Carbon Trading in China

China has made progress in its carbon trading pilot programs but still has a long way to go, government officials and industry players believe.

China, the world's biggest emitter of greenhouse gases, is betting on carbon trading as a key measure to cut its emissions for each unit of economic output 40 to 45 percent below 2005 levels by 2020. Already, five regional carbon markets have been up and running in the Guangdong province and cities of Shenzhen, Beijing, Shanghai and Tianjin since 2013. Central China's Hubei province last month also kicked in its cap-and-trade system.

The city of Chongqing now is the last Chinese pilot region that needs to launch carbon trading.

At a climate finance forum hosted by the International Finance Corp. last week in Beijing, Xu Huaqing, deputy director general of China's National Center for Climate Change Strategy and International Cooperation, said that carbon credits sold in the existing Chinese carbon markets already surpassed 100 million yuan ($16 million) as of early May.

Xu said that higher trading activities are expected to emerge in coming weeks because regulated emitters are approaching their deadline of reporting annual emissions and therefore have stronger incentives to trade carbon allowances.

Carbon trading, China's version of a U.S. national cap-and-trade scheme that Congress failed to pass in 2009, is designed to evolve into a system that puts a price on greenhouse gases. It will spur clean energy investments and more energy-efficient technologies by doing so, and right now, carbon dioxide—the main man-made greenhouse gas warming the atmosphere—is the only type of greenhouse gas capped in the Chinese program.

Policymakers here limit the amounts of carbon dioxide companies can emit with a system of allowances. Companies that emit beyond the limit are required to buy more carbon allowances to cover those emissions. Those that become more efficient can sell allowances they no longer need to help finance their improvements.

In addition to its seven regionwide carbon trading pilots, China plans to include more cities and provinces in the scheme by the end of the decade. "We are considering expanding the existing pilot programs into surrounding areas and link up those regional carbon markets; if that fails, the central government will then design a nationwide emissions trading scheme and allocate allowances to each region," said Xu, the government official involved in the national carbon market buildup.

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