China launched its long-awaited emissions trading system on Friday, a key tool in its quest to drive down climate change that causes greenhouse gases and become carbon neutral by 2060.
The system was launched with China, the world’s largest carbon dioxide emitter, trying to take a global leadership role in the climate crisis ahead of a crucial UN summit in November.
China has hailed it as laying the groundwork for what would become the world’s largest carbon trading market, forcing thousands of Chinese companies to reduce their pollution or face deep economic hits.
The program was launched just a few days after the European Union presented its detailed plan to achieve carbon neutrality by 2050.
However, deep questions remain about the limited scope and efficiency of China’s original emissions trading system, including the low price of pollution.
More generally, analysts and experts say that much more needs to be done if China is to achieve its environmental goals, which includes reaching peak emissions by 2030.
China first announced plans for a nationwide carbon market a decade ago, but progress has been hampered by the influential coal industry lobby and policies that prioritize economic growth over the environment.
The system will set pollution ceilings for large power companies for the first time and enable companies to buy the right to pollute from others with a lower carbon footprint.
The market will initially cover 2,225 large power producers that generate about one-seventh of global carbon dioxide emissions from fossil fuel combustion, according to data from the International Energy Agency.
These power producers account for 30 percent of the 13.92 billion tons of geothermal gases destroyed by Chinese factories in 2019.
Citigroup estimates that $ 800 million worth of credit will be purchased for this year, rising to $ 25 billion by the end of the decade.
That would make China’s trading system about a third the size of Europe’s market, currently the largest in the world.
The system was originally expected to be much larger in scope and cover seven sectors including aviation and petrochemicals.
But the government “reduced its ambitions” because economic growth took precedence over the pandemic-induced slowdown, according to Lauri Myllyvirta, a leading analyst at the Center for Research on Energy and Clean Air.
“China’s coal, cement and steel production has increased as the government pours billions of dollars into energy-intensive sectors to increase growth following the pandemic,” Myllyvirta said.
“Emission control rules will disrupt this growth model.”
Another concern for environmental activists is the low price China is putting on pollutants.
The opening trade in the Shanghai market started at 52.7 yuan ($ 8) per tonne of coal on Friday morning.
The average carbon price in China is only expected to be around $ 4.60 this year – well below the average EU price of $ 49.40 per tonne, Citic Securities said in a new research note.
Free pollution permits issued in the beginning and symbolic fines for non-compliance would keep prices low, according to the analysis company TransitionZero.
However, China has characterized Friday’s launch as just the first step.
The system will be expanded to include cement producers and aluminum producers from next year, said Zhang Xiliang, chief designer of the system, last week.
“The goal is to expand the market to cover as many as 10,000 emissions, which are responsible for an additional 5 billion tons of coal per year,” Zhang said.
Chinese state media have also pointed out that the current version is already the world’s largest market when judged by the amount of greenhouse gas emissions covered, rather than market value.
Other problems with the system are that a lack of technical knowledge and continued pressure from the strong coal and steel lobby can slow down progress.
Local officials and companies know little about emissions reporting or even the basics of climate science, says Huw Slater of the China Carbon Forum.
And regions that depend on coal and carbon-intensive industries for growth have been slow to join the program.
“Officials are afraid that if they limit pollution too quickly, it could reduce jobs and lead to social unrest,” Slater said.