While emissions trading in China is currently restricted to the power sector, the country is poised to open its carbon market to the cement, steel and aluminium industries. The Ministry of Ecology and Environment wants to add more heavy-emitting industries to the carbon emissions trading scheme (ETS) by the end of 2024, with the initial plan open for public review on 19 September.

By including the additional industries, the greenhouse gas covered by the exchange will amount to approximately 60 per cent of China’s total emissions, more than all of the USA's emissions, according to the ministry. The expansion of the China ETS will encompass approximately 1500 industrial enterprises.

Initial steps towards full implementation

The ETS in China will be expanded first by familiarising participants between 2024-26, and improving management and quality of the data recovery process while reducing quota allocations to businesses from 2027. It will be a trading performance standard. Carbon allowances quotas will initially be allocated to enterprises free of charge, according to Reuters.

Importantly, there is no upper limit on allowances between 2024-26. Therefore, there is little pressure on enterprises joining the China ETS to reduce greenhouse gas (GHG) emissions immediately. The aim is to expand the market and catch up with the more mature carbon trading schemes such as the European model. China’s ETS currently includes over 2000 companies producing 4.5bnta of CO₂, compared to the EU ETS which had a limit of 1.6bnt of CO₂ in 2021.

Renovation and transformation

From 2024-25, China aims to reduce CO₂ emissions by 3Mt by renovation of equipment in the cement sector, according to the National Development Plan and Reform Commission. During this period,the country aims to cut the equivalent of 5Mt of coal usage in cement production.

In a plan released earlier in the year, China stated that half of the clinker production capacity in its key regions for air pollution control should complete ultra-low emission transformation by the end of 2025. Moreover, by 2028 approximately 80 per cent of China’s overall clinker production capacity will have fully transitioned.

Gradual reduction in carbon intensity

“China’s ETS has minimal impact on CO₂ emissions so far mainly due to factors such as the generous supply of allowances,” said Shan Xinyi, analyst with the Centre for Research on Energy and Clean Air.

However, the ministry is likely to strengthen incentives after 2026 by reducing the number of free allowances and driving up market activity.  “(It will be) gradually reducing carbon intensity benchmarks, introducing more companies and more sectors into this market, and gradually increasing demand for carbon allowances and consequently the trading price,” said Jingwei Jia, an associate director with Sustainable Fitch in Hong Kong.

Therefore, China’s ETS will only become effective in addressing carbon emissions when the emissions cap has been introduced and the carbon emission prices start to rise. By the end of 2023, the cumulative trading volume of carbon emissions allowances in China’s ETS reached 4433Mt, with a total transaction value of CNY24.92bn (US$3.49bn), according to a Ministry of Ecology and Environment report. Between 2026-34, China is projected to cut GHG emissions by 13.3 per cent, compared to a reduction of just 3.6 per cent between 2022-26, according to Resources for the Future. 

Steering China to an effective ETS market that forces cement producers and other heavy industries to reduce their carbon emissions will be essential for the country to reach its goal of carbon neutrality by 2060.

Published under Cement News