FEATURE ARTICLE: China Must Develop Market-Based Carbon Emissions Trading System: Think Tank

The Chinese state-backed think tank has proposed accelerating the development of a market-based regime around the country’s carbon market, providing clear signals on carbon prices, managing long-term expectations. term and encouraging investment in low-carbon technologies, according to a September 19 report. 14.

The report of the China Council for International Cooperation on Environment and Development, or CCICED, also suggested an absolute emissions cap, the introduction of carbon auctions, the development of a hybrid carbon pricing system. which incorporates carbon trading and carbon tax, and the withdrawal of foreign and domestic coal. investments.
The recommendations shine a light on China’s future carbon market roadmap and highlight some of the most high-profile discussions to date on topics such as a national emissions cap that were once considered taboo.

“Evaluate a potential emission ceiling, increase the share of allowances with auctions and extend [carbon trading] to other sectors are all future steps on the road to a highly efficient carbon trading system, ”said Kate Hampton, CEO of Children’s Investment Fund Foundation, co-lead of the report at the 2021 annual meeting of the CCIED September 10.

CCICED, founded in 1992 and supported by the Chinese State Council, the country’s highest executive body, is a political think tank. Its report is part of a project initiated in 2018, entitled Global Climate Governance and China’s Role, responsible for formulating recommendations on climate policy.

Absolute carbon cap
The main recommendations of the CCICED report include a shift from an intensity-based approach to a hard cap for the Chinese carbon market that will tighten the supply of carbon credits, increase carbon prices and enable targeted emission reductions. , similar to the European carbon market.

However, the challenge in the context of China is to establish an equitable cap, which can be reasonably allocated to each province and to each sector at different stages of economic development.

CCICED recommended a double-checking system that assesses emission performance based on two benchmarks – “absolute carbon emissions” and “emissions intensity” – over the period of the 14th Five-Year Plan (2021-2025) , which should be gradually extended.

“When it comes to cities and provinces, you obviously take into account the dynamics of population, industry and levels of wealth. All of these will be very important in deciding the allocation system, ”said Hampton.

Over the next five years, China’s carbon market will cover more emission-intensive sectors, such as steel, non-ferrous metals, petrochemicals and transportation. It is crucial for the government to determine whether to set a hard cap or to keep the current method for the long term.

Hybrid carbon trading and a reasonable carbon price
Besides a carbon cap, a reasonable carbon price is also vital for China to meet its decarbonization goals, and the CCICED report suggested the introduction of carbon auctions and carbon taxes to build a pricing system. more efficient carbon.

Currently, emission allowances in the Chinese carbon market are allocated free of charge. Companies with coal units only have to pay 20% of emissions above their allowances, while companies with gas units do not have to pay for excess emissions.

CCICED said the free allocation method cuts companies’ costs but neglects their climate responsibility and liability.

He said the current national carbon market is exposed to the risks of market failure, which can result in an inefficient carbon price. An effective carbon price relies on well-established legal frameworks, tighter quotas, diverse types of investors and sufficient trading volumes, which will take time to develop in China.

Hampton said China should consider developing a hybrid carbon pricing system based on the principle of controlling transaction costs.

CCICED said a carbon tax can be an additional policy instrument that protects against the risks of market failure and covers less emission-intensive sectors that cannot be listed in the national carbon market.

Withdraw from coal
China’s decarbonization journey is closely associated with coal reduction. The CCICED report underscored the importance and urgency of reducing coal use and coal financing.

Domestically, in the power sector, China is expected to control the addition of new coal-fired power generation and phase out small-scale coal combustion during the 14th Five-Year Plan period, according to the report.

“President Xi has already pledged to control coal and reduce coal. It must be something the whole world is doing, because there are so many countries historically dependent on coal that need to switch to a new power system. China can help lead the way, ”said Hampton.

CCICED recommended strictly controlling capacity expansion in pollution-intensive and energy-intensive industries such as steel, non-ferrous metals, cement, chemicals and petrochemicals, and promoting zero technologies. carbon as carbon capture.

Globally, China needs to cut funding for overseas coal-fired electricity, including Belt and Road investments, CCICED said, adding that there are also opportunities.

“We need renewables at the center of the power system, and China is a real leader in renewables,” said Hampton. “As China goes to net zero, China’s technology and expertise will only be increasingly useful around the world, especially along the Belt and Road,” she concluded. .
Source: Platts

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