China officially launched its emissions trading scheme (ETS) in February 2021. Years of negotiations, planning, and pilot testing have underpinned this long-awaited programme. It also comes at a critical time for the Chinese government, which last September announced that the country would reach carbon neutrality by 2060.
The new scheme only applies to the thermal power sector, the vast majority of which is coal-fired. 2,225 power plants are signed up for the scheme. While this is less inclusive than the government’s previous plans, it still covers a remarkable amount of carbon emissions. It is the world’s largest ETS, estimated to encompass approximately 40% of China’s and 12% of global emissions. The first compliance period began in 2021, and official trading is expected to begin imminently.
China’s ETS is different than most because it relies on emissions intensity benchmarks, rather than a cap on overall emissions. The distribution of allowances is calculated based on the power plant’s output and the emissions intensity benchmark, so plants are not penalised for operating at high capacity. Instead, the system is designed to incentivise plants to run more efficiently. This goal is well aligned with other Chinese policies that prefer high efficiency, low emissions (HELE) coal plant technology. However, this accounting method means that emissions under the ETS will not necessarily decrease.
Despite its questionable effect on total emissions output, China’s ETS design does align with the country’s national climate goals. President Xi Jinping has pledged to reach peak emissions by 2030, then decline to net-zero by 2060. This timeline gives China extra time to adjust its economic approach, including further electricity market reforms, before reaching for more ambitious climate targets. The ETS design employs a similar strategy, starting with a weaker system to encourage voluntary compliance before potentially strengthening the requirements later on.
The next sector to join the scheme will likely be the refining and petrochemical sector, according to recent announcements from the government. However, the timeline for this expansion is still unknown. Future changes to the ETS will be a test of China’s commitment to responding to climate change: it will need a full system approach to meet its 2060 net zero target.