Over the next several years, pilot programs were launched in eight cities and provinces—Beijing, Shanghai, Chongqing, Shenzhen, Hubei, Tianjin, Guangdong and Fujian. See discussion of these pilot programs below. As these pilot programs were being launched, Chinese experts conducted extensive research on how best to design emissions trading programs, often drawing on experiences in other countries around the world.
- China’s Emissions Trading Scheme.
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Chinese experts began working with experts from California, the European Union and other jurisdictions. Thousands of Chinese emissions trading specialists received training in these programs. Several of these programs continue today. In September , President Xi Jinping announced that the Chinese government would launch a national CO 2 emissions trading program by the end of The announcement was made three months before the Paris climate conference, at a summit meeting with US President Barack Obama. Once the carbon market for the power generation sector is successfully established, the market shall gradually expand to cover other sectors, trading products and trading types.
Power sector entities that emit more than 26, tons per year of CO 2 are subject to the plan. CO 2 emissions from these entities are roughly 3 Gt per year. The largest emissions trading program in the world today, run by the European Union, covers approximately 1. Once the emissions trading program is operational, covered entities will be required to surrender allowances each year to match their emissions. Entities will be allowed to sell surplus allowances and buy allowances to cover any shortfall.
Entities that fail to surrender sufficient allowances will be subject to penalties. Retirement of coal-fired power plants in China will have to move beyond small plants and increasingly focus on large, as well as aging, CHP plants. Repurposing existing efficient supercritical and ultra-supercritical electricity-only units to CHP could be an alternative way to avoid the construction of new CHP units. Regulation and market-based measures could be mutually supportive ways to reduce CO 2 emissions significantly in the medium to long term.
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Based on experience elsewhere, covered companies will also build up carbon management capacity and integrate a carbon cost for their medium- to long-term decision making. The chosen allowance allocation, output-based and relying on benchmarks, will create incentives to increase the efficiency of existing coal-fired power plants. In the short term, the ETS creates an incentive for high-emission coal plants to improve their CO 2 emission factor, for example by investing to improve efficiency or by burning higher-quality coal.
It could also encourage companies to shift generation from less efficient to more efficient plants within their portfolio. In the longer term, the ETS will motivate companies to shift investments from subcritical or even less efficient plants to supercritical and ultra-supercritical plants.
In addition, the ETS would favour the phase-out of smaller and less-efficient circulating fluidised bed CFB , high pressure and subcritical coal plants. The CO 2 fuel factor the amount of CO 2 emitted per unit of fuel that is used for monitoring emissions from coal will be decisive for the stringency of the entire ETS given the dominance of coal-fired power plants. A high default factor is applied to plants that do not monitor their CO 2 fuel factor, which is a good incentive to improve monitoring.
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However, the more units are monitored, the higher the surplus of emissions allowances will be, as monitored fuel factors will be well below the default value. Among the benchmark options currently considered by Chinese regulators, a single benchmark for conventional coal Option 1 would result in a more stringent ETS than two benchmarks differentiated by plant size Option 2 1. Moreover, two benchmarks may produce counterproductive outcomes by encouraging generation from less efficient plants covered by a weaker benchmark, rather than from more efficient ones covered by a more stringent benchmark.
The benchmark values are the most lenient for larger conventional coal-fired power plants, no matter the option or whether fuel factors are monitored. This results in an overall allowance surplus. For each allowance allocation option, the analysis examines three cases of CO2 fuel factor monitoring by coal-fired units. The scale of the surplus will depend on the average monitored value of the CO2 fuel factor for the coal fleet, which may differ slightly from the assumed value. Distributional questions on a provincial level arise as units in some provinces generate large allowance surpluses, while others generate large deficits.
Policymakers should pay close attention to the large extremes of allowance surplus and deficits on a provincial and company level, especially for the ten provinces and five state-owned power companies with the largest coal-fired power capacity. The ETS needs to be designed so that it can be adjusted and adapted to policies that affect its functioning. For example, any rapid changes in the capacity mix — such as a plan to retire large amounts of coal-fired power capacity over a short period e.
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The effectiveness of the ETS will be closely related to progress with power market reform, in particular for power dispatch. Without a reform of dispatch, the ETS will have a limited role in reducing power sector emissions, because coal-powered units will not be able to adjust their operation in response to the price signal stemming from the ETS allowance allocation.
A clean energy transition of the power sector will also require policies that support low-carbon energy generation. Since the current ETS covers only coal- and gas-fired power plants, it will have limited influence on reducing the share of coal power in the total generation mix. Entities can receive surplus allowances for their supercritical and ultra-supercritical plants, but currently receive no surplus by investing in low-carbon power technologies such as renewables.
This situation may even have the perverse outcome of making the most efficient coal power plant more economically competitive than renewables. The benchmarks for coal-fired power plant CO 2 emissions should be enhanced to better reflect the expected policy ambitions regarding the existing coal plant fleet and to avoid significant overallocation of allowances, which would jeopardise the functioning of the ETS. Second, it supports stakeholders ministries, companies, financial institutions through capacity building and stakeholder management processes, so that they can assume their roles and responsibilities in the market.
Third, it facilitates learning through international dialogue and exchange with jurisdictions that have already implemented an ETS. At the same time, lessons learnt in the Mexican context will be disseminated at the international level. The country is currently looking at opportunities and costs for emissions reductions in order to define well-suited policies and measures for achieving these targets.
The energy and industrial sectors play an important role in reducing greenhouse gas emissions, therefore finding cost-effective mitigation instruments for these sectors is crucial to promote low-carbon development, reduce emissions, and at the same time promote economic growth, that is, decouple emissions from growth. This program will contribute to the compliance of the Mexican sectorial commitments for low-carbon development.
Germany has over ten years of experience with Emissions Trading and Emissions Reports. A limit of overall emissions in one or more economic sectors is defined and reduced year by year.
UPDATE 1-China expects first trade in national emissions scheme in 2021
Through this mechanism, companies have the flexibility to minimize their emissions in the most cost-efficient way and where it is cheapest. The instrument, therefore, contributes to changing the behavior of producers, consumers and investors in order to reduce emissions.
At the same time, the inherent market mechanism provides flexibility to decide who takes actions, when, and which actions to take. Having been the first of its kind, it inspired and continues to inspire the development of other national or regional schemes. Mexico is not alone in its endeavor. Germany has already assisted Mexico in setting up a National Emissions Registry RENE , a database that collects information on GHG emissions from all major GHG emitting sectors, like energy, industry, transport, and others, particularly from entities with emissions over 25, tons of CO2eq.