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UPDATE: China launches emissions trading scheme for power

19 July 2021 Kevin Adler

Chinese government officials announced that 16 July marked the debut of the country's long-awaited national carbon emissions trading scheme (ETS) for the power sector, and that more than 4.1 million mt of carbon allowances changed hands.

The ETS is being managed by the Shanghai Environment and Energy Exchange.

Given China's economic size and status as the world's largest emitter of carbon, the Chinese ETS is expected to quickly expand to become the world's largest carbon market, surpassing the EU ETS in terms of carbon emissions covered.

Tracking media outlets in China, OPIS (the price reporting agency owned by IHS Markit) reported that trading began at $7.42/mt for credits that can be used through 31 December 2021.

Originally scheduled for spring 2021, the date for the ETS launch had been pushed back to 30 June. Progress was being made, such as the exchange announcing its operating hours. But on 1 July, the exchange confirmed a second delay, adding that it would be brief, according to analysts.

"We believe that the national carbon ETS market is an integral part of China's climate change efforts," said Lara Dong, IHS Markit director, research and power analysis. "The Chinese Premier Li Keqian indicated [7 July] that the trading will begin in July 2021. The one-month delay will have minimal impact on the current compliance cycle, or the future pace of the ETS market development."

China took the biggest steps towards enacting the carbon ETS in February and March 2021 with the release by the Ministry of Ecology and Environment (MEE) of the rules for allocation of allowances and "trial" emissions trading. This enabled the creation of the registry of allowances and development of the trading platform—the necessary parts of the ETS that have been delayed to later this month.

Initially, the ETS will cover the nation's 2,225 power plants that reported at least 26,000 mt/year of CO2-equivalent emissions for any calendar year from 2013 through 2019. These include power plants serving residential and commercial customers, as well as those dedicated to industrial sites.

The covered facilities account for about 40% of China's annual emissions, or nearly 4.4 gigatons/year of CO2-e, according to the International Carbon Action Partnership (ICAP), a coalition of 32 governments that share best practices on running trading schemes.

Expansion plans

As far back as 2016, MEE announced that eight industrial sectors eventually will be included under China's ETS: power generation, refining and petrochemicals, chemicals, building materials, steel, nonferrous metals, paper, and aviation. On 7 July, MEE confirmed that the refining and petrochemicals sectors are next in line after power generation, and that they represent about 14% of the nation's CO2-e emissions.

ICAP estimates that more than 72% of the nation's emissions will be covered at the point that all eight sectors are added.

In the spring, when the administrative rules for China's ETS were announced, Zhang Jianyu, vice president of EDF's China Program, expressed optimism they would help to guide China towards achieving its emissions goals. "The ETS will become an effective tool to help China achieve carbon peaking before 2030 and carbon neutrality by 2060—goals that Chinese President Xi Jinping pledged in 2020," he said.

EDF, an international nonprofit with expertise in emissions and climate change, provided technical advice to China on creation of the program.

No emissions hard cap ... yet

However, critics of China's ETS point out that it does not impose a hard cap on carbon emissions, in contrast to most national or regional trading programs in effect today. China's ETS gives each affected facility an allowance per year. This is calculated according to the expected output and carbon intensity of its operations (carbon emissions per unit of output). If an operator produces less power or produces more efficiently, it generates credits that it can sell. If it exceeds its allowance, it must buy allowances or pay a penalty.

But without a hard cap, the entire ETS structure can be adjusted each year to allow total national emissions to rise. And until a hard cap is installed—which is expected in the future—the program's effectiveness could be limited in terms of reducing emissions and encouraging the closure of coal-fired power capacity.

In fact, China keeps moving in the other direction. Greenpeace East Asia released a report in March that said 46.1 GW of new coal-fired capacity was approved by China in 2020, or more than in the three previous years combined.

"With an influx of new coal approvals, China's coal country provinces are falling farther behind," said Zhang Kai, deputy program director for Greenpeace East Asia in Beijing. "While one [region] lays the groundwork for new tech and energy, the other digs deeper into the coal pit. Provincial governments will struggle to close this gap on their own. They need policy support and financial support. Low-carbon transition funds should be on the political agenda as soon as possible."

China's National Energy Administration (NEA) rates each province on its potential for coal power overcapacity, and the related financial risks for new installations. Greenpeace noted that the NEA rated 27 provinces at high or moderate risk of overcapacity in 2017, but only six in 2020, despite the increase in power plant approvals last year.

This is a mistake, Zhang said. "Coal overcapacity is a drag on renewable energy development and a ticking time bomb for provincial economies. As China's energy transition accelerates into 2060, coal plants will see more excess capacity and more competition. Already shrinking rates of return will flop. They'll become stranded assets," he said.

Includes reporting by Lujia Wang, OPIS

Posted 19 July 2021 by Kevin Adler, Editor, Climate & Sustainability Group, IHS Markit

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