In this paper, we assess the existing seven local pilot carbon emission trading schemes in China and analyse the factors determining whether China’s carbon market is successful in terms of handling substantial amounts of CO2 emissions rights, regulating the market and trading them at a reasonable price. The emission trading system is developing slowly in most of the participating provinces and cities. Prices tend to decline, while volumes trading slowly increase. The volatility is partially the result of regulation (the rights need to be renewed before a certain date) and partially due to government interventions in the market. Based on the assessment, recommendations are provided for China implementing a national carbon market, based on the experiences and lessons learnt from the seven local carbon emission trading schemes. Conditions for China to roll out the system and later improve the national emission trading scheme to replace the existing local emission trading schemes are formulated.
CO2 emissions are a hot topic, given their contribution to climate change. At the United Nations (UN) conference in Paris at the end of 2015, all countries of the world promised they will try to reduce their CO2 emissions. During the UN Climate change conference in Copenhagen in 2009, no such agreement could be reached, since China promised only to reduce CO2 emissions per unit of output. Now it has promised to reduce total emissions by 2030. China President Xi also promised in Paris that China would extend the current system of CO2 emission rights trading to the whole country.
Carbon trading or emissions trading is a market-based tool which should help to limit the production of CO2 emissions at lower cost than when each company would invest itself in cleaner technology [
The Clean Development Mechanism is one of the Flexible Mechanisms defined in the Kyoto Protocol that provides for emissions reduction projects in other countries. It generates Certified Emission Reduction (CER) units which may be traded in emissions trading schemes and help industries in developed countries.2 They contribute to their own emission reduction targets. The projects and the issue of CERs are subject to approval to ensure that these emission reductions are real and “additional”.3 The CDM allows industrialized countries to buy CERs and to invest in emission reductions where it is cheapest globally.4
China decided to start its own ETS, after learning from international ETS experiences. In 2012, seven local pilot ETS were selected and these seven pilot ETS have been functioning since the end of 2013. Based on data for China’s seven pilot ETS, this paper addresses the following issues:
1Emission trading originated much earlier and was first put to practice in the US for SO2 and NOx pollution control.
2The CDM is defined in Article 12 of the Protocol, and is intended to meet two objectives: 1) to assist parties not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of the United Nations Framework Convention on Climate Change (UNFCCC), which is to prevent dangerous climate change; and 2) to assist parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments (greenhouse gas (GHG) emission caps). “Annex I” parties are those countries that are listed in Annex I of the treaty, and are the industrialized countries. Non-Annex I parties are developing countries (Wikipedia).
3The CDM is supervised by the CDM Executive Board (CDM EB) and is under the guidance of the Conference of the Parties (COP/MOP) of the United Nations Framework Convention on Climate Change (UNFCCC).
4Developing countries hold the largest share of CDM quotas and hence developed countries are buying them from them, which can be considered as supporting their environmental policies. China has for example developed a series of policies to support pilot work in reducing its carbon emissions and financed them through CDM (Beijing, 2014, issue 10: 8).
1) To what extent are the existing seven local pilot ETS an effective and efficient market for CO2 emission rights?
2) Which recommendations can be formulated for China, based on the experiences with other ETS so far, for improving the national ETS, which was launched at the end of 2017?
Carbon emission trading aims to promote the control of one type of greenhouse gas emission, namely CO2. There are three mechanisms to curb carbon emissions [
China’s carbon market is developing since the National Development and Reform Commission (NDRC) issued its Notice on carrying out pilots of carbon emissions trading in 2011 [
5The third mechanism (joint implementation) will not be discussed.
6The goal is to allow market mechanisms to drive industrial and commercial processes in the direction of low emissions or less carbon intensive approaches than those used when there is no cost to emitting carbon dioxide and other GHGs into the atmosphere.
