China sets low bar for firms in new carbon market expansion plan
It lacks details and seems fairly lax on emission allowance allocation for companies, a carbon compliance lawyer says
CHINA’S plan to expand its carbon market to steel, cement and aluminium will cover 60 per cent of its total climate-warming greenhouse gas emissions.
However, the relatively low bar set for companies could blunt its impact in the first phase, experts said.
The long-awaited enlargement of China’s emissions trading scheme (ETS) will force around 1,500 industrial enterprises – such as Baosteel, Anhui Conch and Chinalco – to buy carbon emission allowances (CEAs) to cover the carbon dioxide generated by fossil fuel consumption.
This gives them an incentive to decarbonise.
A plan released for public feedback on Monday (Sep 9) said these companies will be granted large amounts of free allowances during the 2024 to 2026 “implementation phase” with ample CEA supply, even as they come under pressure to meet the technical requirements of the scheme.
“The work plan, while lacking in sufficient detail, looks fairly lax in terms of allowance allocation and compliance deadlines,” said Shawn He, a Beijing-based lawyer who advises firms on carbon compliance.
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China’s national carbon market – already the world’s biggest – was launched in 2021 and covers 2,257 power plants with around 5 billion tonnes of total emissions.
Cumulative trading volumes hit 442 million tonnes of carbon dioxide by the end of 2023.
However, though carbon prices have steadily increased, breaching the 100 yuan (S$18.33) per tonne mark for the first time this year, the environment ministry said on Monday that market “shortcomings” were limiting participation.
It said expanding to new sectors would help it catch up with more mature carbon trading schemes such as the one in Europe, but an oversupply of allowances could still impede progress.
“China’s ETS has had minimal impact on carbon dioxide emissions so far mainly due to factors such as the generous supply of allowances,” said Shen Xinyi, analyst with the independent research organisation Centre for Research on Energy and Clean Air.
The ministry said the main goal during the first phase of the expansion was to help firms familiarise themselves with market rules and improve data collection, with any profit or loss from carbon trading “accounting for a small proportion of a company’s operating income”.
Allowance quotas, which are based on carbon intensity benchmarks rather than absolute emissions, will be distributed entirely free of charge, it said. This means that only “backward” companies will buy extra credits.
In the early stage, the government will be engaged in a process of “trial and error” to work out how the new sectors fit into existing market infrastructure, said Jia Jingwei, a carbon market analyst with Fitch Ratings.
“Even though at this point they are going to be using the free allocation approach... it will allow the companies to experience how to do carbon reporting and figure out how to align with new regulatory requirements,” she said.
The ministry said it would start to “strengthen” incentives after 2026, likely to involve a reduction in free allowances and tougher industry targets to drive up market activity.
“(It will be) gradually reducing carbon intensity benchmarks, introducing more companies and more sectors into this market, and gradually increasing demand for carbon allowances and consequently the carbon trading price,” said Jia. REUTERS
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