China’s carbon market grows slowly amid data concerns

As of 29 April, China has seen around 190 million tonnes of carbon emissions allowances (CEA) traded to reach 8.3 billion yuan since the launch of its national carbon market on 16 July, 2021, according to data from Shanghai Environment and Energy Exchange. By summer 2022, the CEA that have changed hands should well exceed 200 million tons.   

The move to trade carbon emissions nationwide came as China pledges to hit peak emissions before 2030 and achieve carbon neutrality by 2060 - aims dubbed the "dual carbon" goals. 

China is the world’s largest carbon emitter, emitting 10 billion tonnes of carbon dioxide in 2021. The country’s carbon market comes with "Chinese characteristics," Zhang Xiliang, professor of management science and engineering and director of the Institute of Energy, Environment, and Economy at Tsinghua University, said in a recent media interview.

The biggest difference between China’s ETS and other carbon trading programs is that China’s system is intensity-based, in which the emission cap is not decided upfront and can be adjusted based on emission intensity.

While the EU ETS and other programs hold covered entities accountable for their absolute emissions measured in tonnes, Chinese firms’ compliance obligation relates to their carbon intensity, measured in emissions per unit of production.

China’s carbon market also only includes the power industry with 2,162 companies, which emit close to 4.5 billion tonnes of carbon dioxide per year, or around 40 percent of China’s total - which already made it the largest in the world. In the EU, ETS emissions cap in 2021 was 1.6 billion tonnes of carbon dioxide. 

Many expect China’s carbon market will expand to seven more sectors, namely petrochemicals, chemicals, building materials, steel, nonferrous metals, paper-making and aviation, despite there being no clear timeline. 

Given the few players involved, China’s carbon trading efforts seemed slow, inactive and limited in the first six months. 

Mei Dewen, president of the Beijing Environmental Exchange, told state media in April that the volume of China’s carbon market was only 7.6 billion yuan (€1.09 billion) compared to €558.9 billion in the EU in 2021. The turnover rate of the EU carbon market exceeded 500 percent, while it was less than 5 percent in China. The average price of allowances was 42.79 yuan (€6.16) per tonne in China, compared to €56 per tonne in the EU.

"Objectively speaking, the EU carbon market has been in place for decades," he said, citing the big gap in GDP and economic structure between China and the EU. 

Tan Luyue, carbon analyst at Refinitiv, echoed this view. 

"2022 will be a year of progress towards China’s dual carbon targets. However, compared with EU ETS trading volumes and price level, China national ETS is on the low side," she told FairPlanet. 

"Also, the relatively low-price level has limited impact upon driving emission reduction, not to mention data quality issues and some compliance enterprises unfamiliar with the ETS data reporting and trading, which further limited its impact currently on the 'dual carbon' national goal," she added.

A slow start is not uncommon, the analyst said. In its first year of trading in 2005, the EU ETS saw 321 million allowances transacted, but this had topped 12 billion by 2021. "We expect it will take some time for an ETS to be mature," she said.

As China’s carbon market is in its infancy, authorities are expected to keep refining the measures. Many will have to take their cue from the Interim Regulations for the Management of Carbon Emissions Trading that are expected to come this year. 

Data fabrication

As carbon trading is gaining momentum in China, data fabrication by companies has been the focus of authorities during the first year of the program.

Disciplinary inspectors at the Ministry of Ecology and Environment (MEE) vowed in March that their key task this year is to address data fabrication, after the MEE made public four companies that fabricated reports and samples or failed due diligence.

"While the fabricated test reports and samples and inaccurate conclusions of the reports were individual cases, they reflect how complex and difficult it is to regulate the carbon market," an inspector said.

The MEE pledged to oversee the quality of the carbon emissions reports, clamp down on fabrication of carbon emissions data, and make the wrongdoings public. 

Tsinghua University’s Zhang said data quality has been a concern in the early days of any carbon market. 

"As time passes, data quality will improve. The carbon markets in the EU and California also saw this problem in the early stage. I think this is normal," he said. "This is largely related to the incompetency of companies, as they misunderstand the requirements for data reports."

He claimed that there is no evidence that companies fabricate data intentionally or conspired with third-party inspectors to fabricate data. The MEE, he added, is also working on a guiding document to address this issue.

Li Yonglin, director and senior vice president of Sinopec Corp. also acknowledged the data quality issue during the Two Sessions in March, the annual meetings of two of China's major political bodies. 

He called for establishing and improving the monitoring, reporting and verification systems for carbon dioxide emissions, strengthening third-party supervision and imposing harsher penalties on data fabricators. 

Li also pointed out other issues he has observed in the carbon market: The daily turnover is low most of the days, coal-fired power plants are excluded from the national market, there are not enough China Carbon Emission Reduction certificates, and the carbon market is separate from renewable energy markets.

He urged the authorities to expand the scale of China’s carbon market to include more players and investors, introduce an auction mechanism and explore new financial tools to diversify the trade, while rolling out measures to incentivise companies to reduce emissions.

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