Carbon trade system opens to utilities

Largest market will be accessible to 1,700 companies, 3.3b metric tons

China started the world's largest carbon trading system on Tuesday, sending strong signals that it plans to use the market as a key policy tool to curb emissions and also is keeping its Paris Agreement commitments.

The nationwide carbon market, which is built upon seven pilot programs implemented since 2013, will be open only to the power generation sector during its early phase, according to the National Development and Reform Commission.

Still, it is expected to exceed the European Union's market, with more than 1,700 power generation enterprises producing 3.3 billion metric tons of carbon expected to be involved, according to the commission.

The power sector accounts for about one-third of China's carbon dioxide emissions.

Zhang Yong, vice-minister of the commission, said the introduction of the nationwide market shows China is delivering on its Paris Agreement promises.

China pledged to peak carbon emissions by the end of 2030 in the Paris pact sealed in 2015.

Putting a price on carbon will propel market players to further cut carbon emissions, as they have to consider those costs in making future investment and production decisions, according to Jiang Zhaoli, deputy director of the commission's Department of Climate Change.

China will not introduce financial products such as carbon futures in the early stage as some other countries did because speculative behavior will do more harm than good in encouraging actual carbon reduction, according to Jiang.

The initial benchmark for market inclusion is set at 26,000 metric tons of carbon or above a year.

Firms involved that plan to emit more carbon should reduce emissions or buy spare credits from other companies, and those with extra allowances can sell or keep them for future use.

While creating the market is a milestone, much needs to be done to make it a success in coming years, experts said.

Transparency and public participation will be crucial for it to be an important incentive for carbon reduction, according to Femke de Jong, policy director of Carbon Market Watch.

Liu Shuang, director of the Low Carbon Economic Growth Program with the Energy Foundation China, said improvements will be needed for a stronger legal basis, a more stringent cap and better allocation.

"For immediate next steps, it is essential for regulators to set up a reviewing mechanism to carefully monitor operational progress and collect data in a timely way to inform the design and decision-making for the next phases," she said.

The government has set a three-year road map for gradually improving the framework before allowing real transactions. Real transactions are expected to take place in 2020.