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China's 'monumental' new emissions trading scheme

The carbon market initially will cover China's energy sector before expanding over the coming years.

On Tuesday, China announced further details of its forthcoming national emissions trading scheme (ETS), revealing the rollout will start in the energy sector before full implementation from 2020 onwards.

In a move that campaigners hailed as a "monumental" step in the global fight against climate change, the Chinese government confirmed the long-awaited ETS — trailed last week at the One Planet Summit in Paris — will create the world's largest carbon market once it comes into operation, dwarfing Europe's ETS in size and scope.

The cap-and-trade scheme will see high emitting companies buy and sell emissions credits below a defined, gradually declining limit. The market is set to initially cover around 3.5 billion metric tonnes of carbon from 1,700 stationary sources across China's power sector, including the country's coal plants.

The scope means the ETS initially will account for around 34 to 39 percent of China's total emissions before gradually expanding to also include other high emitting industries such as aluminum and cement in the coming years. The scheme is also expected to grow to include the heating sector, with China announcing a five-year plan to convert northern cities to clean heating during the winter through to 2021 in order to avert a deepening heating crisis, according to Reuters.

The world has never before seen a climate program on this scale.

Green NGO the Environment Defense Fund said that by the time the program is fully implemented from 2020, it is expected to cover some 5 billion metric tons of CO2, which would account for a sizable chunk — roughly 15 percent — of total global emissions.

"The world has never before seen a climate program on this scale," said EDF president Fred Krupp. "It is important that the world's largest emitter should lead on climate, and that is precisely what China is doing by launching its national emissions trading system. China has stepped up its climate leadership dramatically in recent years, and is now increasingly seen as filling the leadership void left by the U.S."

Initially, nine regions and cities, including Jiangsu, Fujian and seven regions where pilot schemes have been operating, will coordinate to establish the ETS system, Reuters reported. The intention is that the market will become the primary mechanism for ensuring China remains on course to peak its total emissions by 2030 at the latest, in line with the country's Paris Agreement pledges.

However, there are still no firm details as to precisely when trading in the long-awaited carbon market actually will begin, nor a timetable for the phase-in of other industries. Chinese media site Shoudian reported that is "probable" that formal trading will not start until 2019, but officials are yet to provide an official start date.

Having begun piloting emissions trading programs four years ago, China's President Xi Jinping had promised to launch the cap and trade program before the end of 2017.

Some commentators have suggested the lack of clarity is because China is still not ready to launch the ETS. Having begun piloting emissions trading programs four years ago, China's President Xi Jinping had promised to launch the cap and trade program before the end of 2017. But analysts have warned much of the technical infrastructure required for a national rollout is still not in place.

However, in a statement, Krupp said it was "smart" for China to take its time over developing and gradually phasing in the scheme. "Chinese leaders have drawn lessons from the experience of other countries, and they're moving in a gradual and sure-footed way to make sure they get this right," added Krupp. "I think that's smart."

It is also not yet known what price will be placed on carbon emissions to start with, although some have estimated the initial price could be $7.50 per ton of emissions, with a longer-term aim for the figure to rise to around $45 per ton.

Critics of the EU ETS long have argued that it has failed to deliver on its early promise because a glut of emissions credits has led to low carbon prices. However, supporters of the scheme have countered that it has normalized the practice of carbon pricing and has encouraged investment in energy efficiency measures and the switch away from carbon intensive coal power.

Commentators said China's new market will form part of a global trend. Once China's system launches, there will be 19 carbon trading systems operating globally, covering almost half of the world's economic output.

The launch of China's scheme will fuel hopes it could in future link up with other markets operating elsewhere, such as in the EU and California.

Jonathan Grant, director of the climate change team at PWC U.K., welcomed the news as a "massive step forward in China's efforts to tackle emissions — and one that could have global ramifications," but he stressed the importance of ambitious policy to ensure the ETS is effective.

"China's action could reduce concerns about competitiveness which is often a barrier to implementing climate policy in other countries," said Grant in a statement. "For the trading system to be effective, the NDRC [China's state planning commission] will need to set an ambitious emissions cap, roll-out the trading system to other sectors and allow the price to flow through to consumers. Carbon pricing regulation has been implemented in many countries around the world, but to reduce emissions, prices need to be high enough to prompt companies to change their investment decisions and operations."

The launch of China's scheme will fuel hopes it could in future link up with other markets operating elsewhere, such as in the EU and California.

Last week, national state leaders across North and Central America announced a declaration promising greater cooperation on carbon trading. Together Canada, Colombia, Costa Rica, Chile and Mexico pledged to set up a working group with a view to developing a common framework to deepen regional integration of carbon markets throughout the region. The declaration was also signed by the governors of California and Washington and the premiers of Alberta, British Columbia, Nova Scotia, Ontario and Quebec.

Moreover, a new $11.9 million, three-year EU-China cooperation project on emissions trading started just a few weeks ago.

Miguel Arias Cañete, EU Commissioner for Energy and Climate Action, also welcomed China's announcement. "As the U.S. government turns its back on the fight against climate change, China, the EU and many others are forging ahead with strong climate policies and measures," he said in a statement. "This major announcement sends a very strong signal: the world is changing with new, broad climate leadership. With both the EU and China committed to emissions trading, two major international players are championing carbon markets as a key policy tool to curb emissions and put a price on carbon."

With specific details of China's ETS and rollout timetable still unknown, it remains to be seen just how ambitious or rapid the decarbonization of the world's second largest economy will be over the coming years. Nevertheless, China has sent a strong signal that carbon is a pollutant that industrial emitters must pay for, and many will hope the move could prompt other governments to move in the same direction.

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