China’s carbon market expansion may have limited impact in the first phase

China’s plan to expand its carbon market to include steel, cement and aluminium will cover 60% of its total greenhouse gas emissions. However, the relatively low bar set for companies may weaken the impact of this step at the first stage. Reuters reports this with reference to experts.

As noted, the expansion of China’s emissions trading scheme (ETS) will force about 1.5 thousand industrial enterprises, including the world’s largest steelmaker Baosteel, to buy carbon emission allowances, which will give them an incentive to decarbonise.

But despite the pressure companies in these industries will face, they will also be provided with many free allowances during the implementation phase in 2024-2026, and the supply of allowances will be sufficient, according to the published plan.

Shaun He, a Beijing-based lawyer who advises companies on carbon compliance, believes that the work plan, despite its lack of detail, appears to be quite lenient in terms of allowance allocation and compliance deadlines.

Prices for carbon emission allowances in China have been steadily rising. This year, for the first time, they exceeded the 100 yuan ($14.05) per tonne mark. However, the Ministry of Environmental Protection has said that market shortcomings are limiting participation. The ministry believes that expanding it to new sectors will help catch up with more mature schemes such as the European one.

According to the ministry, the main goal of the first phase of the expansion is to help companies familiarise themselves with the market rules and improve data collection.

Emission allowances, which are based on carbon intensity rather than absolute emissions, will be distributed free of charge. This will mean that only ‘lagging’ companies will be able to buy additional ones.

Initially, the government will engage in a trial-and-error process to figure out how the new sectors fit into the existing market infrastructure, said Jingwei Jia, associate director at Sustainable Fitch in Hong Kong.

The authority has promised to increase incentives after 2026, which is likely to include a reduction in free allowances and stricter sectoral targets to stimulate market activity. Therefore, the expert believes that this will mean a gradual reduction in carbon intensity benchmarks, the involvement of more companies and sectors in the carbon market, as well as a gradual increase in demand for allowances and, accordingly, prices.

China’s national carbon market, which is already the largest in the world, was launched in 2021. It covers more than 2,000 power plants with total emissions of about 5 billion tonnes. By the end of 2023, the total trading volume in this market reached 442 million tonnes of CO2.

China will add steel and aluminium to the carbon market at the end of 2024. Reducing emissions, in particular, can soften the blow from the European CBAM.