HONG KONG -- China plans to kick off a national carbon market next year, but because many challenges remain unsolved in its regional carbon trading pilots, the move has met with a mix of praise and caution.

Last week, Reuters quoted Jiang Zhaoli, a senior official with China's National Development and Reform Commission, as saying China will cap carbon dioxide emissions from six major polluting sectors in a national carbon market likely to be launched by the summer of 2016.

Jiang said companies in power generation, metallurgy, nonferrous metal, building materials, chemicals and aviation will be targeted first under the national system. He also said the system will start with a three-year trading phase before becoming fully functional in 2019.

Although Jiang disclosed only a few details of the Chinese national carbon trading system, those details are not set in stone; they require final approval by the State Council.

The plan to roll out the system has already surprised some researchers.


"China just rolled out its regional carbon trading pilots for two years, and many problems have yet to appear. I think it is still too early to scale up the scheme to the national level," said Wang Tao, an expert on climate and energy policy at the Carnegie-Tsinghua Center for Global Policy in Beijing.

Chinese regulators are still struggling with their regional carbon trading experiments. Shenzhen, the first carbon market in the nation, for one, has been promoting carbon trading for years, yet emitters there still found it challenging to understand the mechanism.

A difficult concept to implement

Some emitters even hung certification of their allocated carbon permits on the office wall because they thought it was an honor from the local government, signed by the Shenzhen mayor (ClimateWire, May 23, 2014).

Wang and others say China is far from ready to put all the regions into the carbon trading system. "Even if the government will launch a national carbon market next year, it can't be a national carbon market in its real sense," Wang said.

There are already some indications of that. Sun Cuihua, a senior climate official, said in a conference last year that although the Chinese national carbon market will start in 2016, some provinces would be allowed to join later if they lacked the technical infrastructure to participate from the outset.

Sun is deputy director of the climate change department under China's National Development and Reform Commission, which released a guideline in December known as ground rules for the upcoming Chinese national carbon market.

The National Development and Reform Commission noted in the guideline that companies regulated in the system will have to hand over one carbon permit or offset credit to the government for each ton of carbon dioxide they emit. While most carbon permits will be allocated to the emitters for free in the beginning, as time passes, the government will charge for an increasing share of them, the guideline says.

Seven Chinese regions -- Beijing, Shanghai, Tianjin, Chongqing, Shenzhen, Hubei and Guangdong provinces -- are currently running their carbon trading pilots on similar regulations. But trading activities stay low, as participants are tempted to trade only for compliance a few months before the deadline.

Thomson Reuters Point Carbon estimates that in 2014, the seven Chinese regional carbon markets traded emissions credits equivalent to some 24 million tons of carbon dioxide. Although this figure is expected to reach 40 million in 2015, it is still considered extremely modest compared to the market potential, said Chai Hongliang, an analyst at the research firm.

Harmonizing 7 different themes

Jeff Swartz, international policy director at the International Emissions Trading Association, agreed. He predicted that China's energy revolution, rather than the national carbon market, is the instrument that will play a leading role in helping the country peak its carbon emissions around 2030.

"Carbon trading will definitely help," Swartz said, "but the majority of emissions reduction will come from technology innovation in the energy sector to reduce coal consumption and an increased use of non-fossil fuels."

Already, Beijing has pledged to scale up renewable energy installation and nuclear power plant construction, aiming to get 20 percent of its primary energy from non-fossil-fuel sources by 2030.

Nevertheless, according to Swartz, the buildup of the Chinese national carbon market is still a much-needed move.

As he explained, "This shows that the Chinese government will put carbon trading as a top priority. Right now, it is still hard for many state-owned enterprises to take carbon trading seriously."

"This will also make it easier for companies to trade more cost-effectively, because they can follow one carbon trading system, instead of five or seven systems," Swartz said.

Currently, there are significant differences among Chinese regional carbon trading systems. For instance, Beijing and Shanghai banned the use of carbon offset credits generated from emissions-reduction projects before 2013, while the others chose to accept them.

Market observers say the lack of a unified regulatory system has created uncertainties and forced traders to pay extra attention to different eligibility restrictions across the various regions.