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Article26 Mar 2021

China Puts a Price on Carbon

China is introducing a nationwide emissions trading scheme (ETS) this year. We summarize an analysis by Citi Research’s Tracy Liao in her recent report on the scope and mechanics of China’s ETS and the potential implications for carbon-producing industries domestically and globally.

China plans to launch a national emissions trading scheme (ETS) before 30 June 2021. Futures trading will likely begin in 2022/23. In the initial phase of China's national ETS, Citi Research’s Tracy Liao estimates that over 30% of China’s annual greenhouse gas (GHG) emissions and 20% of global emissions will be covered by carbon tax and trading programs. Once China includes non-power sectors into carbon trading (likely by 2025), the shares should rise to 64% of China’s 2020 GHG emissions and to 27% of global 2020 emissions.

Initial participants in China’s ETS include power plants, which accounted for over 30% of total domestic emissions in 2020. Under the scheme, participants with emissions above limits derived via sub-sector benchmarking are obligated to purchase allowances. Other sectors expected to be covered by the ETS within a few years are petrochemicals, chemicals, building materials, steel, non-ferrous metals, paper, and domestic aviation.

Figure 1. Estimated 2020 CO2 Emissions from Eight Participating Chinese Industrial Sectors

Source: Citi Research, “Electric Power Decision-Making and Public Opinion Reference”, Issues 4 and 5 (January 29, 2021), note that emissions from industrial sectors are partly double-counted with those from the power sector.


During the first compliance cycle, the impact of the ETS will likely be limited. Benchmarks will be lenient, free 100% allowances will be allocated, and no emissions caps will be imposed. Also, an allowance provision means that any emissions exceeding 20% of benchmarks will not incur additional costs. While this framework in the short term risks incentivizing the buildout of new coal-fired power plants, adding to emissions, Tracy Liao believes that China’s ETS could eventually develop into the world’s largest effective carbon trading scheme (see projected timeline below).

Energy-intensive sectors in China may start feeling the impact of rising carbon emissions costs during 2025-30. Initial ETS market participants include 40 captive power plants linked to smelters that accounted for 58% of China’s 2020 aluminum production. Broadly speaking, China could move up global cost curves relative to countries without emissions controls. Supply chains in China could shift to countries that do not face the same regulatory costs, especially to the many emerging markets that are nowhere near establishing a market for carbon pricing.

Most studies show that ETS programs have a significant impact in curbing carbon emissions. The impact on economic growth is ambiguous, however. Carbon pricing could impair the competitiveness of carbon-emitting firms, leading to weaker industrial output and employment. On the positive side, this could be offset by incentives for fuel-efficiency innovation and the economic benefits from improved air quality.

Figure 2. China to Transform into an Effective and Inclusive Carbon Market During 2025-30

Source: Citi Research, MRV = Monitoring, Reporting and Verification

For more information on this subject, please see China Commodities Focus: Demystifying China’s Carbon Pricing: A Primer.

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation.It is not investment research. The comments expressed herein are summaries and/or views on selected thematic content from a Citi Research report. For the full CGI disclosure, click here.


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