International Carbon Markets: a
Case Study on Chinese Emissions
Trading Schemes
Kathryn A. Walker
Research Project Placement for Ndevr Environmental Consulting
3rd February 2014
Ndevr Pty Ltd
Suite 6, Level 3,
499 St Kilda Rd
Melbourne, VIC 3004
P +61 3 9865 1400
W www.ndver.com.au
E ndver@ndver.com.au
A.B.N 72 084 281 836
Table of Contents
List of Abbreviations ..................................................................................................................... 3
Executive Summary ....................................................................................................................... 4
Climate Change Policy and Carbon Trading ............................................................................... 6
Climate and Carbon Policy……………..…………………………………………………….6
Table 1. Current carbon emission reduction policies.…………………………….…….…6
Table 2. Complimentary schemes in climate change policy..………………………….…7
Emissions Trading Schemes…………………………………………………………………7
Drivers for Carbon Trading in China ............................................................................................ 8
Development of Carbon Markets……………………………………………………………..8
Drivers of China's Climate Change Policy................................................................ …9
Implications ...............................................................................................................10
Services Offered. .......................................................................................................10
Current ETS projects ................................................................................................................... 12
Who will the policy target?...……………………………..……………………………...…..12
Table 3. Summary of pilot scheme components………………………..……………...…13
Scheme Intricacies……………………………………………………………………….…..16
Controlled Market…………..…………………………………………..………………...…..17
Uncertainties………………..………………………………………………..…………...…..18
Table 4. Summary of China's emissions reduction targets…………………..……..…....18
Future Directions………....…………………………………………………..……….……...19
Market Entry and Future Directions ........................................................................................... 20
Needs analysis ..........................................................................................................20
Table 5. Disciplines required for carbon market function…………………………………20
Future Directions .......................................................................................................21
Figure 1. Timeline of expected international ETS commencement…………….……….21
Barriers to Entry........................................................................................................ .21
Table 6. Barriers to carbon market entry…………………………………………………...21
Funding Opportunities ...............................................................................................23
Australian links with Chinese policy………………………………………………………...23
India's climate change policy…………………………………………………………...……24
Conclusion ................................................................................................................................... 25
References.................................................................................................................................... 26
Research Project: International Carbon Markets
List of Abbreviations
Abbreviation Full name
ABE
The Asian Business Engagement Plan
CCER
Chinese Certified Emissions Reduction
CDM
Clean Development Mechanism
CER
Certified Emissions Reduction
CFI
Carbon Farming Initiative
CO2
Carbon dioxide
CO2e
Carbon dioxide equivalent
EPs
Equator Principles
EU
European Union
ETS
Emissions Trading Scheme
FYP
Five-Year Plan for Economic and Social Development
GDP
Gross Domestic Product
GHG
Greenhouse gas
MEP
Ministry of Environmental Protection
MRV
Monitoring, reporting, verification
NDRC
National Development and Reform Commission
UNFCCC
United Nations Framework Convention on Climate Change
US
United States
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Research Project: International Carbon Markets
Executive Summary
This report was conducted as part of a research placement on behalf of Ndver Environmental Consulting. It
is intended to provide an informative summary, for internal purposes, on the state of carbon markets with
particular examination into the Chinese Emission Trading Scheme.
The development of emissions reduction schemes, including the Emissions Trading Scheme (ETS), has
increased globally in response to predicted threats to the economy and environment associated with
anthropogenic warming of the climate. In an attempt to combat rising greenhouse gas emissions, climate
change mitigation policies are being adopted by many countries. Carbon trading markets have developed
over the last decade and are being increasingly undertaken as part of climate change policy.
China has developed their own climate change policy: they want to avoid the economic, environmental and
social consequences of climate change and reduce their dependency on fossil fuels. The country is
attempting to convert to a ‘low carbon economy’, using a number of strategies, including the ETS. The
recent adoption of the Chinese carbon market, developed through positive experiences with the Clean
Development Mechanism.
China is currently trialling the ETS domestically, through seven pilot schemes. If successful, they intend to
develop a national scheme, by 2020. The pilots vary in design characteristics, such as emissions budgets
and sectors encompassed. The regions chosen also vary in terms of economic status. The reason for this
is to assess how the ETS is likely to run under different conditions and economic contexts. The most
successful design features will be selected to develop the national system, and any weaknesses
abandoned.
Companies will have to comply to set emissions caps or will face a hefty fine. They also may not be
allocated a share of their permits the following year. It is likely that some administrative measures will also
be employed, to reach set targets on emissions intensity reduction.
There are a number of uncertainties and risks associated with the Chinese scheme and carbon markets
generally, which will need to be managed through time. Risks include;



Volatile market prices, where permit prices have the potential to crash
Lack in behavioural change if prices are too low
ETS related crime
It is uncertain whether quickly-approaching emissions targets will be met using the pilot schemes, and
whether regulatory measures will continue to be used now and into the future. Transparency is also an
issue, with some governments withholding information on permit pricing and allocation, and methodologies
used to calculate emissions levels.
Despite the risks, carbon markets provide a lot of opportunities and services to local economies,
communities and the environment. Not only do these markets create a large number of jobs, across a
broad range of areas, they also help fund offset programs and energy efficiency research. The reduction in
emissions levels will aid air pollution mitigation and be beneficial to health. There is also the potential for
carbon markets to expand and operate on a global scale. If the Chinese scheme is successful, it may
encourage other countries to adopt the ETS and help develop the global climate change policy.
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Research Project: International Carbon Markets
Based on a needs analysis, a number of essential skills and professionals are needed to create and
maintain a carbon trading market. Among these, important disciplines include, financial advisors, lawyers
and auditors. In order for Australia to develop an ETS and link to the Chinese system, it is quite likely they
would need to employ Chinese professionals or employ a team of climate policy experts at the Australian
embassy in Beijing.
