Nation to expand carbon market soon

China is set to significantly expand its carbon emissions trading system, aiming to become the world's largest carbon market. After a trial phase that started in 2013, China launched its national carbon market in July 2021, initially covering the power generation sector. This sector accounts for approximately 40% of China's total carbon emissions and includes over 2,000 companies with annual emissions exceeding 26,000 tons of CO2.

The expansion of the carbon market is part of China's commitment to peak carbon emissions before 2030 and achieve carbon neutrality by 2060. The government plans to include additional high-emitting industries such as petrochemicals, steel, cement, aluminum, and building materials. By gradually including more sectors, China aims to create a unified and efficient market that can drive down the cost of reducing carbon emissions through the use of market mechanisms.

The national carbon market operates on a cap-and-trade principle. The government sets an overall emissions cap for the covered sectors and then allocates emission permits to participating companies based on their historical emissions. Companies that emit less than their allocated permits can sell their surplus on the market, while those that exceed their limit must buy additional permits or invest in measures to reduce their emissions.

By creating a financial incentive for companies to lower their emissions, the carbon market encourages innovation and investment in cleaner technologies and practices. As the market expands and matures, it is expected to play a crucial role in helping China meet its ambitious climate targets.

China's progress in developing its carbon market is being closely watched by other countries and international organizations as a potential model for how large economies can use market mechanisms to combat climate change. The expansion and success of China's carbon market could have significant implications for global efforts to transition towards a low-carbon economy.