Understanding China’s Carbon Market and Its Mechanisms
Understanding China’s Carbon Market and Its Mechanisms
Sub: Env
Sec: Climate change
Why in News
China is seeking public feedback on a significant plan to include key industries such as cement, steel, and aluminum in its emissions trading scheme (ETS). This expansion is expected by the end of the year and aims to boost market liquidity in the world’s largest greenhouse gas (GHG) emitting nation. This move is pivotal in China’s efforts to curb emissions and transition toward sustainable development.
China’s carbon market is composed of two major systems:
Mandatory Emission Trading System (ETS)
Voluntary Greenhouse Gas Emissions Reduction Market (China Certified Emission Reduction – CCER).
These systems operate independently, but they are connected via a mechanism allowing firms to use voluntary market credits (CCERs) to meet their compliance targets under the ETS.
About The Emission Trading System (ETS):China’s mandatory carbon market, ETS, began operations in July 2021 on the Shanghai Environment and Energy Exchange.
Coverage: Initially, it included over 2,000 major emitters in the power generation sector, each responsible for emissions of at least 26,000 metric tons per year.
Expansion: The ETS will eventually include eight major sectors: power generation, steel, building materials, non-ferrous metals, petrochemicals, chemicals, paper, and civil aviation.
These sectors account for 75% of China’s total emissions.
Mechanism of ETS:Firms receive free certified emission allowances (CEAs) based on industry carbon intensity benchmarks. These benchmarks are set by the government and reduced over time.
If a company’s emissions exceed its quota, it must buy additional CEAs from the market.
Conversely, companies with emissions below their quotas can sell surplus allowances.
Carbon Pricing:Carbon prices in China’s ETS are typically lower than international markets. Prices tend to rise when quota allocations are reduced, driving demand for credits and pushing prices higher.
AboutThe China Certified Emission Reduction (CCER) Market: The CCER is China’s voluntary GHG emission reduction trading market, which was relaunched in January 2023 after being suspended in 2017 due to low trading volumes.
The CCER market allows broader participation and supports key emitters in meeting their targets under the ETS by providing an option to offset 5% of their total emissions with voluntary credits.
The expansion of the mandatory carbon market through the inclusion of new sectors is expected to drive demand for CCERs. This will likely increase trading volumes in the voluntary market and enhance liquidity.
About Global Carbon Markets: Carbon markets allow for buying and selling of carbon emissions with the objective of reducing global emissions.
Carbon markets under international law were first set up under the Kyoto Protocol (1996) and became operational in 2000.
The protocol mandated binding reductions in emissions by developed countries, but not in developing ones, and set up three carbon market instruments:
Emissions trading under which developed countries could trade abatements exceeding their mandates with others which fell short;
Joint Implementation (JI) covering negative carbon generated from individual projects which could be traded between corporates in developed countries;
Clean Development Mechanism (CDM) by which such credits could be generated from projects in developing countries and traded to corporates in developed countries.
Carbon Markets under the Paris Agreement:
The provisions relating to setting up a new carbon market are described in Article 6 of the Paris Agreement.
Article 6.2 enables bilateral arrangements for transfer of emissions reductions.
Article 6.4 is about a wider carbon market in which reductions can be bought and sold by anyone.
Article 6.8 provides for making ‘non-market approaches’ available to countries to achieve targets.