China’s Giant Carbon Market to Start Trading This Week

(Bloomberg) -- China’s national carbon market, which will become the world’s largest emissions trading system, will finally begin online trading on Friday, according to people familiar with the matter.

The system, which will initially cover more than 2,200 companies in China’s power sector, is now ready to commence operations, according to the people, who requested anonymity to discuss private details. The market has encountered a series of previous delays and missed a June 30 deadline to launch.

The Ministry of Ecology and Environment, which oversees the carbon market, didn’t respond to a faxed request for comment. A spokesperson for the Shanghai Environment and Energy Exchange, which will host trading, declined to comment.

The program was announced more than three years ago, and takes over from regional pilot projects that have been around even longer. This year it will cover power companies that account for about half of the country’s and 14% of the world’s energy-related emissions. China’s market will eventually grow to encompass more industries, such as steel- and cement-makers.

The market works fairly simply. The Chinese government gives every power plant the right to a certain amount of pollution in a given year. Pollute less than that, and you can sell excess pollution rights, or allowances. If you want to pollute more, you have to buy extra allowances.

Listed transactions will be for 100,000 tons of carbon dioxide equivalent or less, and price moves will be within 10% of the prior day’s close, the exchange said in June. Larger block trades will are possible within 30% above or below the previous closing price.

While it’s uncertain how rapidly trading will take off, China’s program is expected to have limited real-world impact at its outset. Officials may be doling out so many allowances that power generators won’t need to buy extra in order to burn coal, according to an April study from TransitionZero, a financial analytics group focused on decarbonization.

That’s in stark contrast to the impact being had this year by Europe’s carbon market, which dates back more than a decade. Soaring prices for emission credits has made burning coal more expensive, giving European generators more incentive to switch to cleaner natural gas or renewable energy.

When trading starts in China, carbon prices are forecast to trade at 40 yuan ($6.19) a ton this year, before rising to 160 yuan a ton in 2030, data provider Refinitiv said last month. The advance will be due to increasingly stringent green policies in China, and as additional industries join.

©2021 Bloomberg L.P.

With assistance from Bloomberg