools for properly handling the relationship between economic development and carbon emission reduction, Zhao explained.

It should be noted that the quality of carbon emissions data of enterprises is particularly important for fair allocation of carbon emission quotas across the country. According to Zhao, China adopts a unified, open, and transparent method of allocating carbon emission quotas and makes the authenticity and accuracy of carbon emissions data the utmost priority in the construction of the national carbon market.

Since the national carbon market is expected to guide optimal allocation of resources for carbon emission reduction according to prices, how the transaction price for trading is set and what level it will be kept at have drawn wide attention.

From a microcosmic and near-term perspective, the transaction price is determined by the supply and demand of the quotas, while macroscopically and in the long run, it is determined by the overall situation of and trend in economic operation and industry development, Zhao noted.

The transaction price of carbon emissions trading should be neither too high nor too low, according to Zhao, who explained that if the price is too low, it will dampen enterprises’ enthusiasm for reducing carbon emissions; but if the price is too high, it will overburden some companies with heavy carbon emissions.

According to the seven pilot carbon trading programs, the weighted average carbon prices have been around 40 yuan (about $6.2) a ton in the recent two years, Zhao said at the press briefing.

On the basis of sound initial operation of the national carbon emission trading market, China will include more industries with heavy carbon emissions, such as iron and steel, non-ferrous metal, petrochemical, as well as aviation, into the market, according to the press conference.

The MEE will make continuous efforts to improve supporting institutional systems, promote the introduction of interim regulations on the management of carbon emission trading, and complete relevant technical regulations, standards, and management systems, Zhao said.