Pilot work has now started in seven provinces and municipalities (Beijing, 2014, issue 10: 17). In June 2013, China started seven pilot emission trading schemes (ETS) in Hubei Province, Guangdong province, Beijing, Tianjin, Shanghai, Shenzhen and Chongqing. March 7 2014 the Beijing Carbon emissions market was operating in the China Beijing environment exchange in the Beijing financial street area for 100 days. It is an online market. However, every day trading transactions had taken place and in this period of 100 days in 2014 for 3 million yuan (US$484,000) transactions were taking place involving 64,217 tons of carbon emissions (Beijing, 2014, issue 10: 8).
These data raises all kinds of questions, such as who are the parties involved, do the prices and quantities trade vary a lot and how important is the “secondary” market for CO2 emissions (a financial market where you could buy options related to the price of tradable CO2 emission rights) and how is the system regulated? Trading on the CO2 emission rights exchange has become more active, with major Chinese and international companies and local and international investors participating [
CO2 emissions are rapidly increasing in China. The China Daily (10-9-2014: 11) notes that Greenhouse gas levels in China hit new high [
China’s total CO2 emissions are more than the sum of the US and the EU. China’s per capita CO2 emissions have surpassed those of Europe (China Daily, 24-9-2014: 1). Although in 2009, during the Copenhagen Climate change conference, China was not yet willing to fix a limit. However, already in December 2014 China has pledged to address total CO2 emissions (China Daily, 25-9-2014: 1). The Financial Times (28-4-2014: 5) calls this ‘shift in the wind’ the result of pressure from within the country, whereas China had refused to listen to foreign calls to cut carbon emissions.
7 Pilot areas | Threshold (annual emission in 10.000 tons) | Number of installations involved in ETS | Estimated share in total CO2emission in the pilot areas |
---|---|---|---|
Beijing Tianjin Shanghai Hubei province Guangdong province Chongqing Shenzhen | 1 2 Industrial: 1 non-industrial: 2 6 2 2 Industrial: 0.5 Buildings 20,000 m2 Government buildings 10,000 m2 | 415 (2013) 543 (2014) 114 191 138 184 (2013) 190 (2014) 242 Industrial 635 Buildings 197 Total 832 | 40% 60% 50% 35% 55% 40% 40% |
Source: [
7An “installation” because it could be an individual facility of a company: one factory or a power generation plant of a firm having several installations.
Although it may sound like a market where physical goods are traded, the CO2 market in China also makes use of financial instruments to improve its functioning. Not only big polluting companies are buying (and selling if they have managed to reduce their emissions) CO2 emission rights, also individuals and financial service companies can do so. Their motive is to make money. They hope the price will increase and hence they can sell the rights at a later stage with a profit. This adds liquidity to the market and improves its functioning [
Most transactions on the Beijing CO2 emission rights trading market are made via floor trading, carried out by using the electronic platform of the Beijing Environment Exchange (CBEEX; Beijing, 2014, issue 10: 19-21). Related party transactions and block transactions can also be made via the over the counter (OTC) trading mode.8 It is noted that no daily price limit applies, while there are also pricing and auction transactions.
We note in
8Over-the-counter (OTC) or off-exchange trading is done directly between two parties, without any supervision of an exchange. It is contrasted with emission trading schemes taking place via an organized exchange.
According to
Year | Volume | Average price (one dollar is 6.197 yuan) | Turnover |
---|---|---|---|
Nov. 28, 2013 in Beijing (trading kick-off day) | 3 online deals involving 800 tons | 51.25 yuan (US$ 8.27) a ton | 122,050 yuan (US$ 19,685.48) |
2014 March 7, 100 days in business | Transactions were taking place involving 64,217 tons of carbon emissions | 484,000 $/64,217 t (US$ 0.13268) or 3,000,000 RMB/64,217 t (46.72 RMB/ton | 3 million yuan (US$ 484,000) |
2014 | 2,106,667 tons | 49.83 yuan a ton | 105 million yuan |
2015 | 3,160,000 tons | 41.46 yuan a ton | 131 million yuan |
Source: Beijing Environment Exchange, http://www.cbeex.com.cn/article/zxdt/bsdt/201601/20160100057721.shtml.
