Challenges to investment
As one of the world’s most populous countries which has undergone rapid growth and industrialization, China faced significant challenges in controlling emissions and promoting clean energy alternatives in the late 2010s. In particular, China’s energy generation was highly depending on coal, which contributed significantly to carbon emissions. In addition, the size of the energy market created difficulties ensuring compliance and encouraging energy efficiency across diverse and widespread industrial sectors. China had already launched several pilot Emissions Trading Schemes (ETS) and other emissions reduction programs but lacked a unified national regulatory framework and carbon trading market.
Approach
To address these challenges, China announced its national Emissions Trading Scheme (ETS) in 2017, to be launched in 2020. The scheme aimed to create a market-based approach to controlling emissions. The scheme set a cap on emissions allowed for covered entities and allowed entities to trade emission allowances in the carbon market (cap-and-trade). To guide the development of the national ETS, the Ministry of Ecology and Environment (MEE) published the Interim Rules for Carbon Emissions Trading Management, a regulatory framework which detailed entities’ compliance requirements and trading mechanisms for the carbon market. The ETS initially covered 2,225 designated participating “key emission entities” based on their emissions over 2013-2018, comprising about 40% of China’s total carbon emissions. These participants, primarily from the power generation sector, namely coal and gas, were designated to encourage the clean energy transition. In 2021, the ETS was updated to better allocate allowances reflecting actual emissions, improve market stability and reduce overall emissions more effectively.
Key Enabling Conditions
The early success of the national ETS in China was enabled by several conditions. First, the Chinese government’s strong commitment to achieving peak carbon emissions by 2030 and carbon neutrality by 2060 has provided a clear policy direction and support for the ETS. In addition to ETS-specific frameworks, the broader push to install renewables capacity incentivized investments in cleaner and more efficient energy technologies. More broadly, increasing awareness of climate change and environmental issues among the public and businesses fostered a supportive environment for the ETS and other sustainability initiatives. While initially focusing on the power sector, the ETS is designed to expand to other high-emission industries, enhancing its impact over time.
Impact / Outcomes
The first compliance cycle was hailed by MEE as a success, given a 99.5% compliance rate among covered entities and the successful establishment of an active carbon trading market. Though initial trading prices were low, and volume was thin, the initial performance of China’s ETS mirrored the early stages of ETS’s from other jurisdictions such as the EU and California in the United States. Energy intensity, one of the key targets of China’s ETS, declined 3,539 MJ/thousand 2015 USD in 2020 to 3,485 MJ/thousand 2015 USD in 2021. Encouraged in part by the ETS, China saw a new capacity change of 403 GW of renewable energy over 2020-2022, with renewables now constituting over 45% of installed capacity.
Additional Sources
- IEA (2020). China’s Emissions Trading Scheme: Designing efficient allowance allocation, https://iea.blob.core.windows.net/assets/d21bfabc-ac8a-4c41-bba7-e792cf29945c/China_Emissions_Trading_Scheme.pdf
- IEA (2022). Enhancing China’s ETS for Carbon Neutrality: Focus on Power Sector Co-ordinating climate and renewable energy policy, https://iea.blob.core.windows.net/assets/17fc0c1d-7fff-4ca6-af39-7f6e6f1c33fc/EnhancingChinasETSforCarbonNeutrality_FocusonPowerSector.pdf
- IRENA (2022). Energy Profile: China. https://www.irena.org/-/media/Files/IRENA/Agency/Statistics/Statistical_Profiles/Asia/China_Asia_RE_SP
- Sandalow, D., Meidan, M., Andrews-Speed, P., Hove, A., Qiu, S. Y., Downie, E. (2022). Guide to Chinese Climate Policy, https://chineseclimatepolicy.oxfordenergy.org/wp-content/uploads/2022/11/Guide-to-Chinese-Climate-Policy-2022.pdf