National Carbon Market Tool to Achieve China's Low Carbon Transition

Mon 08 Feb, 2021 - 8:08 PM ET

The operational phase of China’s national emission trading scheme began on 1 February 2021, starting with 2,225 entities in the power sector. The first compliance cycle requires entities to report and verify 2019-2020 emissions, which, along with carbon intensity and other variables, will determine their free allowance llocation. Entities whose emissions exceed the free allocation will be required to purchase an allowance in the open market. Trading is targeted to begin in mid-2021.Allocation Plan to Encourage Efficiency: Initially, carbon allowances will be allocated based on four carbon intensity benchmarks and will depend on the power generator’s size and fuel type. This multi-benchmark approach differs from the absolute emissions cap used by the European ETS and should improve efficiency rather than substitution across fuel sources. Fitch expects a shift to a single benchmark over time as well as the introduction of absolute emission constraints.Rules Will Tighten to Meet Emission Pledges: The initial effect of the ETS is likely will be limited, as compliance obligations are capped at 20% of verified emissions above the free allowance. However, we expect the rules to become stricter and for obligations to increase as the ETS becomes fully functional and policymakers step up efforts to meet emission pledges. This is due to policymakers using the initial phases of the ETS to explore the market mechanism and test the market infrastructure. China has pledged to achieve a 65% reduction of carbon intensity per GDP unit by 2030 and net-zero emissions by 2060.

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