China launches its national emissions trading system. The power sector comes first

On Friday 16 July 2021 trading began in China's national emissions trading system (ETS). The system initially covered the power sector — over 2000 generating companies whose combined emissions are about 4.5 billion t of CO₂ a year. According to the Ministry of Ecology and Environment, the new market surpasses the EU system and becomes the largest mechanism of its kind in the world.

Who is covered

The government says the market covers “over 2000” companies in the power sector and about 4.5 billion t of CO₂ a year. Reports from the first days spoke of about 4 billion t, and the exact number of participants varies between sources (see the update note). Further industries are to join the system later: the ministry announced seven additional high-emission sectors, including steel, chemicals and paper.

The first day of trading

According to data from the Shanghai Environment and Energy Exchange, on the first day of trading, 16 July, about 4.1 million t of allowances were sold with a total value of about 210 million yuan. The opening price was 48 yuan, the daily upper limit 52.8 yuan, and the average price of the day 51.23 yuan (about USD 7.90) per tonne. By comparison, the weighted average price in the pilot systems in recent years was about 40 yuan.

How the system works

Unlike the EU ETS, the Chinese one is based on free allocation of allowances according to production benchmarks (emission intensity), not on an absolute cap. A company that emits more than its allocation must buy the missing allowances, and one that emits less can sell the surplus. As a result the system improves efficiency but does not limit the absolute sum of emissions.

Significance for biogas and waste

At launch the system covered only companies in the power sector. Credits from projects that reduce emissions (including methane) are to be the subject of a separate mechanism, but we do not analyse its details in this post.

What this means for Poland/Europe

The Chinese ETS affects the European system indirectly — through the discussion on competitiveness and the CBAM mechanism. For the biogas industry it is a signal that the price of emissions is becoming an increasingly global policy tool, although price levels in the EU and China may differ significantly.