2013 and the total quota of Beijing is only 50 million ton in the first performance year 2013. Both Hubei and Guangdong have fewer installations involved in the emission trading schemes. However, the total quota of Hubei is 324 million ton and total quota of Guangdong is 388 million ton in the first performance year 2013. The main reason is that both Hubei and Guangdong have more heavy industries (e.g. big chemical industries that are energy intensive), while both Shenzhen and Beijing have limited heavy industries and their economy is focusing on financial and other services. Therefore, the average size of installations in Shenzhen and Beijing is much smaller than that in Hubei and Guangdong.
The Chinese certified emission reduction strategy (CCER; [
Is this ETS a stable or mature market? Economics would suggest the following criteria for an effective and efficient market [
Pilot ETS | CCER percentage | CCER project requirements | Types of CCER projects |
---|---|---|---|
Hubei | 10% of initial annual quota can be counteracted by CCER However, the max. CCER counteracting amount should be less than 50,000 tons of CO2 | All CCER projects should be located in Hubei | 1) All CCER projects should be registered 2) Non hydropower projects 3) Priority given to agricultural and forest CCER projects |
Shenzhen | 10% of annual quota can be counteracted | Except agricultural and forest CCER projects, all CCER projects should be located in Shenzhen | Recyclable energy and new energy CCER project Cleaner transportation CCER project Ocean carbon storage CCER project Agricultural & forest CCER projects |
Shanghai | 5% of annual quota can be counteracted | No requirements | All |
Beijing | 5% of annual quota can be counteracted in case CCER projects are Beijing local. 2.5% of annual quota can be counteracted in case CCER projects are outside Beijing | More than 50% of CCER projects should be located in Beijing and nearby provinces of Hebei, Inner Mongolia | 1) CCER projects after 2013 2) Non hydropower projects 3) Both CCER and energy saving projects 4) Agricultural and forest CCER projects |
Guangdong | 10% of annual quota can be counteracted in case CCER projects are local | More than 70% of CCER projects should be located in Guangdong province | 1) Forest CCER projects 2) CCER projects of hydropower, heating, heat recovering and recovering of gas are not allowed 3) Pre-CDM is not allowed |
Tianjin | 10% of annual quota can be counteracted | No | 1) CCER project after 2013 2) Non hydropower projects 3) Priority given the CCER projects located in Beijing, Tianjin and Hebei province |
Chongqing | 8% of annual quota can be counteracted | Encouraging local CCER projects | 1) Non hydropower projects 2) Encouraging agricultural and forest CCER projects 3) CCER projects after 2013 |
Source: Policy documents of seven pilot emission trading schemes.
getting smaller and smaller as demonstrated in
The table shows price fluctuations in the period of 2013-2014 in the seven pilot emission trading schemes, but also some convergence towards a price range between 10 to 40 , which is lower than the 51.25 yuan originally paid on November 28, 2013, the day the Beijing market started trading.
Prices in Shanghai and Beijing have stabilized. The main reason is that Shanghai has distributed three-year quota in one time (2013), thus the market has very clear understanding of the carbon trading system and very clear market expectations. Although the quota distribution in Beijing is annually based, the
Pilot ETS (Yuan/ton) | Performance period 2013 | Performance period 2014 | ||
---|---|---|---|---|
Average price | Variance | Average price | Variance | |
Hubei Shenzhen Shanghai Beijing Guangdong Tianjin | - 67.67 36.13 53.01 62.32 31.28 | - 365.42 21.68 5.58 23.68 36.98 | 24.34 44.96 31.56 53.19 29.10 23.75 | 1.24 54.56 37.12 45.58 129.75 14.87 |
Data source: Carbon K-line http://k.tanjiaoyi.com/; till 28 June 2015. Chongqing is not included, since there are limits to trading in Chongqing in 2013-2014.
