China’s long-awaited national emissions trading system (ETS) launched last week, following prolonged anticipation. The effort was first announced in 2011, during the 12th Five-Year Planning process, as part of a broader strategy for enhancing green development. It builds upon several regional pilot programs which launched in 2013-2014 with 7 provincial and municipal pilots, each with varying targeted sectors and program design elements. Intended to help China achieve a suite of climate objectives (i.e., peaking carbon emissions by 2030), the national market was announced by Chinese President Xi Jinping in the lead-up to the 2015 Paris Agreement as part of the U.S. - China Joint Presidential Statement on Climate Change.
As the largest carbon market in the world, China’s system will be more than ten times larger than California’s, doubling the share of global emissions covered under such a system, and covering approximately one-tenth of global carbon dioxide emissions. In the first phase, the market will be focused exclusively on the power sector, covering over 2,200 businesses, (comprising more than 40 percent of the nation’s emissions), with plans to incorporate additional sectors (i.e., steel and cement) - and the regional pilot markets - in the future.
Trading for credits began at 48 yuan ($7.40) per ton of carbon on opening day Friday, July 16th, 2021, with the price rising to 51.23 yuan ($7.89) by the end of the first day of trading. The initial price in China’s system was significantly lower than current trading on California’s system (around $19), or that of the European Union’s ETS (around $56 per ton), which has been active for over a decade. Initial allocations are free (rather than being sold at auction) and set by the level of existing power plant emissions, to help encourage initial participation by the Chinese power sector. Where a company’s emissions exceed its initial allowances, they would be required to pay for credits. The system’s calculations are based on the carbon intensity of fuel, and not absolute emissions. Fees for non-compliance are about $4600 per infraction. It remains to be seen how well the system will perform with this scale, design, and price.
The carbon market experience in the United States and California, specifically, could provide some insights into the design and implementation of such systems moving forward. The Regional Greenhouse Gas Initiative (RGGI) links several states in a regional market for the power sector, while the State of Washington recently passed a statewide cap-and-trade mechanism. Meanwhile, the State of California’s cap-and-trade program has been operational since 2013, and forms an important part of the state’s approach to reducing greenhouse gas emissions 40% below 1990 levels by 2030. Integrally, the system sets an overall cap on emissions, allocating allowances to pollute to a certain threshold per allowance, and enabling trading to satisfy emissions obligations. The program encompasses more than three-quarters of the state’s emissions, and is linked with a similar program in the Canadian Province of Quebec. Given its earlier start, the design and implementation of systems like California’s helped to inform and shape the regional piloting efforts in China.
Indirect or informal coordination between the California and Chinese systems - also known as linkage by degrees - can potentially yield benefits, including more efficient implementation and monitoring. In both cases, there may be some opportunities to draw lessons-learned across jurisdictions (for example, the use of a cap in California’s system), and to help inform the design and implementation of future markets, including in other regions. Further, dialogue and exchange can help inform the administrative, political, and regulatory frameworks in which such systems operate (i.e., monitoring and verification systems).