ESG

A CO2 conundrum

Slow start for China’s emissions trading scheme

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Will it lead to less of these?

Without more effort from China to bring down its carbon emissions, there is no chance of escaping the “mutual suicide pact” of climate change, John Kerry warned this week. It won’t be possible to limit global warming to a rise of 1.5 degrees Celsius if Beijing leaves it as long as 2030 to reach peak emissions, the US climate envoy claimed.

The warning comes only a few days after the launch of China’s first carbon emissions trading scheme at a national level, following more than a decade of discussions and preparations.

The scheme began trading on the Shanghai Environment and Energy Exchange and kicked off with a company paying about $1.2 million to emit 160,000 metric tonnes of carbon emissions. China’s state news network was delighted, predicting that the exchange would soon become the world’s largest in terms of the volume of greenhouse gases traded.

But the feedback from climate campaigners is that the scheme isn’t ambitious enough to move the dial on China’s emissions goals, including its target for going net-zero in 2060. The scheme has been limited to about 2,200 coal- and gas-fired energy plants. This initial group accounts for 40% of China’s energy-related emissions (with the government saying more firms will be added over time). Critics counter that more industries should have been included from the outset, especially the steelmaking, construction and chemicals sectors.

The more fundamental complaint is that the new scheme won’t cut emissions drastically because the authorities are not capping them in absolute terms.

Instead the government is giving the power plants the right to produce a certain amount of pollution for a given amount of energy generated. Pollute less than the limit, they can sell the excess pollution rights. Pollute more, and they will need to purchase extra quota from the emissions trading scheme via the Shanghai bourse.

Critics argue that the initial allowances are too generous and that companies are being given the green light to increase their emissions as long as they are reducing the volume of emissions per unit of energy output. Supporters counter that the scheme has been designed to give the power plants an incentive to invest in less-polluting processes. There’s also the likelihood that regulators will ratchet up the pressure by toughening the benchmarks over time and perhaps imposing a hard cap in the future.

Yet the plan can’t conceal the core conundrum for policymakers of how to cut emissions when China’s economy is expected to grow by 5% a year, which will bring a massive increase in power consumption. A further criticism is that the carbon prices in the scheme are too low, closing on day one at about Rmb51 per tonne (about $7.90). That is almost double the levels of pilot schemes that ran regionally in China before the programme went national but it is still substantially lower than equivalent schemes in Europe, where a metric tonne costs around $60.

At least the new mechanism in China has tighter standards on how companies report their emissions, demanding more information in areas such as coal type and consumption. But authorities are relying on independent agencies to verify the data and the penalties for failing to comply with the regulations don’t look like much of a deterrent. The maximum fines are just Rmb30,000 ($4,605).

Proponents of the scheme make the point that it is a first step, not a final one. “The goal is to expand the market to cover as many as 10,000 emitters responsible for about another five billion tonnes of carbon a year,” Zhang Xiliang, the lead designer of the programme, explained to state media.

Others agree that Beijing needs time to make the scheme more effective and that the initial phase is about putting in the foundations for the scheme. “A high priority is on getting the system up and running, getting companies to understand how much they’re emitting, and to understand what carbon is,” Valerie Karplus, a professor at Carnegie Mellon University and an expert in Chinese carbon emissions reporting, told Forbes magazine.


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