China’s recent plan to expand its carbon market to include steel, cement, and aluminum aims to cover approximately 60% of the country’s total greenhouse gas emissions. However, experts warn that the relatively lenient standards set for companies may diminish the scheme’s effectiveness in its initial phase.
The expansion of China’s emissions trading scheme (ETS) will require around 1,500 industrial companies, including major players like Baosteel and Anhui Conch, to purchase carbon emission allowances (CEAs) for the CO2 produced from fossil fuel use. This move is intended to incentivize these companies to decarbonize.
Despite the pressure to comply with the scheme’s technical requirements, firms will receive significant amounts of free allowances during the “implementation phase” from 2024 to 2026, leading to an ample supply of CEAs. Critics, such as Shawn He, a carbon compliance advisor, argue that the plan lacks sufficient detail and appears lax in terms of allowance allocation and compliance timelines.
China’s national carbon market, launched in 2021, is already the largest globally, encompassing over 2,200 power plants and accounting for around 5 billion tons of emissions. Although carbon prices have risen, the environment ministry acknowledged that “shortcomings” within the market are limiting participation.
The ministry stated that the initial goal of the expansion is to help companies adapt to market rules and improve data collection, with any financial impact from carbon trading being minimal for most companies. Allowance quotas will be allocated based on carbon intensity benchmarks, meaning only less efficient companies will need to purchase additional credits.
Looking ahead, the government plans to strengthen incentives post-2026, potentially reducing free allowances and imposing stricter industry targets to enhance market activity. This gradual approach is expected to drive up demand for carbon allowances and subsequently increase carbon trading prices.