Market entry is currently challenging - a number of barriers to entry exist and need to be managed as the
market develops. Some examples include;




Existing knowledge gaps on pricing mechanisms and other methodologies
Methods of funding
Bipartisan political agreement
Lack of transparent mechanisms to monitor and verify emissions levels
The Chinese and the European ETSs are employing a ‘learning-by-doing’ approach to their schemes; they
will working through problems and learn from mistakes as they arise.
A potential funding opportunity for carbon market development in Australia is Austrade’s Asian Business
Engagement Plan, and internationally, the Equator Principles are encouraging financial institutions to invest
in green projects, including emissions reductions schemes. Carbon markets are yet to become wholly costefficient and creating funding to combat climate change will remain one of the greatest financial challenges
of our time.
In the upcoming UNFCCC convention in Paris, 2015, the progress of a global agreement on climate
change mitigation is anticipated, to be in force by 2020. It is likely the conference will influence the
execution and timing of international strategies, including the development of the global carbon market. The
timing and direction of Australia’s climate policy is likely to be influenced by this conference. The EU, US
and China will be major players in international negotiations.
China has managed to relatively quickly implement their own ETS, which in comparison took Europe and
Australia years of debate and arranging to pursue. If China manages to successfully run a carbon market
and implement a national scheme, there is potential to lower global emissions levels, trigger innovations in
clean energy technology and encourage other countries to adopt similar emissions reductions mechanisms.
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Research Project: International Carbon Markets
Climate Change Policy and Carbon Trading
Climate and Carbon Policy
The potential environmental and socio-economic impacts associated with anthropogenic greenhouse gas
(GHG) production, have been cause for international concern. The current rate of climatic change is not
sustainable and will pose a number of threats not only to the environment, but also the functioning of
modern economies.
Mitigating GHG emissions will affect a range of industries, such as agriculture and materials production, as
well as influencing electricity consumption, fuel use and heating. If not managed, likely changes to natural
systems will include a rise in temperature extremes, sea level rise and exacerbated biodiversity loss.
Carbon dioxide (CO2) is the largest GHG contributing to climate change: it represents approximately two
thirds of human-produced GHGs (DSE 2013). A single, standard unit for measuring the combined impacts
of all GHGs is the carbon dioxide equivalent, CO2e. This is a measure of the equivalent amount of warming
each GHG would cause, in terms of CO2 (a calculation of each gas’ ‘global warming potential’).
Carbon emissions are hence generally used as the ‘target’ GHG, and the terms can be used
interchangeably. They are also generally more readily measureable - CO2 emissions sources can be
identified directly (US EPA 2012). The development of emissions mitigation strategies, is a core component
of climate change policy. Various carbon emission reduction strategies have been trialled and implemented
globally, as summarised by Tables 1 and 2.
Table 1. Current general carbon emission reduction policies.
Scheme
Description
Carbon Tax
The government sets a price polluters will pay per tonne CO2 released to the atmosphere –
known as permits. The price per tonne increases annually to promote a reduction in carbon
emissions (Energy Action 2013).
Pro: permit price is controlled. Con: amount of emissions reduced is uncertain.
Examples: many exist worldwide, including in India, Japan and local taxes in the US.
Emissions Trading
Scheme (ETS)/ Cap
and Trade
Market-based approach to CO2 emissions reduction. Permit price is floating (affected by
market fluctuations) however a cap on the total amount of emissions is set by the
government. Unused permits can be traded on the market; hence it is in business’ best
interests to reduce carbon emissions.
Pro: emissions reductions are controlled. Con: price of permits is uncertain.
Examples: mandatory EU ETS, the Australian Carbon Pollution Reduction Scheme (the
proposed ETS under the Labour government).
Direct Intervention
(including ‘commandand-control’ policy)
Government-implemented activities that directly target companies to reduce emissions. Can
include financial incentives to implement emissions-reducing projects or forced compliance
of national emissions targets.
Pro: less uncertainty involved. Con: can be costly to local economies, e.g. may force closure
of companies.
Examples: China’s top-down administrative measures to reach targets during the 11th FiveYear Plan. The Emissions Reduction Fund of Australia’s current climate change policy, the
Direct Action Plan.
Table 2. Complimentary schemes for climate change policy.
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Research Project: International Carbon Markets
Scheme
Description
Offset Schemes
Projects that reduce GHG emissions, such as sequestering CO2 from the atmosphere. They
are designed to compensate for emissions produced. Offsets should be used in conjunction
with a policy designed to reduce GHG emissions at the source (Greenfleet Australia).
Offsetting may be required as part of another scheme or can be voluntary.
Examples: Certified Emissions Reductions issued by the Clean Development Mechanism
(an offset strategy in the EU ETS). In Australia; the Carbon Farming Initiative – where
abatement activities (e.g. revegetation) can generate offset credits (Department of
Environment 2013). Both strategies generate tradeable carbon credits.
Energy efficiency
research and
development
programs
Involves research into energy efficiency improvement. Includes research into new and
existing clean energy projects. Can promote investment into new technologies, including
renewables.
The Chinese government has funded extensive research into energy efficiency
improvement.
Investment in clean
energy and energy
efficiency targets
Government or private sectors may choose to voluntarily invest in clean energy
technologies. ‘Clean energy’ includes renewables and non-fossil fuels such as nuclear
power. A growing industry, particularly in China. Various countries within the EU have
adopted these technologies.
Energy efficiency targets can be set by local governments to encourage energy-saving
activities. Subsidies can be provided to incentivise the uptake of projects. Examples include
the Victorian Energy Efficiency Target and the Energy Savings Scheme of NSW.
A holistic approach may be needed (i.e. multiple policy use) in climate change mitigation, as policies can
fail. Climate change policies will differ between countries and their circumstances.
Emissions Trading Schemes
Of particular interest, is the Emissions Trading Scheme (ETS). The ETS is a market-based approach to
lowering GHG emissions. It involves the commodification of carbon, where emissions are turned into
tradeable units that can be transferred or sold.
The schemes vary in size and scope. Some are mandatory (e.g. EU ETS) whilst others are voluntary and
may be conducted in countries that have not ratified the Kyoto protocol. The goal of the ETS is to reduce
GHG emissions at the lowest possible cost to the economy (Perdan & Azapagic 2011).
