China’s Carbon Emission Trading Scheme and its Implications for Businesses

December 16, 2021
  • Lin Wang portrait

    Lin Wang

    Director, Transformation, BSR

  • Paris Zhang portrait

    Paris Zhang

    Associate, Shared Services, BSR

  • Olivia Li portrait

    Olivia Li

    Manager, Transformation, BSR

Since its inauguration in July 2021, China’s national Emission Trading Scheme (ETS) has become the world’s largest emission trading system, its accumulated trading volume exceeding 800 million Yuan. What exactly is the national ETS? What will likely be the key trends for the sustainability world to watch, and what will be its impact on companies?

What is China’s National Carbon Emission Trading Scheme?

The ETS, a critical part of China's plans to use market mechanisms to reach peak emissions before 2030 and net zero by 2060, puts a price on emitting carbon. It provides financial incentives to companies which reduce emissions by allotting credits to those who pollute below their allowances, while requiring those who go beyond their limit to purchase additional credits.

The scheme currently covers only one sector: power and electricity. With more than 2,000 power plants, the sector is responsible for over 4 billion tons of CO2 emissions per year, about 30-40 percent of the national total. This alone amounts to around 10-15 percent of global CO2 emissions.

The expanded scheme will cover a total of eight sectors (power generation, petrochemical, chemical, building materials including cement, steel, non-ferrous metals, pulp and paper, and aviation) in the coming years. Institutional and individual investors will also be covered. However, the government has not yet unveiled an official roadmap or timetable for expansion.

The national ETS market is still at an early stage, the overall trading volume is limited compared to the size of China’s economy, and trading prices are showing fluctuations. However, key enterprises have been pushed to start their journey toward carbon management, from carbon accounting and reporting to carbon reduction target- and goal-setting. The Ministry of Ecology and Environment (MEE) has also revealed that it plans to publish the Interim Regulations on the Management of Carbon Emissions Trading in the near future.

From Regional Pilots to a National ETS

Since 2011, China has piloted ETS in eight different cities and provinces (Beijing, Shenzhen, Shanghai, Guangdong, Tianjin, Hubei, Chongqing, and Fujian) to see if China can use market mechanisms to regulate carbon emissions and to prepare for the national ETS.

These pilot ETS have some features in common but vary considerably in their approach on some issues, such as the coverage of sectors, allocation of allowances, local policies, and management of noncompliance. For example, while the Beijing and Shenzhen markets cover business giants in the public transport and service sectors, the Shanghai market covers the hospitality, textiles, and financial sectors, and the Hubei market covers the automotive, healthcare, and ceramics sectors. These markets are all highly customized to regional industrial characteristics and conditions. These pilot markets were also given considerable leeway to design their own schemes.

Although their impacts on carbon emissions reduction and cost savings might be very limited so far, the regional pilots provided rich references and lessons for the national ETS.

What Can We Expect from the National ETS, and What are Its Potential Impacts on Business?

The national ETS will take several years to ramp up to full sectoral coverage. Current coverage of the power and electricity sector will have a limited impact on electricity costs since the market is mostly dominated by government-owned or operated companies. It will take years to generate real financial impact on companies and drive significant emissions reduction. But experts at the Shanghai Environment and Energy Exchange (SEEE) and the Climate Bonds Initiative see it as a signal to boost China’s overall climate action efforts. The process will also provide the foundation for developing and improving many other carbon policies.

In the coming years, the legislative basis of the ETS will be further strengthened, both to establish a legally binding commitment as a cornerstone of the scheme and to turn the current ETS, which is more of a governmental administrative intervention to control CO2 emissions, into a market-based approach.

Actual business impacts will also need to be weighted together with the provincial and sectoral dual carbon plans and roadmaps (to be released at the end of 2021) and other carbon-related policy developments. 

In this regard, it will be hard to predict the price impact of ETS on a final product that will include multiple layers of materials, components, industries, and production inputs. That will be further challenged by different regional policies with regards to the readiness and implementation road map; e.g., a lighting product with glass, aluminum, wood etc., coming from different regions. Thus, it will be hard to predict price impacts clearly and simply. 

Nevertheless, China’s ultimate carbon emissions goal will not change, and the ETS will eventually take effect, and have a large impact on businesses over time. Therefore, businesses should prepare in advance through understanding and mapping relevant risks and opportunities as a first step.

This blog is part of a series examining the business impacts of China’s 14th Five-Year Plan, which has drawn great interest in the international community, from policymakers to business. To learn more, read our previous posts on what business can expectChina’s climate goals, and impacts for investors.

BSR’s China team continues to track and analyze the plan’s potential business impacts.  If you are interested in learning more about how BSR can help shape your China strategy, please reach out to speak with someone on our team.

Let’s talk about how BSR can help you to transform your business and achieve your sustainability goals.

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