Many more of the details and outcomes of China’s national carbon market remain uncertain. As well as the lack of firm dates for rollout and expansion to other sectors, other key details about the scheme have also yet to be clarified.
Perhaps foremost among these is the question of the price companies will have to pay for emissions, once the market is established in 2020 or so. Prices have been low in the pilots, and with the mechanisms and processes for allocating or auctioning credits still unclear, it is hard to say if and when a price large enough to put pressure on emissions will emerge.
The issuing of too many permits due to regulators anticipating higher emissions than actually occur could lead to low prices and a loss of confidence in the market. This has been a significant problem in the EU’s carbon market, which is still struggling to correct low prices caused by a massive surplus of allowances.
However, handing out permits on an intensity basis could make it easier to avoid over-allocation if coal power output is much lower than expected, Myllyvirta from Greenpeace tells Carbon Brief.
It is also worth noting that the scheme will be implemented relatively fast, compared to the others schemes, such as in the EU where companies had more notice. Zou Ji, the president of Energy Foundation China, an NGO, told the New York Times that China is likely to issue many credits at first and then gradually tighten annual allocations to force up the market price. However, China has not yet set this out.
Free vs paid allowances
There has been no word on what proportion of allowances will be distributed for free and how many will be sold at auction. Details on how permit auctions might work are also scarce.
Among other things, this will determine the extent to which the China ETS will generate any revenue, which could go to funding additional climate change programmes.
In its 13th Five-Year Plan, covering 2016 to 2020, China said it will develop a greenhouse gas emissions information disclosure system. However, this has not yet been implemented.
The success of the ETS will depend on such disclosure of corporate information, write Kate Logan and Ma Yingying from the Institute of Public and Environmental Affairs (IPE), a Chinese thinktank, in an article for ChinaDialogue.
According to IPE analysis, none of China’s seven official ETS pilots have yet disclosed carbon emissions data for key polluting firms, which contributes to major price volatility by limiting the ability of markets to predict carbon prices. Logan and Yingying write:
“In fact, there is no publicly available information on how much CO2 an emissions trader has emitted, or whether or how their emissions data are verified.”
Swartz also argues that disclosure will be important to the nationwide scheme, for example, by revealing the business case for the use of low-carbon technologies in a sector low on credits.
Verification of data will also be important. Myllyvirta and Shuo warn that the initial allocation of free permits could create incentives for companies and provincial governments to inflate their output or emissions projections, for example.
Speaking to Bloomberg earlier this month, Paula DiPerna from CDP said the market has to be as credible to traders as any other commodity market, in order to create a carbon price that “remotely corresponds to the cost of mitigation”.
It is also unclear whether there will be any fines or penalties for non-compliance with the scheme in its various stages.
Dimitri de Boer, vice chairman of the China Carbon Forum, a non-profit working on climate change, says the central government is likely to learn from experiences of enforcement under the pilot schemes, where compliance has been high, as it rolls out the national ETS. He tells Carbon Brief:
“The pilot systems have had various types of enforcement measures, including fines, penalties in the form of additional compliance obligation for the following year and public announcement of non-compliance…We hope that there will be adequate transparency regarding the compliance of companies.”
While China has created an offset standard, the rules and future of this in the new ETS are not yet clear.
The May 2017 draft plan discussed offsets as a flexibility provision. The new national ETS plan says trading will be expanded to other tradable products, such as voluntary emissions reductions “when conditions allow”.
These so-called “voluntary emission reductions” would allow non-industrial carbon reduction projects, not covered by the ETS, to sell credits to companies obliged to take part, Huw Slater, a researcher at China Carbon Forum, tells Carbon Brief.
According to Swartz, many companies that develop offset projects are not investing until this is clarified. This is important, he argues, as the absence of offsets means additional incentives will be needed for areas such as reforestation and tackling refrigerant gases that also warm the climate.