Environment: China launches its carbon market

China carbon market

Aware of the environmental and societal risks posed by global warming, the Asian country, the largest investor in new energies, intends to be one of the world leaders on the climate issue.

China, which is committed to peaking its carbon emissions (by 2030) and then becoming “carbon neutral” (by 2060), is expected to be a major player at the UN climate summit in Glasgow in November (COP26).

In concrete terms, the new Chinese carbon market launched on Friday will force thousands of companies in the country to reduce their polluting emissions, or risk suffering economic losses. But how does this system work?

Ambitions lowered

For the first time, it sets pollution caps for companies. If they are unable to meet these quotas, they must buy “rights to pollute” from other companies with a smaller carbon footprint.

Questions remain, however, about the scale (smaller than the original plan) and effectiveness of the system (with a low price assigned to pollution).

China has been talking about the idea of a carbon market for a decade. But progress has been steadily hampered by the coal industry and by government policies that favor rapid growth at the expense of the environment.

The system will initially cover 2,162 Chinese power producers, Huang Runqiu, China’s environment minister, announced Friday.

Coal factory in China

Rising power

According to the International Energy Agency (IEA), these companies generate about one-seventh of the world’s carbon emissions from burning fossil fuels.

The American bank Citigroup estimates that 800 million dollars worth of “pollution permits” will be bought this year in China, and 25 billion by 2030.

The Chinese carbon market is then expected to be about one-third the size of the European Union (EU) carbon market – currently the largest.

According to the New China News Agency, however, China’s new emissions trading scheme is already “the largest in the world” in terms of the amount of emissions covered.

Originally, however, Beijing’s scheme was intended to be much broader in scope, covering seven sectors, including aviation and petrochemicals.

Ten times cheaper than in Europe

But the government has “scaled back its ambitions”, as economic growth is seen as a priority in the context of the post-Covid recovery, notes Lauri Myllyvirta, an analyst at the Clean Air and Energy Research Centre (CREA).

Another concern for environmentalists is the low price of pollution. The first trade on Friday morning was 52.7 yuan ($8) per ton of carbon.

And the average price is only expected to be around $4.60 this year in China, well below the $49.40 in the EU, according to a recent note from Chinese bank Citic Securities.

According to the British organization TransitionZero, the distribution of free pollution permits and the imposition of modest fines for non-compliance will keep prices low.

In short, while China’s environmental policy now appears to be aligned with its climate goals, “there is still a long way to go,” says Zhang Jianyu of the U.S.-based environmental group Environmental Defense Fund.

But Beijing has stressed that the carbon market is still in its infancy.

The risk of job losses

The program will be extended to cement producers and aluminum manufacturers as early as next year, said Zhang Xiliang, designer of the new system.

“The goal is to cover up to 10,000 emitting companies, responsible for about 5 billion tons of additional carbon emissions per year,” he said.

Other factors that could slow progress include a lack of technical know-how and pressure from powerful coal and steel lobbies.

Provinces that rely on coal and high-carbon industries for growth have been dragging their feet, notes Huw Slater of the China Carbon Forum (CCF).

“(Local) policymakers fear that if they cut pollution too quickly, it could lead to job losses and therefore social instability,” according to Slater.