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The View | COP26: why carbon pricing is crucial to China’s climate change pledges
- China’s emissions trading scheme is a welcome development, but its size belies its narrow scope and lack of allure for investors
- To reach its full potential, it needs to cover more of China’s emissions, go beyond the electricity sector and let prices reflect the true cost of carbon
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China’s bold announcements to address climate change, namely to reach peak emissions by 2030 and achieve carbon neutrality by 2060, have been accompanied by several policy measures. A key one is carbon pricing, which was pushed forward in July by creating a nationwide emission trading scheme (ETS).
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After nearly three months in operation, it is important to evaluate the scheme’s performance and how it might relate to China’s climate change goals down the road.
Size is a strong point of China’s national ETS market as it became the largest globally from its first day of operation. Roughly 4 billion tonnes of carbon dioxide emissions could potentially be traded – more than twice the size of the carbon allowance in the European Union’s ETS, which has been in place for 16 years.
This might look like a great immediate success, and many have focused on the scheme’s size as a signal of its effectiveness, but size is not all that matters. In reality, China’s ETS size reflects the country’s role as the world’s largest carbon dioxide emitter, accounting for about 30 per cent of the global emissions.
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The scheme only covers about 40 per cent of China’s total emissions and involves just one sector – power generation. Furthermore, the amount is more nominal than real as the market remains illiquid and has a rather small number of participants, around 2,000 polluters for the whole of China.
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