China is methodically building the world’s most ambitious carbon market

On December 19, China officially announced that it would create the world’s largest carbon trading system, meant to help the country meet its ambitious climate change and clean energy targets. (The country wants to get 20 percent of its energy from renewables, and peak its emissions, by 2030.)

It can be difficult for Americans, most of whom don’t track China’s carbon policy very closely, to understand the significance of such developments, so let’s try to put it in context.

To make a long story short: Yes, a comprehensive carbon trading system covering the world’s largest emitter will, eventually, be a Very Big Deal. But Tuesday’s announcement was neither the beginning nor the completion of that effort, only a signpost on a path that the country is navigating with great care.

It’s an exciting signpost, though!

China is building its carbon trading system slowly and deliberately

Back in 2011, China’s government laid out a plan to gradually create a national carbon market. (It appeared in the country’s 12th Five-Year Plan, covering 2011-’15.) The key word here is gradually.

Over the ensuing years, the country established several provincial and city-level carbon-trading pilot projects, with varying rules, scopes, and baselines, to test-drive the concept.

Tuesday’s announcement confirmed China’s intention to move beyond pilot projects to a bona fide national system. Originally, the (insanely ambitious) plan was to expand the system to cover the entire Chinese economy in 2017, but on Tuesday leaders revealed that it will initially cover only the electricity sector — big coal and natural gas plants — which represents about a third of the country’s emissions.

Of course, this is China, so covering “only” the power sector would immediately make its trading system the world’s largest, covering roughly 3.5 billion tons of CO2. By comparison, the world’s current largest system (in the European Union) covers around 2 billion tons, and the biggest in the US (California’s) covers around 395 million tons.

Even trading in the power sector will not begin immediately, however. A few years will be spent gathering and verifying data on plant-level emissions, establishing rules and baselines, engaging in “dummy” trades as a stress test, and generally setting the table. Actual trading, with money changing hands, will begin in 2020. The system will expand to cover other sectors like steel, concrete, and aviation at some unspecified post-2020 date.

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