China launched the world’s largest carbon-trading system on Friday in a step toward ratcheting up its fight against climate change, but it’s unlikely to help the top-polluting nation reduce its emissions in the near future.
China’s long-planned emissions trading program is almost three times bigger than the second-largest, the European Union’s system that first launched in 2005.
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But China is initially limiting its scheme to involve only 2,225 of its own companies in the power sector. Critics say the carbon price is not high enough, a fraction of the rate of Europe’s, to compel emissions reductions.
“Along the margins, it could make some difference. The general idea is it will slow down the increase in China’s emissions in the power sector, but not stop and cut anytime soon,” said George David Banks, an international climate adviser to former President Donald Trump who is now a fellow at the Bipartisan Policy Center.
Chinese officials say the carbon market will help Beijing begin reducing its emissions before 2030 toward the goal of fulfilling its eye-popping new goal announced last year of reaching carbon neutrality by 2060.
But China is also under pressure from the Biden administration and other world leaders to constrain its emissions this decade, meaning not to allow their emissions to keep rising, to show its carbon-neutral target for 2060 is credible.
Nat Keohane, president of the Center for Climate and Energy Solutions, said the launch of China’s new carbon-trading program shows the country is serious about reaching its goals. He said, however, that China would need to improve the scheme over time to contribute meaningfully to reducing emissions. China has suggested it could look to expand the market to other key industries, including cement, aluminum, and steel-making.
“Both of the following are true,” Keohane said. “This is an incredibly important step for China in beginning to put in place policies to drive emissions down from a peak and meet President Xi’s goal of carbon neutrality, and the Chinese program is going to take some time before it really starts to bite.”
White House climate envoy John Kerry also “welcomed” China’s launch of its carbon trading program, but he called on it to be “strengthened over time to deliver greater climate ambition.”
The United States does not have a carbon-trading system or similar program putting a price on emissions.
Under a trading program, emitters such as power plants and factories are given a fixed amount of carbon they are allowed to release a year. They can buy or sell permits to pollute, but the market price is supposed to encourage companies to control their emissions.
In the case of China’s system, experts say there could be a surplus of permits that could mean polluters will buy allowances cheaply. That same problem happened in Europe initially, where there was an over-allocation of allowances that kept the carbon price low.
China’s scheme also does not set an absolute cap on emissions, Keohane notes.
“In China, there is still a ways to go to reform the power sector so price signals really travel through,” Keohane said. “That is going to be limiting the effect of it.”
For the market to work, China will also need to increase the pace of its world-leading buildout of wind and solar energy in order to offset a projected rebound in electricity demand after the pandemic.
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In a new report this week, the International Energy Agency said coal-fired power generation is set to exceed pre-pandemic levels this year and reach an all-time high in 2022, fueled mostly by China, the world’s largest electricity consumer.
“Government actions to displace coal in the electricity sector are going to matter more in the near term than the carbon market to finally get China reducing its overall emissions given the nature of the Chinese government and its relationship to the industrial sector,” said Paul Bledsoe, a strategic adviser at the Progressive Policy Institute and former climate change adviser in the Clinton administration.
