What can we learn from China's launch of the world's largest carbon market?

China has today (19 December) signalled its intent to address climate change with the launch of the world's largest carbon market.

The scaled-back project will initially only include China’s power sector, rather than the eight industries originally proposed. This is mainly due to uncertainties over data quality, measuring and reporting systems in many of the Chinese provinces.

Around 3.3 gigatonnes of emissions will be covered at first, representing around one-third of the country’s national emissions. The other major sectors are expected to be added by 2020.

The cap-and-trade system will see the biggest corporate polluter purchase credits from those that emit less, with companies that each emit more than 26,000 tonnes of carbon each year qualifying.

It is hoped that the market will accelerate the world closer to global pollution pricing.

“The launch of the Chinese carbon market shows that there is increased commitment around the world to price pollution and direct investments into clean technologies,” said Carbon Market Watch’s policy director Femke de Jong.

“Transparency and public participation will be key to making the Chinese scheme a success in the coming years.”

Growing markets

China’s scheme will instantly overtake Europe’s carbon market as the world’s biggest cap-and-trade system.

Existing carbon markets have not yet delivered a high enough price to drive the low-carbon transition. This includes the EU Emissions Trading System (ETS), which has seen its price plunge to around €7 (£6.20) due to oversupply and a generous hand-out of free permits.

China has been running trial carbon markets in seven provinces to figure out a price on carbon. Experts at the Guangzhou China Emission Exchange predict that the initial price will be around 50 yuan (£5.70), expected to gradually rise to 300 yuan (£34).

Emissions trading systems are springing up in various parts of the world, such as New Zealand, South Korea and California, which is in talks with the EU to potentially create a common carbon market.

The rise of these schemes will have widespread implications for the EU ETS, it is believed.

So far, industries have successfully lobbied for free pollution permits by threatening to move production to other parts of the world with laxer environmental laws, but experts highlight that this argument is quickly losing ground.

de Jong said: “With more and more countries across the world adopting carbon pricing initiatives, there is no longer a justification for the EU to give out free permits to the most polluting industries.

“Auctioning of pollution permits should become the norm as we move towards global carbon pricing.”

George Ogleby