The typical ‘cap and trade’ system is a market-based instrument, where the selling and trading of emissions
allowances is conducted. There is potential to create a larger, international market for emissions trading,
which makes this scheme appealing.
Recently, China has implemented a number of pilot ETSs with the eventual target of a national ETS. China
is the world’s largest emitter of GHGs - the implementation of a carbon reduction scheme will contribute to
global emissions reductions. If successful, the Chinese ETS could pave the way towards a global strategy.
China is committed to becoming a ‘low-carbon economy’. As well as the development of carbon markets,
the country is adopting a range of strategies to reduce emissions, including projects to improve energy
efficiency and increase the use and research into renewable energy.
If a national Chinese ETS is established, there is a prospect of linking it with other markets in the AsiaPacific region, including Australia.
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Research Project: International Carbon Markets
Drivers for Carbon Trading in China
As part of China’s climate change policy, the nation is committed to becoming a ‘low-carbon economy’ and
are attempting to achieve this by developing a national carbon market. The idea of this strategy is for China
to reduce their GHG emissions at least cost –whilst still allowing economic development.
There are two ways of setting emissions caps; absolute caps or intensity targets. Notably, China has
chosen to target the growth of emissions, rather than net quantity of emissions produced. This type focuses
on reducing energy intensity (carbon emissions produced per unit GDP). Although this type of cap may not
result in a reduction in total emissions produced, the trajectory will be below what it would have been if left
unmitigated.
Development of Carbon Markets
Historically, the domestic carbon trading market developed as a result of positive experiences with the
Clean Development Mechanism (CDM) in overseas markets. The CDM is a means of implementing
emissions-reducing projects in Annex 2 countries (includes China) of the Kyoto Protocol (UNFCC 2014).
These projects can earn saleable Certified Emissions Reductions (CERs) – which equate to offsetting one
tonne of CO2e – the level in a regular carbon permit (UNFCCC 2014). CERs can be traded and sold to
parties bound to the Kyoto Protocol, and can count towards their emission reduction targets (UNFCCC
2014).
The CDM is a standardised emissions offset instrument, meaning projects must meet strict rules to qualify
for CERs (UNFCCC 2014). There are three types of projects:



Renewable energy projects
Energy efficiency improvement projects
Other projects that reduce sources of anthropogenic emissions
The stringent requirements the CDM meant China developed a capacity to manage robust carbon markets.
Through the CDM process, the National Development and Reform Commission (NDRC) devised valuable
pricing tools, which aided the development of an ETS (e.g. baseline emissions calculations).
Of the 4,200 projects registered under the CDM, over 2,000 are based in China (UNEP Riso Centre 2012).
The revenue generated from CERs funds CDM projects, of which have been so successful in China they
have created a thriving renewables export industry. The positive experiences of the CDM endorsed the
opportunities carbon markets can create, inspiring authorities and encouraging banks to invest a domestic
carbon market (Scotney et al. 2012).
Currently, the price of CERs in the EU ETS is very low and carbon permit prices are volatile, resulting in
little funding for CDM projects. The use of CDMs in higher-level emissions reductions is hence limited. If
China is to reach its target of reducing emissions intensity by 40-45% by 2020, they need to involve an
alternative strategy, such as a carbon market. By developing their own ETS, China can potentially curb its
emissions by encouraging businesses to improve energy efficiency, and not rely on funding from CERs
alone.
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Research Project: International Carbon Markets
Drivers of China’s Climate Change Policy
China’s main policy planning document, the Five Year Plan for Economic and Social Development (FYP) is
a periodic document that states national agendas and provides guidelines on how to meet objectives. Local
governments and major administrative units use these guidelines to produce their own FYPs (Lo 2013).
The 12th FYP (covering 2011-2015), describes the initiation of environmentally-aware economic growth
through ‘low-carbon development’ (Department of Industry). It sets energy and emissions targets, and
commits to trialling mechanisms to reduce energy and carbon use, including a domestic carbon trade
market (Department of Industry). Key targets of the 12th FYP include:



A 16% reduction in energy intensity (consumption per unit GDP)
A 17% reduction in carbon intensity (emissions per unit GDP)
An increase of renewable and non-fossil fuel energy to 11.4% of total energy use (currently
8.3%)
(Lewis 2011)
Although absolute emissions are not likely to be reduced in the near future, the emissions trajectory will be
below what it would have been if left unmitigated.
China’s climate change policy is a macroeconomic-based means of addressing energy security and
conservation (Lo 2010a, 2010b, Qi et al 2007, Richerzhagen and Scholz, 2008). It is largely a result of
addressing socio-economic concerns associated with future climate change, including risks to food
security, reductions to regional economic growth and involuntary migration (and associated social impacts)
(Lewis 2009).
International competition and collaboration, most notably in the research and production of green
technologies, is also a driver. Renewable energy technologies have relatively recently created a major
export market in China; the country is the world’s largest manufacturer of wind turbines and solar panels
(Schreurs 2012, Bradsher 2010). The economic profits and jobs creation associated with the export trade
offers a great service, but also important, is the reduction in dependency on fossil fuels. In a global sense, it
is in China’s best interests to adopt a climate change policy, as it strengthens China’s position in UNFCCC
international climate negotiations.
Purely environmental benefits are not recognised as a primary target of this policy, but rather a contributing
factor. China’s climate change policy document, the National Climate Change Program, released white
papers in 2007 and 2008, with neither referring to the Ministry of Environmental Protection (MEP) or the
national environmental agency (NDRC 2007, State Council 2008). That being said, environmental effects
that are linked to the economy, such as water security and air pollution mitigation are highly motivating
reasons for adopting a climate change policy.
China’s leading economic agency, the NDRC, manages the pilot ETSs. In comparison, the MEP has little
formal involvement. Lo (2013) concluded that therefore, Chinese carbon trading is not an environmental
policy, but rather is predominantly an economic policy with some beneficial environmental outcomes. Lowcarbon economic growth is incentivised, whilst simultaneously curbing emissions (Yu and Elsworth 2012).
