China’s carbon market has seen a significant surge in prices, with carbon permits or credits reaching an all-time high as industries prepare for a looming compliance deadline.
On Monday, emissions permits rose 2.5% to 103.49 yuan ($14.62) per ton. This is the highest since the national market’s launch in mid-2021, as reported by the National Carbon Trading Agency. This increase represents a 35% rise in carbon prices so far this year, fueled by recent government actions aimed at tightening regulations and driving greater activity within the market.
Compliance Countdown: Fueling the Price Surge
China’s carbon market includes a compliance or mandatory Emission Trading System (ETS) and a voluntary greenhouse gas (GHG) emissions reduction market, known as the China Certified Emission Reduction (CCER) scheme, which was revamped earlier this year.
China’s ETS plans to include 8 major emitting sectors—power generation, steel, building materials, non-ferrous metals, petrochemicals, chemicals, paper, and civil aviation—representing 75% of China’s total emissions.
Since its launch, the ETS has become the world’s largest emissions trading platform. It covers about 5.1 billion tons of carbon dioxide equivalent or 40% of China’s total emissions.
The spike in prices comes as China’s power utilities face a year-end deadline to secure enough carbon allowances, also called carbon credits, to offset their 2023 emissions.
The existing ETS system allocates a certain amount of free permits to companies. However, if their emissions exceed these allowances, they must purchase additional credits on the market. The impending deadline has intensified demand for these permits, contributing to the price surge.
This year, the Chinese government introduced stricter regulations to further develop the national carbon market. The goal is to increase the pressure on polluting industries to curb their emissions. These changes could spur a more aggressive transition toward lower-carbon operations among industrial players.
China’s carbon market vitality has been on the rise. By the end of June 2024, the cumulative trading volume in China’s national carbon emissions trading market reached 465 million tons, with a transaction value of around 27 billion yuan (around $3.7 billion).
Expanding the Scope of Regulation
The latest regulatory shift broadens the scope of China’s carbon market, which currently covers around 2,200 power utilities that together account for about 4.5 billion tons of carbon dioxide emissions annually. New rules will extend emissions obligations to other high-polluting sectors starting next year, including:
- steel,
- aluminum, and
- cement production.
Moreover, fossil-fuel power generators are facing tighter emissions caps, which further pushes them toward either reducing their carbon output or purchasing more permits to comply with regulatory requirements.
These measures align with China’s broader climate commitments to peak carbon emissions before 2030 and achieve carbon neutrality by 2060. By intensifying regulations, China aims to use its carbon market to steer industries towards cleaner energy and lower emissions.
Strategic Implications for Industries
As the market adapts to the stricter compliance requirements, industries are being prompted to reassess their carbon strategies. Companies that exceed their allotted emissions must factor in the rising cost of permits. This, in turn, could put pressure on profit margins, especially for high-emitting sectors like power generation, steel, and cement.
To mitigate costs, these industries may accelerate their investments in clean energy solutions, such as renewable power sources or efficiency upgrades, to reduce their reliance on carbon credits.
The inclusion of new industrial sectors into the carbon trading scheme is expected to increase market liquidity, as the demand for permits will expand beyond power utilities to other key players. This change could also drive more transparency and efficiency in China’s carbon pricing mechanism as more companies participate.
What’s Next for China’s Carbon Trading?
With China’s national carbon market still in its early stages, the recent surge in prices represents a crucial phase in its development. Analysts believe that tightening regulations will be instrumental in enhancing the market’s effectiveness as a tool for reducing emissions. The Chinese government’s efforts to refine and expand the market are likely to continue, as it aims to strike a balance between economic growth and climate goals.
If China can successfully integrate more industries into its carbon trading system and continue to enforce stringent emissions standards, the national market could become one of the most significant in the world. This would help the world’s largest greenhouse gas emitter move closer to its climate targets. It could also provide valuable lessons for other countries seeking to implement or expand their own carbon markets.
The response from industrial players in the coming months—particularly as they navigate the end-of-year compliance deadline—will serve as an early indicator of the market’s long-term impact on China’s decarbonization efforts.