What Is China Emission Trading System?

After a decade of preparation, China has launched its national emission trading system as part of its efforts to curb greenhouse gas pollution and go carbon neutral by 2060. China is the world’s biggest emitter of climate change-causing greenhouse gases but hopes that the system will decarbonizes its mammoth coal-powered economy.

China’s emission trading system (ETS) is essentially a carbon emissions market that turns the power to pollute into an allowance that can be bought or sold. It is a way to put price on carbon by giving selected CO2-emitting sites the right to release a certain amount of carbon in the form of ‘permits’ or ‘allowances’ which can be traded.

Why China is introducing a national emissions trading system?

China is currently ranked the planet’s biggest polluter, accounting for more than a quarter of the global total in 2019, more than the combined total of the next three biggest emitters – the United States, European Union and India – according to US think-tank, the Rhodium Group. The Asian nation is hopeful that the ETS will help drive its extensive energy transition in a cost-effective way.

The plan to implement a national ETS was years in the making, starting in 2010 when China announced that it would introduce a system to regulate emissions. Along the way, China launched a series of pilot ETS located in various parts of the country – Beijing, Tianjin, Shanghai, Chongqing, Shenzhen, Guangdong and Hubei – to reduce carbon emissions at low cost.

How will China’s emission trading system work?

Like other national trading systems, China’s ETS work by limiting the amount of carbon dioxide that companies can release, encouraging them to be more energy efficient and adopt clean technology. It takes over from the regional pilot projects that have been around since 2014.

With a price put on pollution, firms can buy the right to pollute from other firms with a low-carbon footprint. At the end of each cycle, companies must submit permits equal to their actual emission. Companies that fail to cut their pollution will face deep economic hits when they exceed the fixed amount of carbon they are allowed to release for the year.

On the first day of trading, the average price per ton emitted was around $6, which is significantly lower than the average EU price of $49.40 per ton. Analysts are skeptical that the low carbon prices will push companies to invest in greening their operations.

In a rare move to demonstrate transparency and responsibility, companies in the trading system will have to make their data pollution and get third parties to audit emissions records.

What is covered by China’s ETS?

Although different sectors (like steel, aviation and cement) emit significant amount of pollution in the country, China is only beginning the ETS with the energy sector for two reasons. First, the energy sector is responsible for about 30 percent of the country’s total CO2 emissions. Second, the sector has fewer players, making it easier to monitor compliance.

Consequently, some 2,225 power plant operators, emitting four billion tonnes of carbon each year, have been selected to trade on the platform run by Shanghai Environment and Energy Exchange. Other polluting sectors are expected to be added to the system over the next three to five years.

However, there is no fixed cap on the amount of carbon dioxide can release, which means there is little to no pressure on companies to cut down their emissions.


China’s launch of its national emission trading system demonstrates its commitment to fight climate change by curbing CO2 emissions. Because of its flexible emission cap and low carbon prices, it may take years for the system to achieve results but expansion of the program, strict enforcement and introduction stringent green policies will accelerate emission reductions.