China launched regional pilot carbon trading projects in four cities, two provinces and the special economic zone of Shenzhen during 2013 and 2014. Two more local schemes were launched in 2016 and 2017 in Fujian, a southeastern Chinese province near Taiwan, and Sichuan in southwest China, although these are not usually counted as pilot schemes.
The locations of these nine local schemes are shown in the map below.
Location of China’s seven pilot local emissions trading projects, set up in 2013 and 2014, and two more recent local schemes, set up in 2016 and 2017. ETS prices are mean values observed between March 2016 and March 2017. Percentages are of total greenhouse gas emissions for the region. Source: I4CE Global panorama of carbon prices in 2017
The initial seven pilots were developed by local governments with intentionally different designs, to help inform the development of the national scheme. They cover more than 3,000 firms in a variety of sectors depending on the scheme, including power, steel, cement and aviation.
As shown in the map above, the pilots cover 35%-60% of greenhouse gas emissions in each region. Compliance with the various rules of the pilots is reportedly high.
The schemes have run into some issues, however, including a lack of transparency and a low trading volume. One criticism has been that they have mainly avoided using financial derivatives, such as futures trading. Some argue this has made the markets ineffective in providing a clear price signal for big emitters. However, some of the pilot regions are now experimenting with such mechanisms.
According to Paula DiPerna, special adviser with CDP North America, the seven pilot programmes have allowed China to “legitimise” the concept of cap-and-trade. She told Bloomberg:
“China had 10 years to train people and let them learn the ropes of carbon trading. They were a de facto university for a generation of emissions-market traders. The rest of the world has pretty much lost a decade.”
The pilots have also allowed the government to test how trading systems could work with very different profiles. For example, says Swartz, the cities generally have high emissions in the buildings and transport sectors, while in Hubei province, the largest emissions source is iron and steel.
Leaders have emerged among the pilots, helping to establish best practices for the national market, according to ChinaDialogue. Guangdong province and Hubei have experimented with auctioning allowances, for instance, Swartz tells Carbon Brief, while the Beijing market has maintained the highest and most stable carbon price.
As of the beginning of 2017, these covered around 3,000 sources, with total annual CO2 emissions of 1.4bn tonnes.
Prices averaged $2.27/tonne, according to the Partnership for Market Readiness, an international platform backed by the World Bank to foster carbon markets instruments. For comparison, over the past five years EU ETS emissions allowances have hovered between €4 and €9 ($5-11) per tonne, itself well short of most estimates for the social cost of carbon.
Jiang Zhaoli, deputy head of NDRC’s climate change department, has said companies will not feel real pressure to cut emissions until the carbon price hits 200-300 yuan/tonne ($31-47/tonne). He added that he does not expect this to happen until after 2020.
Transaction values since the pilot schemes began reportedly reached around 4.5 billion yuan ($706m) in September last year and the value of trades in the pilots has been rising over time. However, this is far below the €49bn ($61bn) of allowances or their derivatives that were traded in the EU ETS in 2015 alone.
Carbon programmes extended –> Less uncertainty –> Higher prices. Global traded #carbon volumes up 5% in 2017 to 6.3bn t/CO2e. Value up 22% to €41bn. #EUets still largest. Data from our annual – Year in Review publication pic.twitter.com/Vt8STykJi3 — TR Point Carbon (@TRPC_Climate) January 22, 2018
Power-sector emissions now under pilot schemes will shift into the national ETS, once it is launched. The pilot projects will continue for sectors not yet included in the national carbon market, such as chemicals, oil and gas. China’s plan says these will gradually be moved into the national scheme “when conditions allow”.