China will launch a national carbon market that will begin life as the world’s largest, as part of its government's efforts to curb greenhouse gas emissions and fuel the country’s green economy.

The macro-economy regulator of China’s National Development and Reform Commission (NDRC) this week announced the framework policy for launching a nationwide CO2 emission trading system, which initially covers only its power utilities.

The system will cover 1,700 power generation businesses each with annual emissions equivalent to more than 26,000 tonnes, encompassing total emissions of 3.5 billion tonnes per year, according to estimates by the China Carbon Forum.

It will be the largest carbon trading system in the world, surpassing the EU’s ETS, which has a trading volume of 1.95 billion tonnes.

However, Beijing apparently scaled down its ambition on the scope of the trading system, previously slated to cover 7,000 companies across eight industries including petroleum, chemicals, infrastructure, iron & steel, metals, paper, power generation, and aviation. The current plan handpicks only the power generation sector as a frontrunner to test the water.

In the press briefing for the policy release, NDRC officials attribute the scaled-down vision partly to a lack of emissions data in other industries

But the regulator added that it remains the long-term goal to eventually roll out the cap-and-trade mechanism to all the energy-intensive industries, although no timeline is given.

Despite “launching the market”, the regulator will still need one year to create necessary rules and supporting systems for trading, which will be followed by test running the systems, according to the plan. That means the market may only start operation after 2019.

Since 2013, seven cities in China has been running pilot emission trading programmes, with the total trading value reaching $680m. These will gradually merge with the national system, once complete.

Experts said carbon pricing will be a vital factor determining the effects of the trading system. Industry analysts now estimate an initial carbon price of $7.5/tonne when the market kicks off, but NDRC said “a reasonable price” will be around $45/tonne.

Carbon trading is highlighted in the plan as Beijing’s crucial policy measure to achieve its commitment to cut 50~60% of GHG emission (from 2005 level) by 2030. Carbon market experts said that a full-fledged national carbon market would contribute 30% of the emissions reduction.

A national carbon market will no doubt boost renewable investment in China. As experts point out, wind and solar power producers will be able to profit from trading CCERs (Chinese Certified Emission Reduction) asset — emission reduction credits rewarded to renewable projects in China — to the polluters via the carbon market in the future.

Separately, the energy regulator in Beijing has been signaling it wants to kick off a mandatory green certificate trading system next year. However, it is still unclear how regulators will structure the carbon emission trading system, CCER and the green certificates, which overlap to some extent as measures to provide support to the renewables industry.

Transition

China unveils world's biggest carbon market for power sector