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January 18, 2018

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In pursuit of blue sky, carbon trading looms

China, the world’s largest emitter of greenhouse gases, wants to shed that unwelcome status by becoming the world’s largest market in carbon trading.

The process began with pilot projects in 2013, leading up to a trading start in 2020. The initial trading will be limited to the power industry.

Under the program, power companies will be given carbon quotas, or credits. Those who emit below their quotas can sell unused credits to companies that pollute beyond quotas.

The 1,700 power plants included in the first round of trading emit an aggregate 26,000 tons of carbon dioxide a year, the equivalent of burning 10,000 tons of coal, said Li Gao, director of climate change at the National Development and Reform Commission.

In the future, the trading system will be expanded to include steel, chemicals, building materials, papermaking and nonferrous metals.

Coal power plants were the first to be targeted because they account for a third of all carbon emissions. Coal burning has been fingered as a prime culprit in blanketing northern cities in smog every year.

The number of coal plants in China fell to 7,000 by the end of 2017 from 10,800 in 2015 amid industrial restructuring that closed the most inefficient plants.

Still, new coal plants are being built because “the business is still profitable because of relatively low coal prices,” said James Zhou, an employee at a state-owned power plant.

But day by day, plants like that will “face higher costs, especially after carbon trading starts,” said Li Chen, operational director of Shanghai Carbon Favor New Energy Technology Development Co. “They have to pay more every year because carbon trading won’t end.”

Li Chen specializes in carbon management. He welcomes the advent of carbon trading. “It has finally come!” he said. “The government has shown its serious ambition to create the world’s largest carbon trading market.”

Pilot projects in the carbon-trading scheme began in 2013 and concluded at the end of last year. Nearly 3,000 companies and public institutions in China traded 197 tons of carbon valued at 4.5 billion yuan (US$700 million) through last September 30.

The Shanghai municipal government, which was part of the pilot program, expanded the number of companies included in the project to 279 last year from 197 in 2013. It is now urging all listed companies to include carbon emission data in their annual reports.

Though actual carbon trading is still two years away, its specter looms large. Many companies are beginning to realize they will have no choice but to adapt.

Li Chen recalls the time five years ago when a materials company asked his firm to calculate its carbon emissions to see how it compared with other industries on environmental protection. But the interest was short-lived.

“They quit us soon after,” he said. “At that time, the calculation was meaningless to most clients as the trading hadn’t started. They would say to us, ‘Even if I can prove the new product saves more carbon, so what? I can barely make profit from it.’”

But Li Chen said more companies are coming to his offices nowadays seeking information on carbon trading as the start year approaches.

He said his firm did a carbon assessment for a Zhejiang-based nonferrous metals company, which resulted in the installation of solar panels and turned losses into profits. “Companies are realizing that that they will have to pay for their carbon footprint in the future,” he said. “And we are not talking about a one-year cost. It will have to be part of their long-term business strategies.”

Carbon trading is expected to give a big boost to renewable energy industries and create new jobs.

Xu Liang, who earned a master’s degree in environmental governance in Germany eight years ago, said he switched to the recycling industry from carbon emissions management in China because he didn’t see much progress in that industry at the time.

“But now,” he said, “I would urge people to study environmental engineering because the time is ripe for change.”

Good as it all sounds, reducing carbon emissions has not proven easy worldwide.

Carbon prices in the European Union’s cap-and-trade system dropped to about five euros (US$5.29) at the beginning of 2017 after years of trading stagnation. Experts said the price of carbon dioxide should be about US$30 a ton, and they blamed an excessive issuance of credits for damping the market.

In China’s carbon-trading pilot cities, the price of carbon has ranged from 60 yuan a ton in Beijing to 5 yuan in Chongqing.

Jiang Zhaoli, deputy director of the climate change division at the National Development and Reform Commission, said the ideal carbon price in the future should be between 200 and 300 yuan a ton.

“Below that,” he said, “companies won’t feel the pressure and will have little motivation for trading. China must develop standards for issuing quotas.”

Li Chen said the mechanics of the carbon trading market changes are complex and more refinement is needed to ensure smooth implementation.

But he remains optimistic.

“This step toward blue skies,” he said, will “spur market players to speed up preparations for the coming changes.”


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