China is looking to financial markets to help restrain its emissions of greenhouse gases. It surpassed the U.S. as the world’s biggest polluter more than a decade ago and now is building what will become the world’s biggest market to trade credits conveying the right to produce emissions. About 40 countries or jurisdictions have developed or plan to start emissions markets, generally known as cap-and-trade. By forcing utilities to pay for at least some permits to release carbon dioxide, the programs encourage investments in equipment that uses fuel more efficiently and reduces pollution.
1. How big a splash will China make?
Big, though not as big as it initially appeared. A year ago, authorities were considering a nationwide system that would force 7,000 companies to pay more attention to, and perhaps pay for, the pollution they produce. The program announced on Dec. 19 includes 1,700 companies, all in the power utility industry, and it’s not clear if the program will extend across the whole of China or just to nine provinces, said Sophie Lu, a researcher at Bloomberg New Energy Finance in Beijing. Limiting the effort to coal-fired power plants and other power generators gives a reprieve to two other industries thought to be under the gun, the cement industry and producers of aluminum and other non-ferrous metal producers. As initially outlined by Xi Jinping, China’s president, two years ago, the trading system would also include iron and steel, chemicals, building materials and paper production.
2. How widespread is carbon trading outside China?
The European Union currently runs the world’s largest cap-and-trade system, though China’s, once active, will easily surpass it in terms of emissions covered. Beyond the EU, emissions-trading systems are now in place in South Korea, Canadian provinces and several U.S. states, including California. They are under development in Mexico and Japan. China’s participation would boost the portion of emissions covered by pricing worldwide to almost 25 percent.
3. What’s the point of these markets?
Pollution is still rising three decades after almost 200 nations led by the U.S. endorsed the United Nations Framework Convention on Climate Change, a treaty to limit greenhouse-gas emissions. Carbon markets, along with cheaper renewable energy, have started to slow that growth. Companies that can cut emissions quickly are able to sell spare allowances for profit, while emitters that fail to comply may be fined or have to pay for more permits to pollute. But there’s debate about whether a carbon tax would work better.
4. Will China’s entry affect carbon trading in other places?
Not yet, but it might. China’s push for its own market may embolden authorities in Europe and the U.S. to strengthen carbon markets that are up and running. That’s because China’s involvement lessens the chance of industries moving to China to get away from jurisdictions where carbon trading flourishes. More than a decade after carbon trading started in Europe, prices remain at less than half of the level that industry analysts say is needed to spur real change, which is 20 euros ($24) per ton.
5. When does China’s market begin operating?
China may spend as long as two years preparing to start spot trading in the carbon market, nation’s top economic planner said in December. The first two phases, each lasting about a year, will include building systems for data reporting, registration and trading, and will include mock trading of carbon credits. Spot trading follows after that in the third and final phase. It’s still unclear how many of the emission permits will be handed out for free, how any auctions of allowances will work, whether there will be fines for non-compliance and what the timetable is for bringing more companies under the system.
The Reference Shelf
- A QuickTake explainer on the spread of carbon pricing and the debate about its effectiveness.
- The World Bank’s report on carbon pricing.
- New York Times graphic showing how carbon markets work.
- International Emissions Trading Association’s annual report.
— With assistance by Andrew Reierson