China starts national emissions trading

China is set to launch the world’s largest emissions trading scheme. It will be limited initially to the energy sector.

After many years of preparation, China’s Ministry of Ecology and the Environment (MEE) announced the start of the first compliance period for the national emissions trading scheme (ETS) on 5 January 2021. Legislation establishing the ETS entered into force on 1 February, and now requires 2,225 companies in the Chinese energy sector to measure their emissions and submit an emissions permit for every tonne of CO₂ that they emit. Accounting for around 3.5 gigatonnes of CO₂ annually, the Chinese emissions trading scheme is therefore larger than the European EU ETS.

Initially, permits will be allocated based on benchmarks and at no cost. Companies whose permits are insufficient must purchase emissions permits from other companies. Together, these transactions work to create a price for CO₂ emissions in China. The scheme is a milestone both for Chinese climate policy and for climate change mitigation efforts worldwide.

While China’s President Xi Jinping announced the launch of the scheme for 2017 in the run-up to the Paris Climate Change Conference, this announcement remained largely symbolic due to the ensuing delays in preparations. Even with the entry into force of the new law, actual trading will not actually begin for a few months – work finalising both the trading platform and the emissions registry is still underway.

Chinas national emissions trading scheme is part of its NDC

Setting up the national emissions trading scheme is an integral part of China’s nationally determined contribution (NDC) pledged with the Paris Agreement and also aims to provide cost-effective support for achieving the country’s climate goals. In September 2020, Xi Jinping announced that China’s CO₂ emissions would peak before 2030, with the country achieving carbon neutrality by 2060. To meet these goals, China’s ETS will be further expanded in the future and will also need to be developed into a more ambitious system. The MEE has already announced plans to extend the system step by step to other industrial sectors as well as civil aviation.

Since 2012, the International Climate Initiative (IKI) at the German Federal Environment Ministry (BMU) has been assisting China’s development of its ETS as part of the project ‘Capacity building for supporting the establishment of a national emissions trading scheme (ETS) in China’ managed by the Deutsche Gesellschaft für internationale Zusammenarbeit (GIZ). While the first phase concentrated on the regional pilot emissions trading schemes, the project is now focussing on the national scheme. Alongside knowledge transfer and advice on scheme design, over 5,000 individuals from Chinese environmental agencies and commercial enterprises received training in implementing  the national emissions trading scheme. In 2020, the BMU and MEE agreed to expand the thematic scope of the IKI project and continue their partnership until September 2022. To reflect this new remit, the project was also retitled as the ‘Sino-German cooperation on emissions trading, market mechanisms and mitigation of industrial N₂O emissions.'