9Source: Carbon K-Line http://k.tanjiaoyi.com/, consulted 19-9-2016.
quota for coming three years is already fixed (same as Shanghai) and thus carbon market is also quite stabilized.
Hubei emission trading scheme has the biggest amount of trading, sharing 48% of total trading amount of the seven pilot emission trading schemes. In the performance period of 2013, most trading happened in the last month of the performance period in Shenzhen, Shanghai, Beijing and Guangdong. The last month trading amount shares 65% of the total trading amount of the performance period (2013). This situation has changed somewhat in the performance year 2014, in which almost 50% of the total trading took place in the last month trading of the performance year. The high share of the last month trading shows that the motivation of most installations involved in the emission trading schemes is still to comply with local emission regulation. It is not related to the price of reducing emission of CO2. Bringing down the price is an important objective of any emission trading scheme. Therefore, it is still a big challenge for future emission trading schemes how the emission trading schemes could facilitate a reduction of the costs of reducing CO2 emissions. The conclusion is that the quantities traded are still small, although they are gradually increasing.
Among the seven pilot emissions trading schemes, only 12 times real trades happened in Chongqing. Hence the Chongqing emission trading scheme is not successful. The main reason for this failure is that Chongqing has allocated in the beginning too many quota to installations involved in emission trading schemes. Quota were confirmed, based on the highest emission amount in the history of an installation and hence every installation has enough CO2 emissions rights allocated to it by local government. There is no real carbon market in Chongqing. The issue of the initial allocation of CO2 emissions allowances is important and discussed by [
The following
Below we show the monthly variation in the amounts traded, the value of the trade and the average price (Figures 5-7).
The figures depict a clear upward trend for the amount traded and the total value traded, with peaks in June and July when the rights need to be sold. The average price was relatively stable in 2014, but July showed again an outlier.
Pilot ETS | Planned performance time | Real performance time | Number of installations involved | Installations performing well | Rate of well performing installations |
---|---|---|---|---|---|
Shenzhen Shanghai Beijing Guangdong Tianjin | 30 June 30 June 15 June 20 June 31 May | possibility of extension to 30 July 30 June possibility of extension to 27 June 15 July 25 July | 635 191 415 184 114 | 631 191 403 182 110 | 99.4% 100% 97.1% 98.9% 96.5% |
Source: Beijing Sinocarbon (2014).
Month | Amount of trade (ton) | Value of trade (Yuan) | Aver. price (Y/ton) |
---|---|---|---|
1 2 3 4 5 6 7 8 9 10 11 12 | 3170 9800 21,700 22,600 80,973 441,823 357,606 17,003 27,600 15,450 26,000 43,550 | 158,995 508,455 1,248,340 1,223,070 4,298,270.9 24,113,098.3 25,487,543.8 876,525 1,416,025 785,285 1,335,700 2,246,280 | 50.16 51.88 57.53 54.12 53.08 54.58 71.27 51.55 51.31 50.83 51.37 51.58 |
Source: Beijing electronic trading platform for carbon emission trade.
The following
Figures 8-10 depict a similar trend as in Beijing. An upward trend for the amount traded and the total value traded of CO2 emission rights, with a peak in June. The average price was relatively stable in 2014, with even in July only a slightly higher price.
Is there a relation between trading emission rights and reduction of emissions? According to the Financial Times (20-8-2015: 2) China’s emissions are not as large as expected. This is in line with news that coal mines have reduced production or shut down (International New York Times, 19-9-2015: 1). Declining production of coal contributes to achieving the CO2 emission reduction objectives [
1) The importance of a number of alternative sources of energy (in particular wind and solar energy) and the resulting reduction in power generation and hence in the demand for CO2 emissions rights.
