In theory, carbon pricing should encourage a switch from higher emitting power sources, such as coal. While prices in the EU have generally been too low to achieve this, the contribution of a carbon price to the rapid fall in coal-fired power in the UK shows it is possible.
If China does set a rate-based limit of allocating permits rather than an absolute cap, this would mean the setting of benchmark emissions rate per unit of output from each fuel.
It also appears the scheme may set different benchmarks for different parts of the power industry, depending on the size of the producer and type of fuel used. This would mean coal-burning plants would only compete against each other, rather than against cleaner gas plants.
Some experts have warned this means the ETS would struggle to move electricity consumption towards cleaner sources. Zhang Junjie, director of the Environmental Research Center at Duke Kunshan University, told the South China Morning Post:
“The focus will be on improving efficiency of existing plants, rather than improving the energy structure by replacing coal with gas or other cleaner energy sources.”
Lauri Myllyvirta, a clean air and clean energy expert working with Greenpeace in Beijing, similarly says an intensity-based allocation would not encourage a cleaner fuel mix, but could help to push power plants to increase their efficiency. Myllyvirta tells Carbon Brief:
“Improvements in thermal efficiency are much easier to predict than the combination of electricity demand, mix of energy sources and thermal efficiency. Of course, this would at the same time mean that the role of emissions trading in China’s overall climate efforts is more limited than if an overall [emissions] cap was set.”
Myllyvirta points out, however, that even if such an intensity-based method is used, it is not known whether this would just be the approach for an initial period, or more permanently.
A man works at the control room of No.2 power generation unit of the Hongyanhe Nuclear Power Station in Wafangdian of Dalian City, northeast China’s Liaoning Province, Sept. 22, 2016. Credit: Xinhua / Alamy Stock Photo H1ACAN
A man works at the control room of No.2 power generation unit of the Hongyanhe Nuclear Power Station in Wafangdian of Dalian City, northeast China’s Liaoning Province, Sept. 22, 2016. Credit: Xinhua / Alamy Stock Photo
In addition, even if the ETS makes polluting plants more expensive, it may not affect their “dispatch order”. Unlike most other jurisdictions, China does not traditionally change the order in which its power plants are turned on based on their operating costs. Dupuy tells Carbon Brief:
“That means, effectively, that one of the normal channels through which we’d expect to see emissions trading work is not functioning well in the current power system in China.”
The power sector reform effort currently underway in China could address this, says Dupuy. First launched in 2015, this is perhaps the most overlooked of the country’s other climate policies. It promises to address each of the major “pain points” for clean energy and could have far bigger implications for China’s emissions than the ETS. Dupuy tells Carbon Brief:
“One of the major thrusts of the power sector reform is for each of the generators to compete, based on its relative operating costs and relative efficiency, for the number of hours that they’re going to operate on an hour-by-hour, day-by-day basis.
“These new markets should allow the power sector to be more flexible, to be more efficient, and to transmit the cost associated with carbon in a more fluid way to users throughout the system.”
The process of developing this reform is long. While China has a commitment to get to national competitive electricity markets by 2020, Dupuy says he is not sure if this timetable will be met. However, some progress has already been seen.
In the meantime, a shift to cleaner energy may also be driven by China’s other power sector targets, such as goals for the increasing the share of low-carbon sources in the energy mix, and coal plant closures driven by other regulations.