Carbon market to achieve climate goal

China must set a clear timetable to expand carbon market to achieve climate goal as progress has been disappointing, expert says

  • The progress of China’s carbon trading market has been disappointing, with volume and turnover lagging Europe’s market, Zhang Jinbai of Towngas Smart Energy says
  • Beijing should provide clarity on the allocation of carbon-reduction quotas, auction plans, toughen penalties and allow financial institutions to trade to lift liquidity, he says

China should set a clear timetable to expand the scope and robustness of its national mandatory carbon emission rights trading scheme, according to experts at a decarbonisation conference.

Progress of the cap-and-trade market’s growth has been disappointing, according to Zhang Jinbai, executive vice-president of Towngas Smart energy, the mainland-focused natural gas and renewable energy unit of gas distributor Hong Kong and China Gas.

Launched in July 2021, China’s national emissions trading scheme (ETS) is the world’s largest, covering 4.5 billion tonnes of emissions. It was designed using the European Union’s ETS as a reference.

However, its trading volume of around 220 million tonnes last year was the equivalent of only two weeks of the EU ETS’ volume, while the turnover of around €1.4 billion (US$1.5 billion) amounted to less than 0.2 percent of the EU market, Zhang noted.

“Some may say it is just the beginning of China’s ETS, but considering we had eight regional pilots in operation for more than 10 years and the EU ETS was thoroughly studied ahead of the China ETS launch, it is a bit disappointing,” he told a conference hosted by Hong Kong’s Business Environment Council on Thursday.

By 2030, the cap on emissions from sectors covered by the EU ETS is set to decrease by 62 percent compared with 2005 levels, according to the European Commission. Facilities covered have reduced emissions by about 35 percent between 2005 and 2021.

Zhang called on Beijing to announce soon a timetable for including seven more carbon-intensive sectors in addition to power generation, currently the only industry covered, to help reach its goals to peak emissions before 2030 and reach carbon neutrality by 2060.

The Ministry of Ecology and Environment had planned on expanding the ETS’ coverage to the cement and aluminium sectors last year, and adding oil refining, chemicals, steel, paper and aviation by 2025.

Beijing should provide clarity on annual reduction of quotas allocated and auction plans, toughen penalties for breaking rules, and remove a ban on financial institutions and investors’ participation to lift liquidity, Zhang said.

“Boosting the carbon market may not jeopardise the economic recovery, we just need a clear and serious timetable in order to be prepared,” he said.

Earlier this month, Towngas Smart Energy committed to peak its carbon emissions by 2029 and achieve carbon neutrality before 2045 for all of its operations, Zhang said.

It has a plan to grow its installed solar farms capacity from 1 gigawatt (GW) last year to 8GW in 2025 and 11GW in 2028.

This could allow the company to generate over 120 million tonnes of carbon credits between now and 2045, which it hopes to monetise in the voluntary carbon market, Zhang said.

However, it is uncertain whether renewable energy projects will be allowed to generate credits under the China Certified Emission Reduction (CCER) voluntary trading scheme. It was suspended in 2017 and a relaunch is pending an overhaul of rules.

Rapidly falling costs of renewable energy projects due to advancements in technology have raised questions whether they should be financially supported by carbon credits.

Challenges facing the voluntary market include high price volatility, opaqueness and instances of low quality credits due to mis-selling and misuse, Lydia Sheldrake, director of policy and partnerships of Voluntary Carbon Markets Integrity Initiative, told the conference.

“There is a general lack of transparency and trust which is hindering action,” she said, adding the non-profit initiative will launch late next month a code of practice for credit users.

One of the principles is the concept of “additionality”, under which credit revenues should only finance innovative technologies bringing climate mitigation above and beyond decarbonisation mandated by policies and corporate efforts already under way.

Market participants had hoped to trade CCER credits through Hong Kong’s carbon market launched last October, which aimed to connect decarbonisation projects on the mainland with international credit buyers.

Amid ongoing uncertainties around the CCER scheme, Hong Kong should create its own carbon credit products and establish an ecosystem for auditing credit, certification, issuance and trading, Zhang said.

“There are a lot of real emission reduction projects that may not be eligible for CCER credits but can contribute to real decarbonisation,” he said.

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