China’s emissions trading scheme (CN ETS), the largest carbon market in the world, made its debut on Friday, three years after its political launch back in December 2017. In its first compliance period, the scheme is covering 2162 power enterprises responsible for approximately 4,5 billion tons of CO2 emissions per year, which accounts for about 40% of the country’s total emissions. In the coming years, the market is set to expand to industries such as oil, construction and chemicals, although a detailed calendar is currently unavailable.
The new trading scheme is based on a cap-and-trade model, a type of mechanism that already exists in around 45 countries and regions. Still, the Chinese market is different from those operating in other parts of the world, such as the EU ETS. The CN ETS is focusing on reducing carbon intensity (the amount of pollution per unit of GDP) rather than slashing the absolute emissions. CN ETS will be key in achieving China’s target of reaching peak emissions by 2030 and net zero by 2060.
On its first day of trading, both trading volumes and prices exceeded expectations, considering the generous free allocation. The opening price for allowances (CEAs) was 48 CNY (€6,28) and went up 8,5% within just 2 minutes of trading. The session concluded with a closing price of 51,23 CNY (€6,70) and the total trading volume was 4,1 million CEAs, well above anticipated levels.
After a successful opening day, on the second day of trading, the volume fell to just 130 800 CEAs while prices remained above the level of 50 CNY (€6,5). Low trading volume, significantly below the first day, immediately raised concerns about the liquidity on the market. Furthermore, market observers are worried that initial allowances, all granted for free, are too generous while the penalties for non-compliance are not severe enough. A recent study by TranzitionZero revealed that the scheme is already oversupply by 1,56 billion allowances, the equivalent of one year’s worth of EU ETS emissions.