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China ramps up advance toward February carbon market launch

06 January 2021 Karin Rives

China issued regulations for its long-delayed carbon emissions trading system 5 January, ramping up preparations for the 1 February launch of what will be the world's largest such market. The initial compliance phase, which is scheduled to kick off 1 February, will cover carbon dioxide pollution from 2,225 power plants that each emit more than 26,000 mt/year.

Once the power sector is enrolled, the market will gradually be extended to cement, steel, and other carbon-heavy industries. The emissions trading scheme (ETS) is expected to eventually cover some 7,000 companies—all of which will be required to buy and trade allowances, and ensure they do not exceed government-set limits.

But unlike other emissions trading systems that set hard and increasingly stringent caps on total emissions, China will limit how much carbon plants may emit for each kilowatt-hour of electricity they produce. Some critics say such carbon intensity limits won't guarantee pollution reductions at fossil fuel-fired plants that meet the new requirements by becoming more efficient.

Initial phase covers 4 gigatons/year of carbon

Still, the sheer scale of China's emissions provides a huge stage for market-based carbon reductions. The country's power sector-consisting of coal and natural gas-fired plants that generate heat and electricity-accounts for over 4 gigatons of carbon dioxide equivalent annually. That alone surpasses the size of other carbon markets around the world, according to the Environmental Defense Fund (EDF), which provided technical support to China on the development of the trading system.

"The ETS is essential in reducing emissions and the associated costs, while also formulating an effective carbon pricing signal, which lays a solid foundation for the low-carbon transition of society as a whole," Zhang Jianyu, vice president of EDF's China program, said in a statement Tuesday. "As a result, 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."

Long-delayed market boosts China's climate efforts

As the world's largest greenhouse gas emitter, China is under pressure to reduce carbon pollution as countries update their national greenhouse gas targets in the hope of slowing climate change. Of the 197 nations that signed the 2015 Paris Climate Agreement, all but seven have ratified the agreement, according to the United Nations.

The US, the world's second-largest emitter, is expected to rejoin the global pact under President-elect Joe Biden.

With the Chinese ETS an important part of the country's climate strategy, officials there say they want to get the market rolling as quickly as possible after several years of delays.

"We will allocate the carbon emission allowances to the companies within a short time...and will carry out the first online emission trading as soon as possible," Huang Runqiu, head of China's Ministry of Ecology and Environment, told state television Sunday according to a Reuters report.

The carbon market was initially held up by technical problems, along with data accuracy and transparency concerns, which took several years to resolve. The launch had finally been planned for spring 2020, but was delayed again when the COVID-19 pandemic brought emissions data collection and other preparations to a halt, according to EDF.

Power plant operators will retroactively receive allowances covering emissions in 2019 and 2020. Those allowances will be issued by local environmental agencies based on emissions quotas that the national Ministry of Ecology and Environment sets for each province. They will take into account factors such as "economic growth, industrial structure adjustment, energy structure optimization, and [a] coordinated control of air pollutant emissions," according to the market rules.

Critics: China may prolong life of some coal plants

Exactly what impact, and how soon, the market will have on China's emissions trajectory remains to be seen.

A report issued by the UN Environment Programme in December said the country's rapid build-out of coal plants in recent years contributed to a 3.1% emissions increase in 2019. In all, China released a record 14 gigatons of greenhouse gases that year.

Some observers remain concerned, however, over China's decision to sidestep emissions caps in favor of setting a carbon intensity benchmark for each power plant.

This gives operators an incentive to make their plants more efficient so they can sell excess quotas to those who don't—without encouraging investment in cleaner energy.

"It doesn't create any incentive to reduce coal-fired power generation, and doesn't even create any incentive to close coal plants in the higher-emission categories-sub-critical plants which tend to be older and smaller-since plants are benchmarked against other plants in the same category," Lauri Myllyvirta, a lead analyst with the Centre for Research on Energy and Clean Air, wrote in an email 5 January.

"In the short term," he added, "the scheme might even increase the profitability of new coal plants as they will be slightly more efficient than existing ones in the same category."

But Ranping Song with the World Resources Institute, who focuses on climate strategies for developing nations, said in an interview that China still lacks the capacity markets and regional transmission infrastructure needed to push for a swift decarbonization of its power sector.

While the current design of China's carbon market may have a more limited impact on emissions than a traditional cap-and-trade market would, it is a good start, he said. It will be complemented with other strategies, such as continued heavy investment in renewables and grid improvements, Song added.

Posted 06 January 2021 by Karin Rives, Senior Journalist, IHS Markit

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