In its initial phase, the carbon market only covers some 2,200 coal and gas-powered energy firms. With combined CO2 emissions of 4.1 billion tons, China’s carbon market is the largest in the world. The European Union Emission Trading System (ETS) has around 1.6 billion metric tons of circulating allowances.
Compared to carbon markets in other countries and regions, the carbon price in China is relatively low, which many say is not enough to drive down emissions. The carbon price in the EU market reached over US$60, and the price of Australian Carbon Credit Units (ACCUs) is over US$15.
The price discrepancy is largely due to the design of China’s carbon market. Different to carbon trading schemes in other places, such as the EU market, which puts a cap on the total amount of carbon allowed, China’s scheme adopts a so-called “cap-and-trade” model, in which emitters are allocated a certain amount of emission allowances, or cap, which they can either use or trade.
The cap-and-trade model focuses on reducing the carbon intensity of emissions generation, rather than absolute emissions. An emitter’s initial emissions cap is issued based on current energy output and emission intensity, which refers to the amount of energy generated by each unit of carbon emitted.
The government is expected to restrict that over time so companies are encouraged to reduce the emissions they generate for the energy they produce. Under such a model, a company’s allowance can be increased if it increases energy efficiency.
“The rationale is that as the carbon price goes up, energy companies will invest more in increasing energy efficiency and renewable energy,” said Lin Boqiang, dean of the China Institute for Energy Policy Studies at Xiamen University. Lin said that under this model, the government controls the carbon price.
“The key factor is how many free carbon allowances the authorities issue to each emitter, which is a balancing act between the need for emissions reduction and economic development,” Lin added.
According to Zhang Xiliang, executive director of the Institute of Energy, Environment and the Economy at Tsinghua University and chief designer of the carbon market, the design is in line with China’s carbon emissions target of peaking carbon in 2030 and achieving carbon neutrality by 2060.
“Based on our estimate, the marginal cost of reducing emissions in China is US$7 per metric ton,” Zhong told NewsChina. “The current market price of over US$8 is effective in providing an incentive for energy firms to cut emissions.” Zhang said he expects the carbon price will remain between US$8-10 up to 2025 and will reach US$15 by 2030.
A 2020 report on carbon pricing in China by China Carbon Forum, ICF International, an industrial consulting firm and sinocarbon. cn, projects that the carbon price will reach 93 yuan (US$14.4) by 2030 and 167 yuan (US$25.8) per metric ton by 2050.