The present choice not to adopt mandatory emissions targets, or other commitments that could jeopardise
the national economy is notable and consolidates the main priority of the nation; maintaining economic
development.
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Research Project: International Carbon Markets
Implications
The introduction of a carbon market to China reflects the country’s current transition from a centrallyplanned economy to a socialist-market economy. The pilot schemes are a major mechanism aiding this
transition. As China has not used carbon markets before, this trial phase may encounter various problems,
yet this is not unexpected.
The ultimate ‘success’ of the pilots, will be determined by whether the involved companies and the carbon
market is correctly and efficiently run by the end of the first phase (2013-2015) (known as Phase 1 or the
‘trial phase’) (Cassisa 2014). It is less likely that emissions reductions will be obtained during this phase,
and additional regulatory methods may have to be undertaken to reach assigned intensity targets (Cassisa
2014).
The nature of the cap-and-trade policy means that although emissions levels can be controlled, the price of
the pollution cannot. On a free market, there is potential for permit prices to rise and fall dramatically and
this is one of the major concerns with ETSs. For example, the EU ETS has had problems with pricing;
polluters were paying very little for emissions - a consequence of over-supply of permits. When the
European Parliament advisory committee advised against back-loading (removing) permits, the price per
permit crashed to just €2.81 (Hope 2013). This is an example of the sensitivity of carbon markets to
external pressures, such as political uncertainty.
Another risk of carbon markets is the possibility of ETS related crime. As outlined by INTERPOL (2013),
carbon markets are vulnerable to;




Fraudulent manipulation of measurements to claim additional carbon credits than were actually
allocated from an activity
Theft of credits by computer hacking
Selling of credits that either do not exist or do not belong to the seller
Exploitation of the weak regulations in the market to commit financial crimes, such as tax fraud and
money laundering
The lack in understanding about the buying, selling and trading of unconventional commodities (i.e. not
physical commodities) such as carbon permits, makes carbon markets particularly vulnerable to crime
(INTERPOL 2013).
With these challenges in mind, the NDRC will attempt to reduce risk and manage potential problems the
pilot schemes may face in Phase 1. The mistakes made in the early phases of the EU ETS are likely to be
avoided, but just like the EU scheme, Phase 1 of the pilots will be used as a ‘learning-by-doing’ manner of
developing of a carbon market in China.
In any new scheme of this level, complications will be inevitable, but that is precisely why China is running
these seven pilot schemes initially. The goal of these schemes is to tease out any flaws now, to develop a
less risky, more efficient national ETS in the future.
Services
There are a number of services offered from carbon trading markets, including:

Providing a means of reducing emissions, by defined amounts, at the lowest cost to economies
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Research Project: International Carbon Markets





Jobs creation, in a range of fields (e.g. lawyers, engineers, IT, auditors etc.)
Investment opportunities for private entities and individuals
Funding of offset projects such as renewable technology development, can be generated from
Chinese Certified Emissions Reductions (CCERs)
Potential to hasten breakthroughs in energy efficiency, by encouraging companies to consume less
energy (and reduce emissions)
Advances in air pollution mitigation and improved health associated with reduction of particulate
matter
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Research Project: International Carbon Markets
Chinese ETS pilot projects
The domestic trial of emissions trading has recently commenced, with China initiating a number of pilot
programs around the country. Combined, the pilot schemes will produce the world’s second largest ETS, in
terms of emissions capped, second only to the EU ETS.
It is estimated the program will cover approximately 700million tonnes of CO2e emissions; larger than the
scope of the South Korea, California or the (proposed) Australian schemes (Scotney et al. 2012). If the
nation is to succeed in producing a national ETS, it would be the world’s largest and have the potential to
affect climate outcomes.
As China is not considered an Annex 1 party under the Kyoto Protocol, hence does not have binding
commitments to emissions reductions, their ETS policy is internationally considered ‘voluntary’ (Jackson
2013). For the cities and provinces involved however, the schemes are domestically legally binding and
mandatory (Jackson 2013).
China has not previously used a market-based mechanism to manage pollution. In the past, they have
used top-down regulatory methods to reach emissions reductions targets. Their choice to trial an ETS
program reflects their transition from an authoritarian-style government to a socialist-market economy.
Phase 1 of the program, known as the ‘trial phase’, will run between 2013 and 2015 and will involve the setup of seven pilot schemes across the country.
Who will the policy target?
Presently there are seven proposed pilot schemes, five of which are in operation. Five cities, Beijing,
Tianjin, Shanghai, Chongqing, and Shenzhen and two provinces, Guangdong and Hubei were nominated.
The schemes in Hubei and Chongqing are to be commenced in the near future.
The cities vary in population and economic development; ranging from the affluent, global cities of Beijing
and Shanghai to the relatively poor province of Hubei. Trialling ETSs in contrasting regions allows the
government to assess the progress and success of carbon trading under varying economic conditions
(Scotney et al. 2012).
The programs are designed and regulated differently (see Table 3), to help examine which design features
are most successful. Differences in design include:






Cap size
Sectors and extent of industries covered
Allocation of emissions allowances
Trajectories (level of cap reduction per year)
Methods used to monitor, report and verify (MRV) emissions produced
Amount of CCER allowances
(World Resources Institute)
As part of compliance requirements, companies can typically cover 5-10% of their emissions permits by
purchasing offsets, known as Chinese Certified Emissions Reductions (CCERs) which are issued by the
NDRC (World Resources Institute). The program is based on the CDM and rules are similar (Carbon
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Research Project: International Carbon Markets
Market Watch 2013). Companies in Beijing and Shanghai are allowed to cover 5% of their compliance
requirements using CCERs, and Guangdong 10% (Chen & Reklev 2013).
