COP26: why carbon pricing is crucial to China’s climate change pledges
- China’s emissions trading scheme is a welcome development, but its size belies its narrow scope and lack of allure for investors
- To reach its full potential, it needs to cover more of China’s emissions, go beyond the electricity sector and let prices reflect the true cost of carbon
The scheme only covers about 40 per cent of China’s total emissions and involves just one sector – power generation. Furthermore, the amount is more nominal than real as the market remains illiquid and has a rather small number of participants, around 2,000 polluters for the whole of China.
Finally, the market is not yet open for third-party traders such as carbon trading companies, financial institutions and individual investors. As a consequence, carbon-related products are still scarce, making it hard to attract investors.
Unfortunately, the new ETS market has not brought about an increase in the cost of carbon as prices have remained at a low level since the market opened. The price today is less than US$10 per tonne compared to more than €60 (US$70) per tonne in the European ETS.
Had a well-functioning market for carbon pricing been in place by now, the choice between resorting to coal or renewables would tilt towards the latter, as the cost of coal-related carbon emissions would be much higher than it is today.
In short, China needs a fully functioning carbon pricing market more than ever. The creation of a national EST market is clearly welcome, but it is not enough. It needs to cover a larger part of China’s carbon emissions and go beyond the electricity sector.
It also needs to be liquid so carbon prices can go up and reflect the true cost of carbon for the economy. China has a golden opportunity in the run up to the United Nations climate change meetings to demonstrate that its commitments to fight climate change are achievable by further pushing carbon pricing as an essential part of the plan.
This will also mean that any additional production of coal to address the ongoing power crunch will become more expensive and therefore be discouraged in favour of greener options for generating electricity.
Introducing the market for carbon pricing is clearly the most effective way to achieve China’s climate change targets. Rationing electricity, and other tools seen in the past few months, will be too costly to maintain, and could risk missing China’s climate targets.
Alicia Garcia-Herrero is chief economist for Asia Pacific at French investment bank Natixis and adjunct professor at Hong Kong University of Science and Technology. Junyu Tan is an economist at Natixis specialising in Asia thematic research and is a CFA charterholder