China’s carbon market program too limited, analysts say

China has launched the world’s largest carbon market in what analysts see as a cautious and limited attempt by the world’s biggest polluter to cut carbon dioxide emissions.

The buying and selling of greenhouse gas allowances under China’s National Emissions Trading System began on Friday after a launch ceremony at the Environmental Exchange and the Shanghai energy.

In the first half hour, the price per tonne of carbon dioxide equivalent rose from Rmb48 when the market opened to near Rmb53, approaching the daily upper limit of 10 percent, after 160 kilotons were traded for a total value of Rmb7.9 million ($ 1.2 million). ), according to Chinese state media.

But analysts warned that oversupply, limited scope, and no cap on total emissions meant the program would likely not immediately assume its intended “central role” in meeting China’s target of peaking. carbon emissions by 2030 and achieve net zero emissions by 2060.

Only China’s energy sector is included in the trade this year. Other polluting sectors such as steel and cement should be added in the next cycles.

Despite this, due to China’s heavy reliance on coal-fired electricity, the 2,225 sites covered this year account for around 40% of the country’s total CO2 emissions.

The total volume of greenhouse gas emissions covered by the program represents around 15% of global emissions, or around three times the amount covered by the EU program, which was previously the largest in the world.

China’s trading system will initially distribute allowances to companies for free, rather than part auctioned off, as is common practice in most mature carbon markets.

“If there is no abandonment of free allowances, it seems inevitable that the market will have a marginal, if any, impact on decarbonization,” said Matt Gray, co-CEO of TransitionZero, a group of London-based financial research.

Analysis by TransitionZero released in April revealed that China’s emissions trading system had a surplus of 1.56 billion tonnes of CO2 from 2019 to 2020, equivalent to one year of EU ETS emissions , which makes trading unlikely to result in a high carbon price.

The market will also initially use a measure of carbon intensity rather than following the markets of the EU, California or Canada to adopt a ‘cap and trade’ system, where allowances emissions are based on a single industry-wide quota. In China, the allowable emission levels will be calculated based on production and will vary depending on the type of power plant.

The EU Emissions Trading System faced a similar oversupply until 2016, when it introduced market reforms to eliminate excess stocks. In recent months, carbon prices in the EU have reached new highs, hovering around € 60 per tonne, given expectations of tight supply, as the EU hopes to cut emissions by 55% of by 2030.

“The Chinese are only doing what the Europeans did for the first phase of the ETS, which is to treat it as a trial phase where the rules are relaxed to get buy-in from companies,” Gray said.

Additional reporting by Emma Zhou in Beijing

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