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Research Project: International Carbon Markets
Table 3. Summary of Chinese ETS pilot project components
Launch
Date
ETS Type
Cap Type
Total
Regional
GHG
Emissions
Emissions
Reduction Target
set in 12th FYP
(per unit GDP)
Estimated
Scheme
Coverage
Sectors Covered
Permit Allocation
Shenzhen
June 2013
Mandatory Absolute
cap
83.4
MtCO2e
(2010)
21%
31.7
MtCO2e
26 sectors (over 600 entities)
Initial free allocation.
Gradual increase in
auctioning.
Beijing
November
2013
Mandatory Absolute
cap
100
MtCO2e
(2011)
18%
40.8
MtCO2e
Industrial and non-industrial
sectors (490 entities). Include
electricity providers, major
public buildings, heating and
cooling manufacturers.
Free allocation for
2013-15. Small
number of permits
auctioned.
Shanghai
November
2013
Mandatory Absolute
cap
240
MtCO2e
(2010)
19%
110
MtCO2e
197 entities. Energy-intensive
industries, airports, railways,
commercial buildings.
Free allocation for
2013-15.Considering
auctioning.
Grandfathering with
performance-based
correction.
Guangdong December
2013
Mandatory Absolute
cap
510
MtCO2e
(2010)
19.5%
214
MtCO2e
Nine energy-intensive
industries including power
generation, textiles,
ceramics, plastics and paper
production, plus public
transport and buildings.
Free allocation for
2013-15.
Grandfathering
auctioning
complimentary.
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Research Project: International Carbon Markets
Tianjin
December
2013
Mandatory Absolute
cap
130
MtCO2e
(2010)
19%
78
MtCO2e
114 entities (initially). Five
energy-intensive industries:
iron, steel, power and heat
production, chemical
production, petrochemical, oil
and gas exploration, as well
as large buildings.
Free allocation for
2013-15.
Grandfathering and
benchmarking
permitted. May be
updated.
Hubei
TBC
Mandatory Absolute
cap
N/A
17%
35% total
regional
emissions
High emissions industries
(over 150 entities), including
cement, iron, steel,
chemicals, power generation,
glass, pulp and paper, car
manufacturing, non-ferrous
metals etc.
80% free allocation,
remaining 20%
allocated based on
sectorial benchmarks.
10% auctioning after
three years. 100%
auctioning by 2030
(unless domestic
carbon market in
place).
Chongqing
TBC
17%
N/A
Six energy-intensive
industries, including cement,
steel, calcium carbide,
aluminium ferroalloy and
caustic soda.
N/A
Source: CMI 2014
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Scheme Intricacies
Scheme Differences
Some notable individual scheme differences are;




The cities of Beijing and Shenzhen have large service and manufacturing economies, yet small
industry emissions (World Resources Institute). Their emissions productions are likely peak soon,
as the cities plan to replace coal power sources (Beijing will convert to natural gas by 2017) (World
Resources Institute). To compensate for this, their ETSs will involve more companies in the service
sector.
Companies involved in the Beijing ETS will have to reduce their absolute emissions by greater
amounts each year; in 2013 they will have to reduce emissions by 2% (from average emissions
from 2009-2012) and by 4% for 2015 (World Resources Institute).
Shenzhen and Tianjin will allow entities and individual investors (such as financial institutions) not
involved in the ETS, to participate in trading (World Resources Institute). This may result in higher
trading frequencies and greater price fluctuations. This is already being seen in Shenzhen, where
the price has fluctuated between RMB 28 to RMB 130 ($4.5-$20) over the past six months.
Shanghai’s scheme will encompass six Shanghai-based airlines, which will have to surrender
permits for their domestic commercial flights (World Resources Institute). In addition, they will allow
retrospective recognition of companies’ energy-saving efforts. If businesses can demonstrate an
implementation of energy-conserving projects between 2006 and 2011, they will be offered extra
carbon permits (World Resources Institute).
Cap Allowances
In the Chinese scheme, the total emissions cap is considered an intensity cap, rather than an absolute cap,
as it focuses on reducing carbon intensity (emissions per unit GDP). China does not want to accept an
absolute cap, as they want to continue expanding the economy (Vas 2014). Absolute caps are more
binding and require a net reduction in emissions (as opposed to reducing growth of emissions), which
China believes may compromise economic productivity (Vas 2014).
Caps are set by estimating the likely growth in GDP each year. This estimate is used to calculate the cap’s
total allowable emissions, to a level that will theoretically reduce the growth (intensity) of emissions that
year (Cassisa 2014). However, because this method uses estimates, the cap is allowed to be adjusted,
depending on the real growth in GDP (Cassisa 2014).
Unlike other schemes, adjustments are permitted in China, as, for the first time, the country is attempting to
reach emissions targets using a market-based mechanism – and adjustments will allow for error. In the
past they have used command-and-control methods to reach targets. The launch of the pilot schemes and
methods used to calculate their caps reflect the country’s transition from a central commanding body, to a
socialist-market economy.
Effect to Consumers
Electricity prices are strictly regulated in China, and the costs to power manufacturers associated with
mandatory emissions reductions, will not be passed onto consumers (World Resources Institute). Although
this may be helpful for individuals, it does however mean, that this policy is unlikely to alter social
Research Project: International Carbon Markets
behaviours, as it will have little influence on curbing electricity demand (World Resources Institute), which
should be encouraged if climate change mitigation is to be successful.
Enforcement
Each year, companies are mandated to comply with surrendering enough permits to cover their emissions.
If they do not, they face a fine, up to three times the average market price for permits (ICAP 2014). There is
however currently some legal limitation to this (revision of the environment protection law and the draft on
climate change policy is ongoing) (Cassisa 2014). Also, depending on the pilot program, over-emitters may
not be allocated permits the following year, to the equivalent level of CO2e they did not cover (Cassisa
2014).
Other incentives to comply include the public publication of lists of noncomplying companies, and the
removal of the right to apply for loans for noncomplying companies.
