China Sets Out Scaled-Back Vision for Biggest Carbon Market

(Bloomberg) -- China set out a scaled-back vision to create the world’s biggest financial market aimed at limiting pollution in a move that signals its backing for the fight against climate change.

The government in Beijing said Tuesday it’s working on a carbon emissions trading system that will cover 1,700 utilities. That’s fewer than the 6,000 companies across a range of industries authorities were considering for inclusion as recently as a year ago. Policymakers also stopped short of naming a date for trading to begin.

President Xi Jinping’s administration is moving cautiously in designing a system that essentially forces companies to pay for permits to pollute. It’s seeking to balance demands to clear up smog with the forecasts for galloping electricity demand from factories and homes, which will require construction of dozens of new coal-fired pants.

“After several false starts and shifting priorities and nervousness around whether or not carbon speculation will make policy enforcement difficult, the regulators have decided to be even more cautious about the market deployment,” said Sophie Lu, an analyst at Bloomberg New Energy Finance in Beijing.

Even a smaller carbon market in China would mark a significant advance for involving markets in limiting pollution, an idea that gained currency two decades ago with the Kyoto Protocol. It prompted Europe to start a carbon market in 2005 and the U.S., under Presidents Bill Clinton and Barack Obama, to work toward a system of carbon pricing that ultimately was rejected by the Senate. 

The European Union endorsed China’s move, saying it showed the world is moving toward tighter restrictions on fossil-fuel pollution even as President Donald Trump works to stimulate coal use in the U.S.

“As the U.S. government turns its back on the fight against climate change, China, the EU and many others are forging ahead,” EU Climate Commissioner Miguel Arias Canete said in a statement from Brussels. “With both the EU and China committed to emissions trading, two major international players are championing carbon markets.”

China’s market would bring about a quarter of the world’s emissions under some kind of trading system. It would cover more carbon pollution than the EU’s market, whose yearly allowances are currently valued at 14 billion euros ($16.5 billion) a year.

The key provisions of China’s program announced by the National Development and Reform Commission are:

• About 1,700 companies included in initial launch
• Companies that each emit more than 26,000 tons of carbon annually qualify
• More than 3 billion metric tons of carbon dioxide emissions affected

Industry executives and environmental analysts have called for carbon prices of at least 30 euros a ton to prompt a rapid movement toward cleaner forms of energy. Even so, the complexity of calculating how much pollution should be allowed and when charges should kick in has bedeviled authorities managing carbon markets from the start, and prices in Europe have averaged well below 10 euros for the past five years.

The Paris Agreement on climate change injected fresh momentum into the global fight 
against climate change two years ago, bringing together almost 200 countries in a pledge to limit fossil-fuel pollution everywhere for the first time. Xi and Obama worked together on that deal. China’s announcement on Tuesday is another sign that the government there remains committed to the effort even though Trump isn’t.

Market Outlook

China’s system will adopt a cap-and-trade rule in which the biggest corporate polluters purchase credits from those that don’t emit as much. Companies are encouraged to reduce their emissions so they can sell unused allocations.

The carbon market will make it easier for China to attract investment because the system would help ensure clean investments have a strong competitive position against fossil fuels, said Mark Brownstein, a vice president at the Environmental Defense Fund who specializes in energy and climate.

“You’ve gotta get the pricing right to get the investment,” he said by phone. “People are going to be surprised at how aggressively China moves to transition to natural gas over coal, how quickly it will move toward an electric-vehicle fleet and how readily it will continue to deploy renewable energy.”

The EU was the first to require carbon permits, in 2005, only to see the price plunge in part because participating nations handed out too many allowances for free. Australia repealed its carbon tax in 2014 and scrapped plans for permit trading after the measures were blamed for destroying jobs. But carbon markets in various forms are in place in California, New Zealand and South Korea, where they’re attempting to learn from each other’s mistakes.

Pilot Program

China has been running pilot programs since 2013 in some regions, where transaction values totaled 4.5 billion yuan ($680 million) as of September, Li Gao, an official of the climate-change department at the NDRC, said at a briefing in October. The agency said Tuesday that companies that qualify for the national system will stop participating in the pilot projects.

Li said China has yet to determine how it will allocate permits to industry and will also work on building registration and trading systems for the market. China will allocate quotas to its power industry using a reference-line method under which companies that have better management and lower emissions will be given more quotas, said Jiang Zhaoli, deputy director of the climate change division at the NDRC.

To contact Bloomberg News staff for this story: Feifei Shen in Beijing at fshen11@bloomberg.net, Mathew Carr in London at m.carr@bloomberg.net.

To contact the editors responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net, Steve Dickson

©2017 Bloomberg L.P.

With assistance from Feifei Shen, Mathew Carr