What China could learn from EU carbon market development
By Zhang Jianyu |
China Watch |
Updated: 2018-07-17 13:37
Climate change is one of the biggest global challenges facing the 21st century, affecting the survival and development of all mankind. The Paris Agreement reaffirmed the goal of keeping the global temperature rise well below 2 degrees Celsius above the pre-industrial levels and demonstrated the commitment of the international community to address the climate challenge. In their national climate action plans, 40 percent of countries showed willingness to use some form of market mechanisms to achieve their emission reduction targets.
At present, there are 21 regional carbon markets operating in the world, covering 51 countries, states and provinces and accounting for 15 percent of global carbon emissions.
The European Union set up the world’s first major carbon market the EU Emissions Trading System (ETS) in 2005, which is now operating in 31 countries (all 28 EU countries plus Iceland, Liechtenstein and Norway). It limits emissions from more than 11,000 heavy energy-using installations and airlines and covers around 45 percent of the EU’s overall greenhouse gas emissions, making the ETS the largest running of its type in the world. China views carbon emissions trading markets as an important approach to fulfill its emission reduction commitment. Since 2011, China started carbon market pilots in seven cities and provinces and launched its national emission trading system on Dec 19, 2017.
According to the National Carbon Market Establishment Working Plan (Power Generation Industry),China’s national carbon market will start with the power generation sector and cover approximately 1,700 enterprises in the power generation industry, accounting for approximately 3.5 billion tons of emissions, which will make it the largest in the world once it is up and running. The EU’s 13-year experience in ETS development will undoubtedly provide China many valuable lessons and vice-versa.
An absolute emission cap: Cap setting is crucial to ensure emission reduction targets are met and to avoid over-allocation. To achieve its climate action target of 20 percent of overall emission reduction by 2020 and 40 percent overall emission reduction by 2030, the EU set a linear emission factor of 1.74 percent each year since 2013 and a further reduction factor of 2.2 percent annually since 2021. A strong cap ensures that overall emissions do not exceed the cap and thus avoid the risk of dramatic price volatility. Meanwhile, expected future capping is also an important driver of low carbon innovation. At the beginning stage, China’s ETS is expected to follow an intensity approach and use a decreasing benchmark in allowance allocation. This is a compromise of many factors but for a healthy development of ETS in the long run, an absolute emission cap is needed.
Legislation first: Legislation is a paramount mission of the EU’s ETS construction. Prior to the start of the EU ETS, the European Commission adopted a EU ETS Directive in 2003 and established the legal foundation of its carbon market. The directive made clear mandates regarding the EU ETS’s scope, implementation procedure, monitoring, reporting, verification, registration, compliance, and other regulations. In the following years, the directive had several amendments to guide the expansion of the market. In addition, a series of regulations, reports and working documents with the directive together established the legal system of the EU ETS. A unified, consistent and sound legal system enables the EU to carry out equal regulations in each member state, and also significantly enhances confidence among market participants.
The critical challenge to China’s ETS development is that so far there’s no dedicated national level laws or regulations on the carbon market. In the absence of a National Carbon Emission Decree, it’s really challenging for China’s ETS to establish strong enforcement and penalties to provide a leveled playing field and market sustainability.
From free allocation to auctioning: In the first few years of the EU ETS, emissions allowances were given out to participants for free. The amount of allowance issued to each participant was based on estimated, not measured, emissions and economic forecast. This arrangement had its historical constraints, however unmeasured allowances combined with free allocation proved to be risky. The EU ETS experienced severe structural over-allocation and resulted in price volatility. To tackle these challenges, the EU launched an allocation reform, gradually transferred free allowance allocation to auctioning. Comparing to free allocation, auctioning is a more transparent approach, which could more faithfully reveal the supply and demand situation and provide extra funding to support low-carbon development and technology innovation. In the initial stage, free allowance is the least-resistant approach to get the market started but when the market grows more mature, auctions should be given more consideration and be gradually phased-in.
As the world’s two largest carbon markets, China-EU carbon market cooperation has tremendous potential and has won strong support from leaders of both sides. In the 2015 China-EU Joint Statement on Climate Change, the two sides agreed to further enhance existing bilateral cooperation on carbon markets and work together in the years ahead on the issues related to carbon emission trading.
The ETS was again addressed in the most bilateral cooperation between China and some EU member states and is hopefully be strengthened in coming China-EU agreements. China and the EU are both firm advocators for global climate governance and green and low carbon development. Further and more progressive carbon market cooperation can not only contribute to the two’s partnership of peace, growth, reform and civilization, but also act as a positive effect to building a community of shared future for all mankind.