Controlled Market
Predicting the responses to pricing and regulating the market will be one of the greatest challenges of the
Chinese scheme, now and into the future. There is large uncertainty about permit pricing, and in a free
market, there is the potential for prices to fluctuate considerably.
This, combined with China’s dynamic economic growth, will make it difficult to formulate an absolute cap
(number of available permits) for a future national scheme. Periodic adjustment of the absolute cap may
therefore be necessary in future, when creating targets for emissions intensity (Jotzo 2013).
Methodology of permit pricing in the initial phase of the scheme, is not currently publically released. Critics
advise that some form of price regulation should be implemented, to prevent a dramatic drop in price, as
occurred in the EU ETS when permits were over-allocated. Multiple methods exist;




Fixed-price model: permits are sold at a set price
Carbon tax
Price floor and ceiling: permit price can vary within set maximum and minimum prices
ranges
Moderated permit supply: supply of permits altered depending on market prices
(Jotzo 2013)
In the long-term, using a floating market price would be ideal (Jotzo 2013), as it complements carbon
markets in other countries and encourages global market interaction.
In addition, permit allocation needs to be considered wisely; especially the allocation of free permits. In a
sense, these problems can only be managed through ongoing research and by learning from mistakes from both the Chinese pilots and international schemes. This will improve future program design and
market efficiency and robustness (Jotzo 2013).
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Research Project: International Carbon Markets
Uncertainties
There are a number of uncertainties concerned with the Chinese pilots, which are affecting the
transparency of the carbon market. Information on a number of methodologies is being withheld by some
governments (e.g. Beijing and Tianjin), which may be due the desired avoidance of public scrutiny. This
includes;



The number of emissions permits distributed to participants
The methodology used to calculate caps
The price of permits
(Reklev 2014)
Without this transparency, it is very difficult to assess the state-of-play and success of these pilots (Reklev
2014). It also makes transactions and assessing market risks difficult for the parties involved. There may be
more information released on this as markets become more active; at present, there are few transactions
and volumes are very low (Cassisa 2014).
Like the early phases of the EU ETS, the outcome of Phase 1 of the Chinese ETS, will probably have little
impact to emissions reductions (Cassisa 2014). In the early stages, companies will learn how to use carbon
trading and integrate costs of CO2 emissions into their business strategies. This will involve a ‘learning-bydoing’ approach. Phase 1 will show China what challenges need to be overcome in setting up an ETS and
whether a national ETS, or even a link-up of the domestic strategies, will be possible (Cassisa 2014).
The targets set in the 12thFYP (Table 4) are “ambitious”, and some question whether a 17% reduction in
carbon intensity will be possible through pilot ETSs alone, at least in Phase 1 (Cassisa 2014). In order to
achieve the targets, the pilot zones may need to supplement emissions reductions with ‘command-andcontrol’ policy instruments (Cassisa 2014). This is not hard to imagine, with the level of emission and air
pollution reduction that needs to be covered to reach targets, with only two years to go before end of the
12th FYP period (Cassisa 2014). Regulation is already planned for Beijing, which is to replace all coal-fired
power plants with natural gas by 2017 (World Resources Institute).
China is well-known for using top-down regulation to achieve targets. During the 11thFYP, China managed
to reduce its energy intensity by 19.1% (against a target of 20%) largely through direct regulation; which
included ordering large emitters to close down completely during 2010 to meet assigned targets (Han et al.
2012). If carbon trading is to become a viable policy in China, the limits of command-and-control
mechanisms need to become clear (Wu 2011).
The ability to reach targets will be tested further in the future, with a high goal of 40-45% reduction in
carbon intensity by 2020.
Table 4. Summary of emissions reduction targets for China’s climate change policy. Targets are set against
2005 levels.
Energy Intensity (% reduction)
(energy consumed per unit GDP)
11th FYP
Target (20062010)
11 FYP
Actual result
(2006-2010)
12th FYP
Target
(2011-2015)
2020
Targets
20%
19.1%
(achieved top
down
16%
No target
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Research Project: International Carbon Markets
methods –
forced closure
of plants etc)
Carbon Intensity (% reduction)
N/A
N/A
17%
40-45%
Primary Energy consumption (growth)
4%
6.3%
3.75-5%
No target
Electricity generating capacity (growth)
8.4%
13.2%
8.5%
5.5%
(carbon emissions produced per unit
GDP)
(Scotney et al. 2012)
If the schemes do not succeed in their trial phase, it is likely China will scrap the ETS and employ a
different method of emissions reduction, such as a carbon tax (Vas 2014). This is option is easier for China
than other countries trialling carbon markets, because they have no legally binding commitment to the
Kyoto Protocol. With that being said, China is serious about attempting to convert to a low-carbon economy
and reduce their dependence on fossil fuels. In addition, adopting a climate change action plan will provide
China with the power to influence negotiations at international UNFCCC conferences (Vas 2014).
Future Directions
If the pilot schemes are successful, the Chinese government plans to implement a national ETS by 2020,
according guidelines that will be set in their 13th FYP (2016-2020). At this stage, the most successful
components of the pilot schemes will be cherry picked to design the national ETS, and theoretically, any
detrimental components should have been eliminated through the trial phase.
In the longer term, there is the potential to trade internationally, particularly within the Asia-Pacific region.
Bi-lateral trades between China and Australia would be possible in future.
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Research Project: International Carbon Markets
Market Entry and Future Directions
Carbon markets present optimistic opportunities for multidisciplinary services and sector involvement. It is
still considered a relatively new and developing market, but with potential to expand globally. Due to the
complex, challenging nature of the industry, market entry can be difficult, and a number of barriers will need
to be worked through over time to make the market more accessible.
Needs Analysis
The introduction of this policy instrument in China and around the world has provided opportunities for a
variety of individuals and organisations. The implementation and management of a carbon market is a
multidisciplinary field – requiring a number of integrated disciplines and specialist skills. Table 5 describes
the disciplines most needed to create and sustain an ETS and carbon market.
Table 5. Analysis of disciplines required in the running of a carbon market.
