China’s Carbon Emissions Trading Scheme Begins Operations, Imperfect Solution for a Worsening Problem

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China's national carbon emission trading scheme has become operational.
China's national carbon emission trading scheme has become operational. (Image: marcinjozwiak via Pixabay)

China’s ambitious carbon emissions trading scheme (ETS) began activities on July 16, with 4.1 million tons of carbon dioxide quotas worth 210 million yuan (approx. $32 million) traded on the first day alone. The carbon allowances had an opening price of 48 yuan ($7.41) per ton, which eventually rose by 6.73 percent to a closing price of 51.23 yuan ($7.92).

Carbon emission trading involves the purchase and sale of permits that allow a nation or entity to emit a certain amount of carbon dioxide. Carbon trading emerged from the Kyoto Protocol, a U.N. treaty aimed at cutting down emissions around the world. Every country is given a certain number of permits to emit carbon dioxide (CO2) up to a specified level, with the number of new permits granted declining with each passing year.

If a country does not use all of its permits, unused permits can be sold to other nations. In a carbon trading market, companies can buy permits to emit more carbon, while companies that cut down on CO2 emissions may have excess permits to sell. The ultimate aim is to incentivize businesses and nations to reduce carbon emissions as much as possible because more emissions imply more money is spent on buying permits.

In China, the carbon ETS has been set up on the Shanghai Environment and Energy Exchange. In the current first phase, the carbon ETS will cover 2,225 power plants responsible for more than 4 billion tons of emissions per year and 40 percent of the nation’s total emissions. By volume, China’s carbon ETS is the largest carbon market in the world.

“A coal-fired power plant will be granted free permits to cover its verified emissions. But even if it exceeds that verified amount by 100%, it will be required to buy no more than 20% of the surplus on the market. Meanwhile, gas-fired power plants do not have compliance obligations, meaning they can sell surplus allowances and have no need to buy even if they emit more than their allocation,” according to Reuters.

Since emission data from the power sector is easier to collect and verify, the industry was selected to participate in phase one. In the future, China plans to expand the carbon ETS by bringing other industries into the scheme, including those involved in building materials, non-ferrous materials, chemicals, steel, papermaking, petrochemicals, aviation, and so on. In these initial stages, individual and institutional investors are banned from trading in the carbon ETS.

An ineffective solution

China’s carbon ETS has certain loopholes that undermine its ability to manage greenhouse gas emissions. For one, the fines on Chinese companies that fail to comply with the trading scheme is a maximum of $4,600, which is minuscule compared to the millions and billions of dollars in revenue generated by the businesses.

Secondly, the average price of carbon emissions per ton is far too low compared to European markets. China has conducted seven market trials, which predicted the price of carbon emissions per ton would be around 40 yuan ($6.18). In contrast, the price in the European Union ETS between 2021 and 2025 is predicted to be around 47.25 euros ($55.67) per ton. Thus, for the same amount of emissions, Chinese firms will pay significantly less.

“China’s failure to charge for emissions in the past, and exceedingly low emissions trading price in the future, will give it a huge export advantage across dozens of critical and strategic industries to both economic and military power, while at the same time providing China with a carbon-trading scheme to make it look more environmental for purposes of public relations,” Anders Corr, a principal at Corr Analytics Inc., publisher of the Journal of Political Risk, writes in The Epoch Times.

According to a report published by UK-based think tank Transition Zero in April, the volume of carbon emissions available on China’s carbon ETS exceeds industrial demand by 1.9 billion tons. As a result, the price of carbon emissions per ton is likely to remain low.

“The ETS in its current form will likely have no impact reducing power generation emissions in China and could generate windfall profits for efficient coal generators,” the report states.

Another problem is the falsification of data. Back in 2013, a government audit had found that hundreds of Chinese power companies reported false carbon emissions data. In an interview with Reuters, a manager with a state-owned power company said that firms could easily overstate their coal efficiency. He reiterated that there is “no guarantee” that emissions will be accurately reported.

“Data falsification is a long-standing problem: China will not get its environmental house in order if it does not deal with this first,” Alex Wang, an expert in Chinese environmental law at UCLA, had said. 

China is the biggest emitter of greenhouse gases in the world, accounting for roughly 30 percent of the global total. Moreover, the country plans to add an estimated 249.6 gigawatts of coal-fired capacity to its power infrastructure.

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