A national carbon trading mechanism that has been put into operation in China could help promote the country’s climate progress with market-based, cost-friendly solutions. The Ministry of Ecology and Environment published an interim regulation on the management of carbon trading last week. Earlier, on December 30, it published a document laying out the 2019-2020 allocation of carbon emission allowances for the power generation sector and a list of 2,225 companies that would be given emission allowances. These documents were unveiled as China is making increasingly intensified efforts to reduce carbon emissions. While addressing the 75^th session of the United Nations General Assembly via video link in September 2020, President Xi Jinping announced that China aims to see carbon dioxide emissions peak before 2030 and achieve carbon neutrality before 2060. These documents underscore the fact that China’s national carbon market has opened for business, according to the Environmental Defense Fund’s China program. 

Carbon trading is the process of buying and selling permits to emit carbon dioxide or other greenhouse gases. If a company curbs its emissions significantly, it can sell surplus permits in the market, but if it fails to limit its emissions, it has to buy unused allowances from other companies. The two documents published late last year indicate that the 2,225 power generation companies that saw their carbon emissions exceed their total free emission allocation limit between January 1, 2019 and the end of last year may have to buy permits in the market, said Zhang Jianyu, Founder and Chief Representative of the Program. The regulation published last week stipulates that companies could use China Certified Emission Reductions, which are generated within the China Greenhouse Gas Voluntary Emission Reduction Program, as offset credits. But companies are only allowed to use such reductions to offset 5% of the permits they need to buy. 

The carbon trading program will be the first national environmental credit trading mechanism in China. It has replaced the European Union’s carbon trading market, launched in 2005, as the largest such market in the world, Zhang said. Besides the EU, California in the United States and Quebec in Canada also inaugurated carbon trading markets in 2013 and combined them the following year. Zhang said the Chinese market will be the only one to be established before the nation sees its carbon emissions peak.

China started its pilot market in 2013. “It has accumulated the richest experiences in exploring how to establish a carbon trading market, especially in a developing country,” Zhang said. As China forges ahead in promoting the Belt and Road Initiative (BRI), some countries may turn to China for help in building their carbon trading markets. Not only can the country share its rules and experiences, it can also help with capacity building in these nations, he added. 

Scott Vaughan, Chief Adviser to the China Council for International Cooperation on Environment and Development, an international think tank for the Chinese government, said he is optimistic that China’s national carbon trading market will play a role in driving down  the growth of carbon dioxide emissions in China by having the most efficient players in the market sell their excess credits to those companies that are not as efficient, he said. “The aggregate impact would actually change the trajectory of the  peak and move it downwards in order to get at that 2030 goal. I’m very optimistic,” Vaughan said. 

Li Gao, Director Climate Change at the Ministry of Ecology and Environment, said it will make efforts to tighten the allocation of emission allowances as the country forges ahead to establish a carbon emission management mechanism with a national emission cap. Setting a cap on carbon intensity – or carbon dioxide emissions per unit of GDP – as it previously did, will be a major step in promoting carbon reduction in the country during the 14^th  Five Year Plan period (2021-25), he said. “But we are also considering introducing caps on carbon emissions in some key regions to align air pollution control with carbon reduction,” Li said. He added that efforts will also be made to enlarge the national carbon trading market. The Ministry has collected and worked on the verification of carbon dioxide emission data from over 7,000 companies in various sectors from 2013 to 2019. “That work has laid a good foundation to expand the national market from the power generation sector to other sectors in the next step,” Li said, as reported by the China Daily.