ETS Need/Characteristic
Needs Analysis and Potential Partners
Policy-driven management tool. May contain legallybinding commitments (e.g. domestic absolute
emissions caps). Implemented by the government.
Requires: lawyers, politicians, government bodies
and Non-Government Organisations.
Market-based mechanism
Requires: Business and trade experts as well as
financial institutions for market entry and
investment.
Development of methods to improve energy
efficiency, improve air quality and reduce emissions
Requires: scientists and engineers (particularly
environmental engineers).
Development of clean energy technologies
Requires: engineers/environmental engineers.
Baseline emissions calculations and ongoing
emissions monitoring
Requires: scientists; including statisticians and
environmental auditors (essential for MRV
processes).
Creation and implementation of the carbon market
Requires: business professionals and computer
programmers, as well as accountants and financial
advisors. Financial auditors, lawyers and IT
professionals also needed for MRV and to prevent
criminal activity.
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Research Project: International Carbon Markets
Future Directions
If China can produce a successful and robust ETS framework, it would be a significant step in developing
the global carbon trading market. If the domestic Chinese schemes succeed, this may encourage other
nations to adopt similar policies.
The national ETS is aimed to be running by 2020, and theoretically is likely to dovetail with other carbon
trading schemes (Figure 1), such as the South Korean and Californian ETS, hopefully motivating the way
towards a global climate change policy
(Scotney et al. 2012).
It is unlikely that complete global link-up of
markets will occur, due to the vast variation
between the design of schemes. Schemes
would still be linked to a degree though;
CDM, bi-lateral and multi-lateral trades will
continue to be possible, and potentially on a
larger scale – particularly in the Asia-Pacific
region (Vas 2014). Bi-lateral trades between
Australia and China would be likely, made
easier with the common time-zone (Vas
2014).
The international political environment will significantly shape the evolution of the market (CMI 2012).
International negotiations, particularly during the upcoming UNFCCC convention in Paris, 2015, will
influence the timing of projects and direct new objectives. At this conference, the UNFCCC hopes to finish
negotiation on a global agreement on climate change policy, to be in force by 2020 (Scotney et al. 2012).
China is considered a major international player, as the implementation of their climate change strategy will
strengthen their own negotiation position at UNFCCC (Vas 2014; Scotney et al. 2012). The EU and the US
are also major players.
Barriers to Entry
The carbon market is a relatively new and dynamic market, and has many challenging components. This
makes it difficult to enter and there are a number of barriers to entry, as summarised by Table 6;
Table 6. Barriers to carbon market entry.
Barrier to Entry
Effect
Knowledge gaps
The carbon market is complex and contains a number of uncertainties, and with
imperfect information, it can be difficult for new players to enter the market. An
example; the lack of an ideal pricing mechanism for permits. It is uncertain
whether regulatory balance should be employed.
Methodologies and lack
of effective regulatory
There are no universal methodologies to;

Calculate permit price
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Research Project: International Carbon Markets
agencies


Allocate permits
MRV methodology (making companies potentially liable during audits)
This makes it difficult to predict likely risks of market entry and difficult to assess
whether the market is competitive.
Private sector
The market will predominately feature trades between private companies, which
can be difficult to monitor and gather information on.
Transparency between
markets
Carbon markets between countries can vary dramatically. This will make market
link-up challenging, and will take time to establish. Within markets, there is need
for: transparent mechanisms to investigate fraud, independent auditing and
methodology free of political interference.
Language barriers and
time zone difference
Emissions trading is being conducted on a global scale and managing specific
details and transactions will be a challenge with language and cultural
differences. Differences in time zones may present a slight issue if markets are
to trade internationally, although this is of little concern if an Asian-Pacific
market were created.
Government and
international (UNFCCC)
influence
Thorough negotiation will continue to be required within governments and
between nations if the carbon market is to be securely established. Not all major
players are involved with the ETS, which dis-persuades other nations to adopt
the policy. Bipartisan agreement on a national climate change policy is also
important; the disagreement on Australia’s carbon policy, may cause one of the
world’s first repeals of a major carbon pricing scheme (Morton 2013).
Confidence in
investment
Investors need to have sufficient confidence in carbon markets, as projects may
have long payback periods. They need to be confident that projects will not be
affected by changes in government policy.
Infrastructure
Compatible infrastructure for the development of markets is still lacking.
Currently, most trades are ‘over-the-counter’.
Cultural differences and
expectations in business
practice
Business is conducted differently among nations and opening markets to
foreign players can cause difficulties (as was the case when South Korea
opened its insurance industry to foreign companies).
Funding
Huge costs are involved in setting up national schemes; banks need to support
the idea of a carbon market and be able to outweigh risks –a major challenge.
Source: Vas 2014
To overcome some of these barriers there must be the development of:




Robust systems for trade settlement, transfer of ownership
Robust processes for releasing market-sensitive information (e.g. permit pricing)
Centralised management of counterparty credit risk
Bipartisan political agreement and stable policy arrangements
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Research Project: International Carbon Markets
(CMI 2012)
Funding Opportunities
There is an opportunity for Australia to link with Asian trading markets, including the carbon market, through
the Asian Business Engagement Plan (ABE). This program, funded by the Australian Trade Commission
(Austrade), will provide grants to small-medium sized Australian businesses to harness commercial
opportunities in Asia (Austrade 2014). Up to 50% of the cost of an eligible project can be funded by the
ABE, with grants being between $20,000 and $300,000 (Austrade 2014).
The idea behind the plan is to encourage new business initiatives within Australia and link Australia with
Asian markets (Austrade 2014). Projects that exhibit to potential for long-term links, are particularly
encouraged and such an opportunity presents itself with carbon trading.
Another Australian opportunity lies through the Department of State Development, Business and
Innovation’s ‘Trade Mission Program’. This program provides financial support to Victorian companies
willing to engage with international markets. The program prioritises grants to activities involved in certain
Asian markets, including China (DSDBI 2013). Grants up to $3,000 will be issued to business involved
(DSDBI 2013). The department also provides scholarships to Victorian individuals who undertake intensive
language studies at institutions in China, with the aim of boosting Asia-focused skillsets, and developing
business and cultural relationships (DSDBI 2013).
