A year on, China’s CO2 market fails to drive big emission cuts

Critics say emissions allowances are ineffective due to industry efficiency benchmarks being set at a relatively low bar.

China power plants
China's year-old carbon market has yet to deliver major emissions reductions, experts say [File: Qilai Shen/Bloomberg]

China’s year-old carbon market has given more than 2,000 power plants a taste of emissions trading, but design flaws and data fraud have meant limited large-scale greenhouse gas reductions and environmental gains, experts say.

China’s much-heralded Emissions Trading Scheme (ETS) is already the world’s biggest, regulating about 4.5 billion tonnes of annual CO2 output from the power industry. Nearly 200 million tonnes of carbon changed hands in the first year of operations at a total value of 8.5 billion yuan ($1.26bn).

However, trading has been relatively slow, dogged by a surplus of emissions allocations as well as concerns about data accuracy.

“In terms of the impact, in terms of environmental gains, clearly it’s been limited,” said Matt Gray, co-founder of TransitionZero, a climate think-tank.

Some of the criticism of the ETS is down to the scheme’s design. Emission allowances are handed out free of charge and are determined not by absolute emission volumes but by industry efficiency benchmarks set at a relatively low bar.

Though environmental gains have been limited so far, China’s cautious approach was designed to gain experience and iron out any potential problems without overburdening its enterprises.

Other emissions trading schemes, including the world’s second largest in Europe, also took time to get established, but trading volumes have increased steadily since its launch in 2005. Think-tank Ember credits the scheme for cutting the continent’s coal power emissions by 43 percent from 2013 to 2019.

Liu Youbin, a spokesman with the Ministry of Ecology and Environment (MEE), told a Thursday briefing that building the ETS was “complicated” and “still at an early stage”, and authorities would continue to make improvements.

Data accuracy has remained a significant concern, with the MEE naming and shaming market players in March for tampering and forging test reports and other misdemeanours.

Ministry spokesman Liu said the crackdown served as an effective deterrent.

Fraud concerns

But fraud remains one of the greatest challenges and China has yet to fully address it, according to Shawn He, a Beijing-based lawyer who advises firms on carbon compliance.

“It was a good move by the regulator,” said He. “But I’m afraid the penalties for such malpractices … are too small to intimidate. I hope and expect that to change with new legislation to be adopted in the near future.”

China aims to expand the ETS into other industrial sectors as early as this year, with construction materials, steel and non-ferrous metals all preparing to join. That could pose even bigger challenges when it comes to data accuracy, said Gray.

“If you can’t get data right on power, then there’s no way you’ll get data right on heavy industry, because the heavy industry subsectors are just much more opaque,” he said.

Many of the problems facing China’s carbon market could be resolved quickly, but the government is unlikely to consider the issue a priority this year as it tries to guarantee energy supplies and rejuvenate an economy hit by COVID-19 lockdowns, Gray added.

“I think it’s obvious that those will be the key priorities, and as a consequence, I think emissions trading could take a back seat in terms of how effective it is as a policy.”

Source: Reuters