China's Prudent Path Forward on a Nationwide Emissions Trading Scheme
Energy Fact & Opinion
December 22, 2017
- China released a roadmap for the nationwide carbon emissions trading scheme (ETS) on December 19, 2017.
- The initial phase will focus on the power sector, involving 1,700 power companies, and the trading will be based in Shanghai.
- The power sector ETS will cover over 3 billion tons of carbon dioxide annually—roughly one-third of total carbon emissions by China, which is the largest carbon emitter in the world today.
- Under the plan, power companies—upon receiving credits—will first test out the ETS by simulating credit trading without actual payment.
- The ETS will eventually include additional energy intensive sectors, such as iron, steel, cement and chemicals and the enforcement of emission limits will begin in 2019 or 2020.
- How the credits will be allocated remains unknown.
OpinionThe roadmap provides important and interesting initial details for the long awaited nationwide emissions trading scheme (ETS). While the original plan sees carbon emissions trading in eight sectors, including iron and steel, chemicals and paper-making, China decided to start with just the power sector. The initial phase will cover power companies that emit at least 26,000 tons a year of carbon, which practically targets larger users of coal and natural gas.
First mentioned in the U.S.-China joint communique of September 2015 and reiterated by President Xi Jinping of China at the COP21 meeting in Paris, in December 2015, the ETS had been declared to start in 2017. Less than two weeks before the turn of the calendar year, however, China went ahead with the release of roadmap to demonstrate its commitment to the ETS.
The limited scope, together with the delay in launch reflect difficulties that the Chinese officials are encountering in establishing a comprehensive data collection system that is essential for setting target levels and allocating carbon credits accordingly. The difficulties exist despite China having some experiences with emissions trading through the pilot programs launched in seven provinces and cities in 2013.
The power sector-only carbon emissions trading is still noteworthy in its scale: the 3 billion tons of coverage is significantly larger than the European Union’s emissions trading, which covered about 1.4 billion tons of emissions this year. Although China reportedly has no plan to link its ETS with that of other countries at this stage, the possibility of future linkage is a big boom for those striving to drive emissions reduction through the market-based approach.
One key area for power sector emissions reduction has been to reduce the country’s heavy reliance on coal. According to the latest five-year coal market outlook by the International Energy Agency, China’s coal power generation saw an increase in 2016, and thermal coal demand for power generation is forecast to increase in the medium term although the country’s total coal consumption appears to have peaked and is forecast to continue declining. The power sector-only ETS can help keep the coal power emissions under check and ensure this near-term increase does not lead to a reversal in China’s carbon emissions reduction trend.
The gradual introduction of ETS is far from a cop-out on the highly ambitious original plans for a multi-sector trading system. The experience from the power sector ETS should inform Chinese effort to improve monitoring, reporting and verification (MRV) of emissions trading that is crucial to effectively enforce the compliance. In the coming weeks and months, we are likely to learn details on China’s MRV system, including how participants submit emissions data, register emission rights, as well as emissions trading and settlement.