China has set ambitious climate targets, aiming to reach peak emissions by 2030 and achieve carbon neutrality by 2060. As the largest emitter, accounting for 30% of global emissions, China has taken steps toward emissions reduction, including the establishment of a nationwide Emissions Trading Scheme (ETS) in July 2021. With the potential to trade 4 billion tonnes, China's ETS is twice the size of the EU ETS, which has been operational for 16 years. However, the Chinese ETS currently covers only around 40% of total emissions, focusing solely on the power generation sector, which involves approximately 2,000 participants, leading to an illiquid market. While additional sectors are expected to be included in the future, no specific timeline has been set. The quota allocation process, particularly for sectors with diverse products like metals and building materials, remains complex. Moreover, the market is not yet open to third parties such as carbon traders, financial institutions, or individual investors, primarily to avoid speculative activities.
Despite the implementation of China's ETS, carbon prices in the market have not experienced a significant increase. Currently, prices are below US$10 per tonne, in contrast to the levels seen in the EU ETS, which hover around US$70 per tonne.
China is currently grappling with an unprecedented power crunch, primarily driven by coal-based generation. President Xi Jinping has announced plans to increase installed capacity for renewable energy and ease certain controls on electricity prices. However, the country is also aiming to raise its domestic coal production. Critics argue that a well-functioning carbon pricing market would have resulted in higher carbon prices for coal, thereby advancing the transition to renewable energy sources.
There are growing calls for broader sector coverage within China's ETS and improved market liquidity to allow carbon prices to rise and reflect the true cost in the economy. Without these measures, China risks falling short of its climate targets. Enhancing the effectiveness of the carbon market is crucial for driving emissions reduction and promoting the transition to a sustainable future in China.
