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Introducing China’s Carbon Market

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Introducing China’s Carbon Market

What to know about Beijing’s latest step to combat climate change.

Introducing China’s Carbon Market
Credit: Depositphotos

Last week, China announced the launch of its national carbon emissions trading market. Although China’s plan was first proposed a decade ago, and the current version is far more limited in its scope than originally intended, Beijing is framing the trading program as an initial step toward deepening its commitment to addressing climate change. The move comes after the European Union’s European Green Deal, with plans for Europe to become the world’s first climate-neutral continent by 2050 and reduce carbon emissions by at least 55 percent by 2030. China’s and the European Union’s announcements help provide momentum for the next U.N. climate change conference, slated for November in Glasgow, Scotland.

China’s carbon market will start with 2,225 firms in the coal and gas power sector, an industry that accounts for a sizable portion of the country’s emissions. Officials have suggested that the market is set to expand to include other high-emissions industries – building materials, chemicals, domestic aviation, iron and steel, nonferrous metals, paper, and petrochemicals – but timing of an expansion is not clear.

Zhang Xiliang, executive director of the Institute of Energy, Environment and the Economy at Tsinghua University and chief designer of the carbon market, said that “The goal is to expand the market to cover as many as 10,000 emitters responsible for about another 5 billion tons of carbon a year.”

Carbon trading systems put a price on greenhouse gases emitted by industry, giving manufacturers a fixed amount of carbon to release annually. The businesses can purchase or sell their allowances, with planners hoping that the program will incentivize turning to more efficient production solutions. In China, the initial carbon allowances are based on prior annual performances instead of absolute limits proposed by environmental officials. Unlike other existing trading programs, this provides firms more flexibility.

Participating firms are expected to submit greenhouse gas data to provincial branches of China’s Ministry of Ecology and Environment, which must verify and oversee the systems’ operations. Violations will result in fines or a tightening of future carbon allowances. While the scope of this long-stalled trading scheme is narrow, others have suggested that this sector lends itself well to a carbon market because of the availability of data compared to other industrial sectors. The Chinese platform will trade on the Shanghai Environment and Energy Exchange.

At a news conference last week, Zhao Yingmin, a vice minister for the environment, said that the program will shift responsibility of controlling greenhouse gases to firms and provide economic incentives to reduce carbon emissions.

China is the world’s top emitter of greenhouse gases, surpassing the United States in the mid-2000s. As of 2019, China’s carbon output accounted for more than a quarter of global emissions, according to research by the Rhodium Group. Among China’s stated climate goals are to reach peak carbon emissions before 2030, net zero emissions by 2060, and have renewable energy sources make up 25 percent of the country’s total energy consumption by 2030.

As China increasingly seeks to paint itself as a global leader against climate change, the country itself finds itself increasingly under threat of climate events. According to a recent survey of Chinese people aged 18 to 24, more than 40 percent of respondents called climate change the biggest threat to the world. Just this week, the province of Henan experienced extreme flooding, leaving tens of thousands of people displaced and at least 25 dead, inundating subways, and putting dams and reservoirs at risk. A study by Greenpeace East Asia warned of hotter, longer summers and heavy rainfall in major Chinese urban centers including Beijing and Shanghai. The study found that 73 of the 98 heat waves in the past six decades in the Guangzhou area occurred after 1998.

China’s approach to climate change at home is evolving, in part because the policies are a multi-level game. “NGOs, central government and local government all have different understandings and levels of awareness of climate governance,” said Wang Binbin, associate researcher at Tsinghua University’s Institute of Climate Change and Sustainable Development, in an interview with China Dialogue. “Government-led” approaches include not only central government initiatives but also various levels of local government. “The central government has proposed carbon neutrality and is taking climate change seriously. But if local governments don’t make changes, and if they continue to focus and be evaluated on economic growth, implementation of climate policies will suffer,” Wang added.