China’s carbon market is experiencing a notable uptick in prices, with carbon permits hitting record levels as industries brace themselves for an impending compliance deadline. On Monday, emissions permits surged by 2.5% to 103.49 yuan ($14.62) per ton, marking the highest price since the market’s inception in mid-2021, according to the National Carbon Trading Agency. This surge reflects a 35% increase in carbon prices this year, driven by recent government initiatives aimed at tightening regulations and fostering increased activity within the market.
China’s carbon market comprises a mandatory Emission Trading System (ETS) for compliance purposes and a voluntary greenhouse gas (GHG) emissions reduction market known as the China Certified Emission Reduction (CCER) scheme, which underwent a revamp earlier in the year. The ETS in China covers eight major emitting sectors, including power generation, steel, building materials, non-ferrous metals, petrochemicals, chemicals, paper, and civil aviation, collectively representing 75% of the country’s total emissions. Since its launch, the ETS has evolved into the world’s largest emissions trading platform, encompassing approximately 5.1 billion tons of carbon dioxide equivalent, or 40% of China’s total emissions.
The recent price surge comes as China’s power utilities face a year-end deadline to secure sufficient carbon allowances, also known as carbon credits, to offset their emissions for 2023. While companies receive a certain allocation of free permits under the existing ETS system, any excess emissions necessitate the purchase of additional credits on the market. The looming deadline has heightened demand for these permits, contributing to the surge in prices. This year, the Chinese government introduced stricter regulations to bolster the national carbon market, aiming to exert greater pressure on polluting industries to rein in their emissions and potentially drive a more aggressive shift towards lower-carbon operations among industrial players.
By the end of June 2024, the cumulative trading volume in China’s national carbon emissions trading market had reached 465 million tons, with a transaction value of approximately 27 billion yuan ($3.7 billion), underscoring the growing vitality of China’s carbon market. The latest regulatory changes expand the scope of the market, which presently encompasses around 2,200 power utilities responsible for about 4.5 billion tons of annual carbon dioxide emissions. These new rules will extend emissions obligations to other high-polluting sectors from next year, including steel, aluminum, and cement production. Additionally, fossil-fuel power generators are facing stricter emissions caps, further compelling them to either reduce their carbon output or procure more permits to comply with regulatory mandates.
These measures align with China’s broader climate commitments to peak carbon emissions before 2030 and achieve carbon neutrality by 2060. Through intensified regulations, China aims to leverage its carbon market to guide industries towards cleaner energy sources and reduced emissions. As industries adapt to the heightened compliance requirements, they are prompted to reassess their carbon strategies. Companies surpassing their allocated emissions must consider the escalating permit costs, potentially squeezing profit margins, particularly in high-emission sectors like power generation, steel, and cement.
To mitigate costs, these industries may expedite investments in clean energy solutions, such as renewable power sources or efficiency upgrades, to lessen their dependence on carbon credits. The inclusion of new industrial sectors in the carbon trading scheme is anticipated to enhance market liquidity, as the demand for permits expands beyond power utilities to other key players. This shift could also foster greater transparency and efficiency in China’s carbon pricing mechanism as more companies engage in the market.
As China’s national carbon market is still in its nascent stages, the recent price surge represents a critical phase in its evolution. Analysts believe that stringent regulations will play a pivotal role in enhancing the market’s efficacy as a tool for emissions reduction. The Chinese government’s ongoing efforts to refine and broaden the market are expected to persist as it strives to strike a balance between economic growth and climate objectives. Successful integration of more industries into the carbon trading system and continued enforcement of rigorous emissions standards could position China’s national market as one of the most significant globally, aiding the world’s largest greenhouse gas emitter in advancing towards its climate targets.
Furthermore, this could offer valuable insights for other nations looking to establish or expand their own carbon markets. The response from industrial players in the upcoming months, particularly as they navigate the year-end compliance deadline, will serve as an early indicator of the market’s long-term impact on China’s decarbonization endeavors.
