China’s carbon market: the case for trial and error

China recently announced details of its first carbon trading scheme. Allan Zhang, a specialist in Chinese green policies in PwC’s Sustainability & Climate Change team examines what might be learned from the pilot.

China’s carbon trading system is scheduled to begin in seven pilot cities and provinces this year. As the world’s largest emitter of CO2, China has clearly shown its determination to curb greenhouse gas emissions and improve efficiency of its energy consumption. The carbon trading system is part of the nation’s ongoing economic transition from high energy, and resource intensive industries to a more environmental-friendly and modern services oriented economy.

While this is moving in the right direction, there are still many questions waiting to be answered . Lack of basic data of energy consumption at enterprise level means a top-down “cap” from the National Development and Reform Committee (NDRC) or the related provinces will be difficult to implement.

Chinese companies, who have rarely been involved in the system design process, are not clear about how the carbon credits will be allocated and have limited knowledge on the GHG emission data calculation method, data reporting process and third party verification procedure. There will be concerns about whether energy efficient companies will be penalised by getting less credits relative to those companies with high historical emission figures. How the prices will be determined is another crucial matter that affects companies’ confidence in the new system.

On the other hand, local governments are worried about the possible negative impact the carbon cap may bring to their own economic development, especially those high growth regions where the absolute CO2 emissions may continue to rise in the near term. They are also concerned about the “crowding out” effect where companies might choose to move to neighbouring provinces with no cap on carbon emissions. Starting the trading system in time also seems to be challenging as many things are not ready yet. Despite the challenges presented, the NDRC is undeterred, seeing the exercise as an experimental and testing process. The central government will look to learn from the lessons and experiences of the pilot regions in drafting the national carbon trading scheme in 2015, with a possible national cap to be imposed by 2016.

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