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Capping the Dragon: prospects for Chinese and European emissions trading linkage

cap dragon_cutWhile Europe is trying to get its emissions trading system (ETS) out of the doldrums, China is busily preparing to launch its national carbon market. By 2020, China’s carbon market will have surpassed the EU ETS as the world’s largest carbon market, covering around 3 to 4 billion tonnes of CO2. South Korea, which in 2015 will be the first Asian country to launch a national carbon market, has already indicated that it eventually wants to link its scheme to China’s. It is probable that the EU will also consider some form of linking to the Chinese carbon market in the future, highlighting the importance of robust linking safeguards.

In 2011 China’s central government announced plans for seven pilot markets: four in the cities of Beijing, Tianjin, Shanghai and Shenzhen and three in the Chongqing, Guangdong and Hubei provinces. All of the carbon markets are now up and running and together they cover just over a billion tonnes of carbon dioxide (equal to around half of the EU ETS). The carbon price in these pilots is similar to the current EU carbon allowance price, although the EU ETS has been running for almost 10 years now.

It is clear that the Chinese are trying hard to avoid making the same mistakes as the EU did. Europe’s carbon market is now flooded with an oversupply of emission allowances as industrial and power companies were over-allocated more than 2 billion surplus emission allowances. In some of the Chinese pilots (Hubei, Shenzhen), the allocation of emission allowances is therefore provisional, meaning that the government can make adjustments in hindsight, based on reported emission levels.

In China there is a strong political will to tackle climate change by putting a price on carbon. The Chinese economy, however, does not seem altogether fit for a carbon market: the power market is completely regulated (including regulated power prices) and there is no transparency on the allocation of allowances for example. In November, the Chinese government will present legislation for the national carbon market roll-out that will happen from 2016 until 2020. The legislation will be lacking in detail but might include some more information on defining the government’s responsibility, the potential sectors and the date of operation of the registry.

More importantly, in the first quarter of 2015 China will reveal its plans for post-2020 greenhouse gas emissions reductions which is likely to include a peak year. China’s now emits around 10 billion tons of CO2 into the atmosphere every year and this number is expected to grow to 15 billion tons by 2030. An early peak year, after which Chinese emissions decline, is critical to still be able to limit global temperate rise to below the 2°C threshold.

Without an absolute cap on China’s emissions, linking of the Chinese carbon market with the EU ETS would be extremely challenging. Additionally, linking of the two systems should also be conditional on the EU ETS directive to include robust safeguards that ensure the environmental ambition of the EU ETS is not undermined.

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