With 2017 winding down, China announced the establishment of its national emissions trading scheme (ETS) on Tuesday, December 19th, in Beijing. China committed in 2015 to establishing a nationwide carbon trading system before the end of 2017, and with this announcement, has officially launched the world’s largest carbon trading scheme. That said, in reality, this move is much less profound than widely expected in terms of scope, and a fully functioning system is anticipated to still be several years away. Nonetheless, today’s announcement is a signal of China’s intentions.
China’s National Development and Reform Commission (NDRC) revealed plans for the rollout of the nationwide carbon exchange starting with the power sector. There are future plans to gradually expand the market to include China’s other major polluting industries. The power sector is one of largest polluting industries in China, and with about 1700 companies who will be allowed to trade, it will account for more than one-third of China’s total carbon emissions. By size, that means that between 3.3 and 3.5 billion tons of CO2 will be subject to trading, compared to 2.08 billion tons of CO2 in the European Union’s market, making it, upon establishment, the world’s largest carbon trading scheme.
In terms of structure, Hubei and Shanghai have been tasked with constructing the registration system and the trading system respectively, in coordination with the other regional pilots in Beijing, Tianjin, Chongqing, Guangdong, Jiangsu, Fujian and Shenzhen. The regional pilots will be incorporated into the national market at some point in the future.
Some more granular aspects of the market are still ambiguous, but knowledge and experience gained from the regional carbon market pilot zones have highlighted some of the major issues that need to be addressed for a fully-operational national carbon market. The Chinese government plans to address them over the next 2-to-4 years.
Here are some of the major concerns:
Data accuracy and transparency: The inability to collect adequate and quality data from a number of the companies is why the system launched with only the power sector. The government is working with market participants to upgrade the transparency of data and to ensure confidence in the accuracy of the numbers. The plan is to include the major pollution industries on the exchange in the future including building materials, iron and steel, nonferrous metals, oil and petroleum, chemicals, paper, and aviation.
Strong legal framework: There is no existing law for carbon trading and there are limited regulations. The intent is to track trading on the exchange, and then develop the appropriate regulatory framework. While regulations may be issued over the next year, we do not expect to see a law passed before 2020. It will be tough in the interim period to impose meaningful enforcement on the enterprises that fail to comply with their carbon emissions obligations because of the lack of a regulatory framework.
Readiness of infrastructure: China still has not developed the necessary framework for a fully functioning carbon market, and it is not likely to have one in place before 2020. Issues to be addressed still include development of an allowance registration system, a carbon trading and clearing system, and creation of a Measurement Reporting and Verification (MRV) system, which would ensure smooth operation of the national carbon market.
Carbon trading: To date, China only permits spot trading, managed by the NDRC. While the China Security Regulatory Commission has been tasked with developing plans for a futures trading system – essential for the exchange to be effective – it will not be released in the near future. More likely, a futures trading system will be tested in one of the regional exchanges for a few years and then rolled out on a national basis.
China has a number of challenges ahead of it in establishing a full-blown and fully functional carbon exchange, but they are clearly determined to press ahead. In the interest of using market forces to address China’s continuing battle against pollution, it is important that China succeeds.