China launched its much-awaited national carbon emission trading scheme (ETS) on Tuesday. In its first phase, the focus will be on the power sector.
ETS is an effort by the government to help polluting industries reduce carbon emissions by providing monetary incentives.
"We started ETS with the power sector because monitoring emissions is easier. We will soon extend the scheme to other sectors too," said officials from the National Development and Reform Commission (NDRC).
Other sectors including petrochemicals, construction materials, steel, non-ferrous metals and aviation industries are likely to be covered in the coming years.
The ETS will cover nearly 1,700 power plants in the country that emit more than three billion tons of carbon dioxide. At present one ton of carbon is traded at around 8.26 US dollars under the European Carbon Trading Scheme.
China's ETS will be the world's largest carbon financing project and likely to overtake Europe's version in the coming years.
According to experts, the power sector is one of the major contributors to carbon emissions. It accounts for more than 46 percent of emissions, of which an estimated 39 percent would be likely to be covered by the ETS.
Huw Slater, a research manager for China Carbon Forum, pointed out that China's determination to make emissions trading a success has been evident for many years. The pilot regions have provided valuable lessons in how to ensure that the national system is effective for China's particular economic circumstances.
"The national ETS should help major emitters in the power sector to identify the most cost-effective measures to reduce emissions, helping China to reach a peak in carbon emissions as early as possible and to facilitate a rapid low-carbon transition in the energy sector," said Huw.
China has been cautiously experimenting with the idea of implementing the carbon trading scheme for the last five years.
The NDRC in 2013 launched seven pilot emission trading schemes in Beijing, Tianjin, Shanghai, Chongqing, Shenzhen, Guangdong, and Hubei. The pilot ETS covered major polluting sectors including power, cement, steel and petrochemicals in these regions.
NDRC officials said that along with the seven pilot cities, Jiangsu and Fujian are included under the ETS.
Xie Zhenhua, China's special representative for climate change at Bonn for COP 23 had previously hinted at the implementation of ETS, "All preparations for the Chinese carbon market are in place, and it has now entered the examination and approval process."
Under the Paris Accord, China has promised to cut carbon emissions by 60 to 65 percent per unit of GDP by 2030, compared with 2005 levels. It would also boost its use of non-fossil fuels – making them account for 20 percent of China's energy consumption.
Shanghai is one of the pilot cities, starting in 2013.
"Now the quantity of carbon emissions (in Shanghai) has decreased by seven percent in recent years, and the use of coal went down by 11.7 percent. Some progress has been made," said Zhou Bo, a member of Shanghai Municipal Standing Committee.
What is carbon trading?
The idea of carbon trading was conceptualized with the Kyoto Protocol in 1997, promoting cutting emissions by paying for carbon-lowering schemes. The scheme aims at mitigating climate change impact.
It puts a cap on the overall amount of emissions from carbon sources like the power, steel, and cement making industries that guzzle a lot of coal. In order to control the agreed emission limit, the government issues permits that are generally auctioned.
In case a company breaches its carbon emission limit, then it has to buy more permits. If the company emits less than the set limit, then it can sell the excess permits for cash.