China's National ETS
China's national ETS is the world's largest by emissions covered. Launched in 2021 after years of regional pilots, it covers more CO2 than any other carbon market. Its design and evolution will significantly shape global carbon pricing.
China's ETS at a Glance
| Feature | Details |
|---|---|
| Launch | July 2021 |
| Coverage | Power sector (coal and gas generation) |
| Emissions covered | ~4.5 billion tons CO2 (~40% of national total) |
| Entities | ~2,200 power generation companies |
| 2024 price | |
| Allocation | 100% free allocation |
| Trading | Spot market only (no futures yet) |
China's ETS covers more emissions than the EU ETS and California combined. Its development trajectory will significantly influence whether global carbon pricing achieves climate goals.
The Path to National ETS
Regional pilots (2013-2020):
Seven regional pilots in Beijing, Shanghai, Guangdong, Shenzhen, Tianjin, Hubei, and Chongqing tested different approaches:
- Varied scope and coverage
- Different allocation methods
- Diverse price levels ($3-15)
- Different trading rules
Lessons from pilots:
- MRV capacity building essential
- Data quality challenges significant
- Market liquidity varied widely
- Price volatility manageable
- Industry could adapt
National system development (2017-2021):
- 2017: National system announced
- 2019: Detailed rules developed
- 2020: First compliance cycle trading rules
- 2021: National market launched
Design Features
Coverage:
Currently power sector only, defined by:
- Annual emissions above 26,000 tons CO2
- Includes both coal and gas-fired generation
- Captive power plants included
Allocation:
100% free allocation using intensity benchmarks:
- Benchmarks based on fuel type and technology
- Allocation = Benchmark × Output × Compliance factor
- Output-based updating
Compliance:
- Annual compliance cycle
- Allowances surrendered based on verified emissions
- 100% compliance required
Trading:
- Spot trading only (no derivatives yet)
- National carbon trading center in Shanghai
- Electronic trading platform
China's ETS uses an intensity-based approach rather than an absolute cap:
How it works: Instead of setting a fixed total cap, China sets emissions intensity benchmarks (CO2 per MWh). Facilities receive allocations based on their output multiplied by the benchmark.
Implications:
- If electricity generation grows, total allowances grow
- No absolute emissions ceiling in the same sense as EU ETS
- Total emissions depend on economic growth
Why this approach?
- Accommodates continued economic development
- Avoids constraining energy supply
- Politically feasible for China's development stage
Trade-off:
- Less environmental certainty than absolute cap
- May not constrain total emissions in growth scenarios
- But still creates incentive for efficiency improvement
Evolution: As system matures and capacity develops, China may transition toward absolute caps, potentially aligned with carbon neutrality goal.
Price Levels and Trading
Prices have been lower than major Western systems:
| Period | Price range (CNY) | Price range (USD) |
|---|---|---|
| 2021 H2 | 40-60 | $6-9 |
| 2022 | 50-65 | $7-9 |
| 2023 | 60-80 | $8-11 |
| 2024 | 70-90 | $10-13 |
Trading activity:
- Generally thin trading (low liquidity)
- Concentrated around compliance deadlines
- Limited participation beyond compliance buyers
- No financial participants yet
Challenges and Development
MRV capacity:
Building monitoring, reporting, and verification capacity for thousands of facilities was a major undertaking:
- Training facility staff
- Developing verifier capacity
- Creating data systems
- Quality assurance
Data quality:
Early compliance periods revealed data quality issues:
- Some facilities underreported emissions
- Verification protocols being strengthened
- Penalties increased for data falsification
Market development:
The market remains underdeveloped compared to EU ETS:
- Limited trading outside compliance needs
- No futures market
- Few market intermediaries
- Price discovery limited
Future Expansion
China plans to expand coverage to additional sectors:
Near-term additions (2024-2025):
- Cement
- Aluminum
- Steel
Medium-term:
- Petrochemicals
- Chemicals
- Paper
- Aviation
Long-term vision:
- Economy-wide coverage aligned with carbon neutrality by 2060
China's Global Significance
China's ETS matters globally because:
Scale:
Covering more CO2 than any other system, China's ETS affects global carbon market dynamics.
Development model:
China's approach (pilots, gradual expansion, intensity-based start) may influence other developing countries.
Carbon neutrality commitment:
China's 2060 carbon neutrality goal requires significant ETS strengthening.
International linkage:
As the system matures, potential for international linkage emerges.
China's ETS is like a new highway system. The basic road is built and operational. But it is still being expanded (new sectors), upgraded (better data systems), and connected (potentially linked internationally). The infrastructure exists; development continues.
Looking Ahead
North America has taken different approaches to carbon pricing. The next lesson examines California, RGGI, and Canada's systems.