China’s Carbon Market

Syllabus: GS3/Environment and Conservation

Context

• China is seeking public feedback on a plan to include cement, steel, and aluminium production in its carbon emissions trading scheme (ETS).

China’s Carbon Market

• China’s carbon market consists of a mandatory emission trading system (ETS) and a voluntary greenhouse gas (GHG) emissions reduction trading market, also known as the China Certified Emission Reduction (CCER) scheme.
• The ETS will eventually include eight major emitting sectors including power generation, steel, building materials, non-ferrous metals, petrochemicals, chemicals, paper and civil aviation, which together account for 75% of China’s total emissions.
• The two schemes operate independently but are interconnected via a mechanism that allows firms to buy CCERs on the voluntary market to meet their compliance targets under the ETS.

What is the Emission Trading System?

• ETS started trading in 2021 on the Shanghai Environment and Energy Exchange. 
• Under the scheme, firms are granted a quota of free certified emission allowances (CEAs). 
  • If actual emissions exceed a company’s quota during a given compliance period, it must buy more allowances from the market to cover the gap. If its emissions are lower, it can sell its surplus CEAs.
• Allocations are decided not by absolute emission levels, but by industry carbon intensity benchmarks set by the government, which are reduced over time.
  • Emitters are obliged to submit key parameters on a monthly basis and report emission data every year.
• Since its inception, it has become the world’s largest emissions trading platform, covering about 5.1 billion tons of carbon dioxide equivalent, around 40% of China’s total.

Carbon Markets

• Carbon markets are trading systems in which carbon credits are sold and bought. 
• Companies or individuals can use carbon markets to compensate for their greenhouse gas emissions by purchasing carbon credits from entities that remove or reduce greenhouse gas emissions.
• One tradable carbon credit equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided. 
• When a credit is used to reduce, sequester, or avoid emissions, it becomes an offset and is no longer tradable.
• There are broadly two types of carbon markets: compliance and voluntary. 
  • Compliance markets are created as a result of any national, regional and/or international policy or regulatory requirement.
  • Voluntary carbon markets – national and international – refer to the issuance, buying and selling of carbon credits, on a voluntary basis.

Significance

• By putting a price on carbon, it encourages companies to find cost-effective ways to reduce emissions.
• Companies can choose how and where they reduce emissions, potentially leading to more innovative solutions.
• Offsetting mechanisms can fund projects that contribute to environmental sustainability.
• Carbon finance will be key for the implementation of the Nationally Determined Contributions (NDCs), and the Paris Agreement.

Source: IE