Effective by 2027, China’s cabinet announced on Monday evening that the nation’s carbon trading market will be strengthened through the implementation of absolute emissions caps in certain industries for the first time.
By 2027, the State Council and the Central Committee of the Communist Party plan to implement carbon emission caps, initially targeting industries with stable emissions, according to a Reuters report.
China aims to establish its nationwide carbon market or emissions trading scheme (ETS) by 2030.
“Policymakers are now actively tightening the system,” Xuewan Chen, senior research analyst at LSEG was quoted in the report.
New emissions caps and market expansions
The proposed national carbon market will supersede the existing system of eight pilot markets introduced in 2021.
This new market will feature absolute emissions caps and a blend of both free and paid carbon emissions allowances (CEAs).
Current CEAs rely on progressively stricter carbon intensity benchmarks, rather than absolute emissions limits.
Under a cap-and-trade system, firms are allocated a specific quota of CEAs.
These allowances represent the maximum amount of greenhouse gases a company is permitted to emit.
If a firm’s actual emissions surpass its allocated quota during a compliance period, it is obligated to purchase additional CEAs from the market to compensate for the excess.
Conversely, if a company successfully reduces its emissions below its quota, it can sell its surplus CEAs, creating a financial incentive for emission reduction.
This market-based mechanism aims to encourage businesses to invest in cleaner technologies and practices to lower their carbon footprint.
Mai Duong, Asia-Pacific carbon markets analyst with Veyt, told Reuters:
The (cabinet) document provides much-needed transparency for the development timeline for China’s carbon markets.
She also stated that China views carbon markets as the primary instrument for achieving its decarbonisation objectives.
The existing Emissions Trading System (ETS) is slated for a significant expansion by the year 2027.
This expansion is designed to encompass a broader spectrum of major carbon-emitting industries, thereby increasing the reach and effectiveness of the system in curbing greenhouse gas emissions.
Expectations and challenges
While the official statement confirms this ambitious timeline and general scope, it refrains from providing specific details regarding which new industries will be integrated into the ETS.
This lack of explicit identification leaves room for speculation and further announcements as the 2027 deadline approaches, but it underscores the commitment to a more comprehensive regulatory framework for industrial carbon emissions.
China’s scheme is expected to include industries such as chemicals, petrochemicals, papermaking, and domestic aviation, according to analysts.
Duong added that the regulation would also allow banks and financial institutions to participate in the market, which would enhance liquidity.
Last September, China announced plans to expand its carbon market beyond the power sector to include steel, cement, and aluminium, aiming to cover approximately 60% of the nation’s greenhouse gas emissions.
However, analysts suggest that the substantial allocation of free allowances has thus far limited the market’s impact on China’s carbon emissions.
Duong said:
It is positive that China now has a clear timeline for the full scope expansion – but whether this will deliver significant effectiveness in reducing the country’s giant emissions remains to be seen.
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