China has finally launched its long awaited national emissions trading system, although concerns remain on the overall impact it will initially have on reducing emissions from the world's largest emitter of greenhouse gases.

China’s Ministry of Ecology & Environment confirmed the scheme commenced trading on 16 July at the Shanghai Environment & Energy Exchange, opening at a price of 48 yuan ($7.41) per tonne of carbon dioxide equivalent.

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According to Chinese state media, the price rose to nearly 53 yuan in the first half-hour of trade and a total of 4.1 million tonnes at 210 million yuan was traded on the first day, with the price closing at 51.23 yuan.

The first phase of China's ETS is limited to spot transactions, with over-the-counter transactions not yet covered and foreign investors and individual investors unlikely to be allowed to participate during this initial phase of the system, according to global law firm King & Wood Mallesons

“Widespread attention has been devoted to market access into China’s national ETS for foreign investors,” the law firm stated.

“It may disappoint some investors that the current regulations fail to provide definite guidance as to how they can participate in the national market. However, it is likely that opening access to what is the world’s largest green-field carbon market to foreign participants is being considered.”

World's largest emission trading system

China's scheme sees carbon emission permits allocated to participating companies that can be used to cover their own emissions, while those that are able to cut emissions can sell their surplus allowance on the exchange.

The first phase of the newly launched scheme only covers the carbon emissions of power companies, with other polluting sectors such as steel and cement expected to be added in future cycles.

However, the 2225 power plants currently covered by the scheme are estimated to emit more than 4 billion tonnes per annum of CO2 equivalent, combined, or roughly 40% of China's annual carbon emissions.

That volume makes it the largest emissions trading system globally, according to the International Emissions Trading Association (IETA), surpassing the European Union’s scheme, which covers about 2 billion tpa of emissions.

“The start of trading in China’s emissions market is a major step in the global drive for climate ambition,” IETA chief executive Dirk Forrister said.

“It is now the largest carbon market in the world — and it aspires to rise to the challenge of delivering China’s ambition for the covered sectors over time. It will need to grow wider to reach other sectors to enable China to meet its share of global net zero emissions, so we hope that this humble beginning is a sign of great things to come.”

Questions raised over near-term effectiveness

The newly launched scheme has raised questions from some quarters over its effectiveness, in the near-term at least, to actually lower China’s emissions.

While other schemes typically place an absolute cap on emissions, China’s allocation of permits will be based on carbon intensity, or the amount of emissions per unit of power generation, meaning limits on emissions can still rise as power generation grows.

As China grows its scheme, it is widely expected to introduce an absolute cap as it looks to meet its targets of reaching peak CO2 emissions by 2030 on its path to carbon neutrality by 2060.

This will also likely see the carbon price increase over time, with its current price well below the current average of about €50 ($58.87) per tonne of the EU emission trading scheme.

Head of markets and transitions, Asia Pacific, at Wood Mackenzie Prakash Sharma believes China's new emissions trading scheme is unlikely to impact China’s emissions in the near term.

“For the carbon market to be effective, China also needs to continue its mammoth roll-out of solar, wind and nuclear energy to provide an alternative to coal or gas,” he said.

“China’s launch will unlikely accelerate emissions reduction in the near term, that’s because there is not enough surplus renewable capacity to quickly transition.”