An international initiative, to encourage financial institutions to see the environmental and social issues
associated with financing development projects, are the Equator Principles (EPs). Banks in China and
around the world have been encouraged to sign up to the framework. The EPs are a global riskmanagement framework that advises financial institutions about the risks to the environment and the
community associated with funding projects, and how to help manage them (The Equator Principles
Association 2011). This framework could have the effect of encouraging banks to support environmentallybeneficial projects, including emissions reductions strategies. As China is in the process of converting to a
low-carbon economy, this will be central in its development.
The financing of climate change policies is central to mitigating, and hence avoiding dangerous climate
change (Buchner 2013). A global climate fund to finance climate change mitigation was estimated, by
examining how much money is currently flowing, its sources and where it is going. In 2011, global climate
finance flows were estimated to be on average $364 billion per year (Buchner 2013). The International
Energy Agency however, estimates the world needs to average $1 trillion each year between 2012 and
2050 to be able to finance a low-emission transition (Buchner 2013). This concludes that currently, global
funds are not large enough to finance climate change. Financing long-term gain (i.e. a transition to a ‘green
economy’) will prove extremely challenging against the desire for short-term economic growth (Buchner
2013).
Australian links with Chinese policy
Under the Labour government, Chinese and Australian officials spent considerable time discussing the
structure of carbon markets. In July 2013, funding was granted for joint research on market-based
mechanisms for climate change policy between Australian and Chinese universities (Slater 2013). This
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Research Project: International Carbon Markets
program has the added benefit of strengthening the bi-lateral relationship, proving advantageous in a
market where international co-operation is mutually beneficial (Slater 2013).
Although the Liberal government is choosing to repeal Labour’s carbon pricing policy, they have admitted it
is likely to be reintroduced in future (most likely by 2020) (Slater 2013), as there is a global trend towards
developing carbon markets. For the time being however, the current government is likely to remain
focussed on the implementation of their Direct Action Plan, and little on development of carbon pricing with
China (Vas 2014).
Given the direction of carbon markets towards a global trading scheme, suggestions have been made for
Australia to re-establish the collaboration with China in helping develop their carbon pricing policy (Slater
2013). This would not only strengthen the relationship but would aid in the complex development of ETS
transparency, such as permit pricing (Slater 2013), both of which will be of extreme benefit if Australia does
reinstate an ETS in future.
Either the employment of a Chinese national or the establishment of a permanent team at the Australian
embassy in Beijing (working on carbon market policy development) would be recommended if Australia is
to establish market entry with the assistance of China (Slater 2013). This would be more efficient than
continuous travel between countries and is more likely to aid Australia’s influence to developments (Slater
2013). The annual base salary (2013) of an accountant, in global market sales, with 8-10 years of
experience, is $113-151K AUD and for a commercial market director (Asia Pacific region) with 15+ years of
experience, is $151-283K AUD (Hudson 2013).
India’s climate change policy
India is Asia’s third-largest consumer of energy (Pearson 2010) and is a rapidly growing nation in terms of
population, economy and importantly, emissions. Their voluntary climate change policy has many
differences, but also some similarities to China’s strategy.
Like China, India has set targets to reduce emissions intensity (carbon emissions per unit GDP) by 2020. It
aims to reduce the growth in emissions by 20-25% from 2005 levels by 2020 (Pearson 2010). The targets
are not legally binding and do not represent a reduction in net emissions produced.
In July 2010, India implemented a carbon tax, applying to coal only, which is used to generate over half of
India’s electricity (Pearson 2010). Coal is the major energy source used to power India. A tax of 50 rupees
per tonne (the AU equivalent of less than $1) of coal was placed on coal both imported and exported from
the country (SBS 2013). The revenue created was used to finance clean energy technology research and
environmental remediation programs, conducted by the National Clean Energy Fund (SBS 2013).
India is considering commencing a domestic carbon market, to start later in 2014 (The Guardian 2011). The
market-based mechanism used is called Perform, Achieve and Trade (PAT) (Mukherjee 2011). It will set
‘emissions budgets’ for 563 of India’s high-polluting businesses in sectors such as power generation,
cement and steel production (The Guardian 2011). If companies exceed their energy budget, they can
purchase energy-saving certificates (Escerts) from companies consuming less energy (Mukherjee 2011) forming a market similar to the trading of emissions permits.
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Research Project: International Carbon Markets
There is concern for the feasibility of the scheme however, due to the weak enforcement measures (i.e. low
penalties for non-complying companies) and the lack of information and experts in this area (The Guardian
2011).
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Research Project: International Carbon Markets
Conclusion
Carbon markets and the ETS will be a monumental component of climate change policy. The market-based
nature of the ETS means there is potential to reduce global carbon emissions at low costs.
As part of their climate change policy, China is attempting to convert to a ‘low-carbon economy’, and is
trialling an ETS scheme to help achieve this. Internationally, this is a voluntary scheme and will therefore
boost China’s power to influence negotiations on global climate change policy.
The ETS will be trialled initially, by implementing several domestic pilot schemes. The seven pilots are
designed differently, with differences in emissions caps and targets, sectors targeted and allocation of
allowances. The design features that work most successfully in the pilot schemes, will be cherry-picked to
theoretically create an efficient, regional or national ETS in future.
The ETS will focus on reducing emissions intensity, not absolute emissions, which will permit China to
commece GHG pollutant mitigation, without compromising its economy.
If the ETS trial is successfully developed in China, the country plans to implement a national scheme by
2020, which will hopefully link with foreign schemes. A Chinese national ETS may encourage other
countries to develop their own schemes, hence act as a catalyst for international development of the
carbon market.
Emissions trading is a relatively new and challenging market. There are a number of barriers to entry that
need to be resolved to facilitate market entry and make it an efficient, less risky system.
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Research Project: International Carbon Markets
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