The facts: As part of the commitment to decarbonizing its economy, China launched its National Emission Trade System (NETS) on February 1. The system, still in a very early phase, will be rolled out over the next few years. Currently only covering large energy producers, it will eventually include all major polluting sectors, such as steel and cement, making NETS the largest carbon market in the world by far.
The system is intensity based, setting a baseline for how much CO2 per produced unit of energy is allowed. In this it differs from the European system, which uses an absolute target of CO2 emissions (cap and trade). The NETS will cover 2,225 power companies in its first phase, amounting to one third of China’s CO2 emissions. This figure could eventually rise to 80 percent. The cities of Wuhan and Shanghai are both establishing a registry and trade center for CO2 permits, building on existing institutions from local pilots.
What to watch: With the NETS, China has introduced an important mechanism, although the current standards are too low to make a dent in emitters’ budgets. This can change fast, however, if efficiency standards become stricter. Meanwhile, Beijing has announced a new public platform for tracking emissions and reporting environmental violations, showing a more open approach to supervising violators that have proven hard to monitor. The Chinese leadership will also push green policy in the coming five-year plan, but still needs to balance domestic growth and painful restructuring away from polluting industries. Large new investments in coal send mixed messages about Beijing’s ability to decarbonize, and more consequential policy for phasing out fossil fuel will be crucial.
MERICS analysis: “In the short term, the NETS does not have sufficient teeth to rein in emissions. It attempts to use a market mechanism to regulate emitters that do not have to follow a market logic in their investment behavior, especially in energy. But it clearly shows Beijing’s intention to push sustainability. China sees climate change as a real threat and intends to be a global leader on the issue. With the Biden administration rejoining the climate action table, competition for global climate leadership and standards has become tougher again. Reinstating retired 71-year-old Xie Zhenhua as special envoy on climate sends a clear signal to the world that China does not want to lose ground on climate diplomacy,” says MERICS Senior Analyst Nis Grünberg.
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