2) The economic crisis has led to less economic growth and hence less CO2 emissions.
3) Originally the EU and the member countries have issued too many CO2 emissions rights for free.
4) The low price means that the big polluters can continue to pollute because they buy cheap CO2 emission rights.
From our research the following factors influence whether this national CO2 emissions rights trading market will be a success and contribute to the reduction of CO2 emissions:
Month | Amount of trade (ton) | Value of trade (Chinese Yuan) | Average price (yuan/ton) |
---|---|---|---|
1 2 3 4 5 6 7 8 9 10 11 12 | 6650 60,002 113,303 69,700 164,758 1,114,777 0 0 23,400 32,600 84,060 314,584 | 208,953 2,295,012 4,446,630 2,735,490 6,007,070 44,156,118.2 0 0 765,360 1,096,110 2,945,285 10,748,198.9 | 31.42 38.23 39.25 39.25 36.46 39.61 0 0 32.71 33.62 35.04 34.17 |
Source: Shanghai environment and energy exchange.
1) The capacity of the Chinese government to stabilize the price and to providing the political support to keep the system going;
2) Obliging smaller manufacturing units to buy the CO2 emission rights. It is planned that as of 2017 also companies producing 5000 tonnes of CO2 emissions must buy the CO2 emission rights. This will broaden the market, but also make compliance with existing regulation more complicated;
3) Enough market parties need to be interested in buying the CO2 emission rights;
4) China must put the right regulation in place and be willing to implement the agreed policies.
Experiences gained from the seven pilot ETS China show that the following key factors are influencing CO2 prices. From the supply side:
1) The total amount of quota that local authorities allocated to the market.
2) The amount of remaining emission rights that have not yet been traded in the previous phase. Both the EU and China allow companies/installations to keep a certain amount of emission rights that have not been traded in the previous phase and those can be traded in the next phase.
3) The amount of CCER that can be traded.
4) The quantity of emission rights retained by local government. In all seven pilot ETS in China, local authorities are storing a certain amount of emission rights for stablizing the carbon market at a later stage.
From demand side:
1) Real requirements of emission rights for companies or installations in their production process. Local governments China have set up CO2 emission objectives for all big companies, but many are not included yet.
2) Companies or installations may buy emission rights for their future development (expansion, or upscaling company size).
3) Financial service companies or individuals are willing to be involved in the ETS for carbon investment making profits because the prices fluctuate.
Drawn upon experiences and lessons learned from the EU ETS, China’s carbon trading pilots have designed some effective features in allowance allocation and distribution, which include an allowance allocation rule based on historical emissions combined with some benchmarking, a free allowance distribution arrangement combined with some level of auction, and pre-determined quotas combined with ex-post allowance adjustments. There are also some particular issues related to China’s carbon trading pilots. The issues regarding the design of the allowance mechanism include over-supply of allowances, lack of allowance credits for businesses that take early abatement actions, double-counting of allowances, a heavy reliance on historical emissions, and lack of clarity and transparency of administrative rules governing the allowances allocation and distribution. In order to develop a robust and effective a national level carbon trading scheme in China, it is critical for the country to thoroughly assess the problems that have been revealed in the seven carbon trading pilots and carefully identify ways to address these issues.
Is the CO2 emission rights trading market sufficiently deep to be expanded? We conclude that it seems like China is better placed to control greenhouse gas emissions and in particular CO2 emissions in the near future. The CO2 emission rights trading systems in place imply registering the quantity of CO2 emissions produced and providing incentives to the polluters to cut down on CO2 emissions.
Is this a stable or mature market? To assess this, we studied the prices resulting from trading, using criteria such as size of the market (a substantial amount of trade), trading at relatively stable prices, covering a big part of the demand and supply, without volatile variations. The data show that the current system is at an early stage of development and the quantities are limited, while the prices are declining. The fluctuations are big and the question is how the collapse of the European system bodes for China, in particular if we want to go in the direction of a national carbon trading scheme? China must try to make the market more active by including other cities and regions and more companies and other polluters. It should avoid providing CO2 emission rights for free and harmonize regulation.
