- Fueled by Xi’s decarbonization promises and after much testing, China introduced its national ETS in July 2021. It put much hope into this market-based solution to steer the economy towards renewable energy and energy efficiency.
- The current scope is confined to 2,200+ power plants applying a “cap and trade” principle. This covers 43% of China’s total carbon emission, reaching a market size similar to the EU’s ETS.
- So far, however, trading volume is modest and trading price is low: the large amount of freely-allocated emission allowances, unclear penalties for non-fulfillment, and lack of access for financial investors add up to a slow start of China’s ETS.
- To be a real driver of decarbonization, China’s ETS needs to develop into a vibrant market. This would mean: decrease free allowances, expand to other carbon-intensive sectors like steel and cement, and open up for institutional investor participation.
- However, Qinghua University estimates that on the current roadmap the carbon price will reach a mere 100CNY/ton by 2030 in China (now 45 CNY/ton), lagging far behind the current price in Europe.
- Potential impacts: Increasing carbon emission costs can sharpen the competitive edge of foreign companies’ that have already invested in low-carbon solutions.
- However, the carbon price discrepancy between China and Europe may damage China’s trade with EU under the planned “Carbon Border Adjustment” mechanism.
Sinolytics is a European consulting and analysis company that focuses entirely on China. It advises European companies on strategic orientation and specific business activities in China.