ZHANG JIANYU is chief representative of the China office of the Environmental Defense Fund. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.
All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.
Climate change is one of the biggest global challenges facing the 21st century, affecting the survival and development of all mankind. The Paris Agreement reaffirmed the goal of keeping the global temperature rise well below 2 degrees Celsius above the pre-industrial levels and demonstrated the commitment of the international community to address the climate challenge. In their national climate action plans, 40 percent of countries showed willingness to use some form of market mechanisms to achieve their emission reduction targets.
At present, there are 21 regional carbon markets operating in the world, covering 51 countries, states and provinces and accounting for 15 percent of global carbon emissions.
The European Union set up the world’s first major carbon market the EU Emissions Trading System (ETS) in 2005, which is now operating in 31 countries (all 28 EU countries plus Iceland, Liechtenstein and Norway). It limits emissions from more than 11,000 heavy energy-using installations and airlines and covers around 45 percent of the EU’s overall greenhouse gas emissions, making the ETS the largest running of its type in the world. China views carbon emissions trading markets as an important approach to fulfill its emission reduction commitment. Since 2011, China started carbon market pilots in seven cities and provinces and launched its national emission trading system on Dec 19, 2017.
According to the National Carbon Market Establishment Working Plan (Power Generation Industry),China’s national carbon market will start with the power generation sector and cover approximately 1,700 enterprises in the power generation industry, accounting for approximately 3.5 billion tons of emissions, which will make it the largest in the world once it is up and running. The EU’s 13-year experience in ETS development will undoubtedly provide China many valuable lessons and vice-versa.
An absolute emission cap: Cap setting is crucial to ensure emission reduction targets are met and to avoid over-allocation. To achieve its climate action target of 20 percent of overall emission reduction by 2020 and 40 percent overall emission reduction by 2030, the EU set a linear emission factor of 1.74 percent each year since 2013 and a further reduction factor of 2.2 percent annually since 2021. A strong cap ensures that overall emissions do not exceed the cap and thus avoid the risk of dramatic price volatility. Meanwhile, expected future capping is also an important driver of low carbon innovation. At the beginning stage, China’s ETS is expected to follow an intensity approach and use a decreasing benchmark in allowance allocation. This is a compromise of many factors but for a healthy development of ETS in the long run, an absolute emission cap is needed.
Legislation first: Legislation is a paramount mission of the EU’s ETS construction. Prior to the start of the EU ETS, the European Commission adopted a EU ETS Directive in 2003 and established the legal foundation of its carbon market. The directive made clear mandates regarding the EU ETS’s scope, implementation procedure, monitoring, reporting, verification, registration, compliance, and other regulations. In the following years, the directive had several amendments to guide the expansion of the market. In addition, a series of regulations, reports and working documents with the directive together established the legal system of the EU ETS. A unified, consistent and sound legal system enables the EU to carry out equal regulations in each member state, and also significantly enhances confidence among market participants.
The critical challenge to China’s ETS development is that so far there’s no dedicated national level laws or regulations on the carbon market. In the absence of a National Carbon Emission Decree, it’s really challenging for China’s ETS to establish strong enforcement and penalties to provide a leveled playing field and market sustainability.
From free allocation to auctioning: In the first few years of the EU ETS, emissions allowances were given out to participants for free. The amount of allowance issued to each participant was based on estimated, not measured, emissions and economic forecast. This arrangement had its historical constraints, however unmeasured allowances combined with free allocation proved to be risky. The EU ETS experienced severe structural over-allocation and resulted in price volatility. To tackle these challenges, the EU launched an allocation reform, gradually transferred free allowance allocation to auctioning. Comparing to free allocation, auctioning is a more transparent approach, which could more faithfully reveal the supply and demand situation and provide extra funding to support low-carbon development and technology innovation. In the initial stage, free allowance is the least-resistant approach to get the market started but when the market grows more mature, auctions should be given more consideration and be gradually phased-in.
As the world’s two largest carbon markets, China-EU carbon market cooperation has tremendous potential and has won strong support from leaders of both sides. In the 2015 China-EU Joint Statement on Climate Change, the two sides agreed to further enhance existing bilateral cooperation on carbon markets and work together in the years ahead on the issues related to carbon emission trading.
The ETS was again addressed in the most bilateral cooperation between China and some EU member states and is hopefully be strengthened in coming China-EU agreements. China and the EU are both firm advocators for global climate governance and green and low carbon development. Further and more progressive carbon market cooperation can not only contribute to the two’s partnership of peace, growth, reform and civilization, but also act as a positive effect to building a community of shared future for all mankind.
ZHANG JIANYU is chief representative of the China office of the Environmental Defense Fund. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.
All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.
