Carbon emission market important for China's energy transition

By Kaare Sandholt

In December 2017 China took a big step towards a national market for CO2 quotas. The National Development and Reform Commission announced “The National Emission Trading Scheme for Power Generation Industry” as a starting point for a general national emission trading market in China. China's power sector is chosen as starting point because it generates 65% of its electricity from coal and accounts for more than 3500 Megatonnes (Mton) of annual carbon dioxide (CO2) emissions. The initial trading scheme program aims to create nationwide systems for carbon emissions monitoring, for quota allocation and for market transactions. The start phase will thereby pave the way for expanding the trading system to other sectors, including the industry sector, which currently is heavily relying on coal as fuel.

In this May 12, 2015 photo, workers monitor the carbon trading at the Beijing Environmental Exchange office in Beijing, China.[Photo: AP/Andy Wong]

The establishment of a national carbon emission trading system is an important part of China’s ambitious strategy for transforming the whole Chinese economy. The strategy comprises innovation strategies like “China 2025” which focus on transforming the Chinese industry to match the requirements of the 21th Century, and the strategy of transforming the Chinese society to an ecological civilization with a low-carbon energy system, circular economy and smart use of digitalization. In that context, a green and low-carbon energy system is a precondition for the further economic development, since an energy system based on fossil fuels will severely damage the environment and the living conditions for mankind both in the short run and the long run with large costs for society as consequence.

International experiences on carbon trading systems show that such a system is complex and the efficiency of system is very much depending on the detailed set-up. In this light, it seems like a prudent move to develop the system incrementally, reflecting Deng Xiaoping’s phrasing to, “cross the river by feeling the stones.” Crucial for the long-term impact of the system is the detailed allocation mechanisms and the amount of emissions quotas available for the market and the initial phase will allow for a gradual adaptation to a carbon pricing for the market participants without creating drastic changes in the economic framework for the power industry. On the other hand, it is important that the system, also in the initial phase, creates the right economic incentives for an energy transition towards green and low-carbon technologies in order to allow for economic growth within the framework of an ecological civilization.

China National Renewable Energy Centre (CNREC), an energy policy think tank within the Energy Research Institute as part of the National Development and Reform Commission, has recently analyzed how a sustainable energy system can be developed. The analyses show that a well-functioning carbon trading system could have profound impact on the future Chinese energy system together with other policy measures. The carbon trading system together with implementation of a nationwide electricity market will give strong incentives for further development and integration of renewable energy sources like hydropower, wind power and solar power. Solar and wind power technologies are currently experiencing a rapid decrease in production costs and this development will continue in the years to come. Hence, a reasonable carbon price between 100 and 200 RMB per ton CO2 could make a big difference for the investments decisions in the coming 5-15 years, because it will make renewable energy technologies competitive, compared with existing coal power technologies, even without subsidies to the green technologies.

CNRECs analyses show that China today have the right strategies for policy measures. The success of the energy transition depends on strong implementation of the supporting policies - the power market must be enforced in a way that stimulates flexibility and integration of renewable energy (RE), the carbon pricing mechanisms must ensure sufficiently high carbon prices to make an impact on CO2 emissions and the support schemes for RE must stimulate cost-efficient deployment of RE projects. Also, more ambitious targets for RE and for coal reduction are needed in the near term for China to be able to comply with the Paris Agreement requirements for a “well below 2 °C” future.

From a global perspective, the Chinese steps towards a carbon emission trading system are certainly good news. The impact of climate change is one of the biggest treats for the future of mankind and with the launch of the national carbon market China clearly demonstrates a swift and dedicated follow-up on the pledges for the Paris Climate Agreement as an excellent role model for the rest of the world. It will be exciting to follow the implementation of the full system in the coming few years.

(Kaare Sandholt is Chief Expert at China National Renewable Energy Centre.)