National Carbon Market: China’s Response to Climate change

Ms. Shristi Singh, Research Intern, Institute of Chinese Studies

For a very long time, China believed that climate change is a myth propagated by western countries to contain the growth of developing countries, especially of China. With time, China has realised that climate change is a reality and has decided to stop adhering to the concept of ‘common but differentiated responsibility’. In the past few decades, the economic growth of China had been impressive. It is the world’s second largest economy and most likely to supersede the United States (US) in coming years. The pace of China’s economic growth has put its environment under increasing stresses. Historically, it has been reluctant in cutting its emissions off, fearing that it could hinder its economic growth. At present, China is the world’s largest energy consumer and carbon emitter, but there are positive signs that it is shifting its position.

China launched its much awaited ‘National Carbon Market’ on 19 December 2017 as its biggest initiative to combat climate change. The foundation of carbon market was laid down in 2013 when local markets were launched in five cities (Beijing, Tianjin, Shanghai, Shenzhen, Chongqing) and two provinces (Hubei and Guangdong) to reduce carbon emission. It included sectors like power, cement, metals, textiles and others. These markets were also included in 12th Five-Year Plan (2011-15) and current 13th Five-Year Plan (2016-20). The motive was to experiment the pilot projects in these polluting cities and provinces before commencing the mechanism nationwide. The countdown began when President Xi Jinping visited his US counterpart President Barack Obama in 2015 and promised to launch national carbon market in 2017. This commitment was then included in China’s pledge to Paris Climate Agreement and is also known as ‘Nationally Determined Contribution’ or NDC to reduce global greenhouse gas emissions.

Carbon Market in China

Carbon market can be defined as a marketplace where carbon emissions can be traded. The government sets limit on carbon emissions to ensure that industries cannot pass the environmental costs to the public. There are many ways of implementing the carbon market and the most popular approach is ‘cap-and-trade’ system where the government sets the cap on the emissions based on factors like ‘type’ of the industry and the ‘ease’ with which companies could feasibly reduce their emissions. If the company successfully beats the government’s target it can sell additional ‘saved’ carbon emissions in the market and earn profit whereas other companies that fails, will buy those saved emissions to reach their target.

Carbon market can be seen as China’s response to pressure at home and abroad to clean up its act and achieve target of clean environment. The domestic public is highly concerned about China’s increasingly deteriorating environmental conditions like rising sea level, soil pollution, deteriorating water quality, urban smog and poor air quality and others. The government has responded to these challenges by introducing ‘green technologies’ such as electric cars, solar panels, wind turbines and other eco-friendly technologies.

It was expected that China will upgrade existing local markets into national emission trading system covering eight high-energy intensive sectors such as power generation, iron and steel, paper-making, chemicals, non-ferrous metals, construction materials, aviation and petrochemicals. Instead, the government chose to cover the emission from power sector only, which emits one-third of China’s total greenhouse gases and makes China’s carbon market – the world’s largest carbon market or Emission Trading System (ETS). China has been the world’s leading investor in renewable energy sources for years but its power sector still depends upon high-carbon sources such as coal. Thus, carbon market starting with the power sector will be helpful in reducing coal burning and thereby boost the growth of clean energy industry.

Under the mechanism, the government will set a limit on total carbon emission and within that limit, polluting power generating industries that fails to reach the target will have to buy ‘carbon credits’ from less-polluting industries. This will impose financial burden on the polluters and will grant rewards to the cleaner entities. This way the renewable energy sector would be able to earn extra revenue from selling carbon credits to those that emit more than their allowed quota. For the first time power plants will undergo a rigorous verification process and there will be a continuous check by the government on accurate measure of emissions coming from them.

Environmental or Political Strategy?

China has vied for the role of a global leader on climate action after the withdrawal of the United States from Paris Climate Agreement in June 2017 under the Trump administration. However, carbon market as an idea is not new to the world, but coming from the world’s largest emitter is startling. China has promised that its carbon dioxide emission will peak by 2030 and the market may not produce a reduction in emissions immediately but in a way has been successful in sending signal to the world about China’s seriousness in dealing with the catastrophic climate change.

China has respected the timeline for announcing its carbon market but is being criticised for drifting from its original plan of covering all the eight broad industries to confining it to the power generation sector. At present, there is no hard cap emission on power sector, which can be pointed as China’s conservative approach to cushion the power sector and economy from sudden carbon shock. It can also be seen as ‘image-building’ process initiated by China to improve its image internationally from biggest emitter to one championing the carbon markets and also among its own people to restore their faith in new project as government’s action in dealing with broad environmental issue.

China’s carbon market would dwarf all the existing markets in the world. No official date has been announced for the actual start of the ETS but if successful, it could incentivize other nations to adopt emission-trading system and take a firmer stand on climate change and if it fails, it will dent China’s image and might impact many climate policies in different parts of the world.

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