It is important to try to harmonize the regulation, in particular if in the long run we want to go to a worldwide CO2 emission rights trading scheme. It is also necessary to undertake research into the alternatives for a market for CO2 emission trading rights and how these developments would affect the Chinese system [
However, China launched national ETS at the end of 2017, based on the experiences and lessons learnt from the seven local pilot ETS [
1) A large number of actors involved. The successful pilot ETSs of Beijing and Shenzhen show that the number of actors involved in ETS is more important than the total quantity of tons of CO2 traded. This is also the case of the Hubei ETS. A lack of enough actors is the key factor for the failure of Chongqing ETS in the first trading year.
2) Stabilized prices. Both the EU ETS experiences and the Chinese pilot ETS show that relatively stabilized price is one of the key factors for an effective ETS. By learning from international experiences, China has already developed a number of instruments from both supply side and demand side for ensuring the stabilization of prices.
3) Fluctuations under control. Fluctuation is possible in a mature market system. However, a mature market system should have certain mechanisms to ensure that the fluctuation remains under control. China is a big country and there are significant differences in terms of economy, culture and social development between eastern China and western China. It is estimated that there is a high possibility of strong price fluctuations when one national ETS will be in place. Therefore, the national authorities of China should set up an effective regulatory and economic mechanism to ensure that the fluctuations remain under control.
4) A longer period for trading. In addition, it is also recommended that China fixes a relatively long period for the trading phase (e.g. 3-5 years), instead of a one year trading phase, which is currently the case in the seven pilot ETS. A longer period for a trading phase will ensure that installations and actors involved will have more clear understanding of the market and will motivate installations and actors involved in increasing investment in low-carbon technology, which may lead to a reduction of emissions in the long run.
5) There are a number of issues in the design of the carbon allowances in China’s 7 pilot ETS due to the limited preparation and lack of reliable production and emissions data. These issues become evident after 1 - 2 years in operation of these pilots. It is important for China to address these issues to meet the country’s ambition to create a national carbon trade market.
6) In China’s 7 pilot ETS, rules published by the program administrators that govern allowances allocation and distribution lack the necessary clarity and transparency. Most of these rules are described merely in very general terms without specific details. Important information such as what and how various factors are used to determine the allowances have not been provided. However, this type of information is important as it helps covered entities understand the efforts they need to make to reduce their emissions and enables researchers to identify potential flaws in the allowance system design. It will be in China’s benefit to strengthen transparency in the design of its allowance allocations and distribution. In this respect, the EU ETS set good examples. They not only timely publicize their legislative documents involving the allowance mechanism, but also develop a large number of explanatory documents providing the details of the allowances allocation and distribution.
We finish with listing the challenges for the market of CO2 emission rights in China, which require more research:
1) Are the ETS properly regulated to deal with fluctuations in the future?
2) What is the long-run impact for China of the collapse in the CO2 prices in Europe?
3) Is there an empirical relation between CO2 trading and reduction of CO2 emissions?
4) What will be the role of the clean development mechanism (CDM) in the future, now that Kyoto has finished?
This research was funded by the Beijing Climate Change Response Research and Education Centre (BCCRC), Beijing University of Civil engineering and Architecture and through fundamental research fund of BCCRC, which was provided by Beijing Educational Committee. We would like to thank staffs of BCCRC, who kindly participated in this project for their valuable contributions of data collection and scientific advices.
Zhang, M.S., Liu, Z.L., Jin, W. and Van Dijk, M.P. (2018) For CO2 Emission Trading in China, Can the Market Become a National One, Four Years after Creating Seven Local Markets? American Journal of Climate Change, 7, 218-235. https://doi.org/10.4236/ajcc.2018.72015