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China’s Carbon Market Hampered by Fraud, ‘Weak’ Design

Experts say China’s Emissions Trading Scheme has had limited impact, as its design is flawed and Beijing is focused on generating more power. Fraud by market players was also a big concern

China's carbon trading scheme has soft start, activists say.
China's carbon market is not working yet, because officials in Beijing are still prioritising energy output, critics say. Emission allowances are handed out free of charge, and determined not by absolute emission volumes but by industry efficiency benchmarks set at a relatively low bar. File photo of a China coal plant by AFP from 2015.


Data fraud and a soft approach by the government have undermined the success of China’s year-old carbon market, which climate activists say is yet to do the job it was set up for.

More than 2,000 power plants are listed on the country’s Emissions Trading Scheme (ETS), which is already the world’s biggest, but experts say the design is so flawed that it has had little impact in terms of reducing greenhouse gases.

The ETS is part of moves to regulate around 4.5 billion tonnes of annual CO2 output from the power industry. Nearly 200 million tonnes of carbon changed hands in the first year of operations at a total value of 8.5 billion yuan ($1.26 billion).

More sectors are due to incorporated this year but critics are far from impressed. Trading has been slow and dogged by a surplus of emission allocations, as well as concerns about data accuracy.

“In terms of the impact, in terms of environmental gains, clearly it’s been limited,” Matt Gray, co-founder of the TransitionZero climate think tank, said.

Some of the criticism stems from the scheme’s design. Emission allowances are handed out free of charge, and determined not by absolute emission volumes but by industry efficiency benchmarks set at a relatively low bar.

While environmental gains have been limited, China’s cautious approach was designed to gain experience and iron out any potential problems without overburdening businesses and state enterprises.

Other emission trading schemes, such as the world’s second-largest in Europe, also took time to get established, but trading volumes have increased steadily since its launch in 2005. Think tank Ember credits the scheme for cutting the continent’s coal power emissions by 43% from 2013 to 2019.

Liu Youbin, a spokesman with the Ministry of Ecology and Environment (MEE), told a briefing on Thursday that building the ETS was “complicated” and “still at an early stage,” and authorities would continue to make improvements.


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Naming and Shaming

Data accuracy has remained a major concern, with the MEE naming and shaming market players in March for tampering and forging test reports and other misdemeanours.

Ministry spokesman Liu said the crackdown served as an effective deterrent.

But fraud remains one of the major challenges and China has yet to fully address it, according to Shawn He, a Beijing-based lawyer who advises firms on carbon compliance.

“It was a good move by the regulator,” said He. “But I’m afraid the penalties for such malpractices … are too small to intimidate. I hope and expect that to change with new legislation to be adopted in the near future.”

China aims to expand the ETS into other industrial sectors as early as this year, with construction materials, steel, and non-ferrous metals all preparing to join. That could pose even bigger challenges when it comes to data accuracy, Gray said.

“If you can’t get data right on power, then there’s no way you’ll get data right on heavy industry, because the heavy industry sub-sectors are just much more opaque,” he said.

Many of the problems that China’s carbon market faces could be resolved quickly, but the government is unlikely to consider the issue a priority this year as it tries to guarantee energy supplies and rejuvenate an economy hit by Covid-19 lockdowns, Gray added.

“I think it’s obvious that those will be the key priorities, and as a consequence, I think emissions trading could take a backseat in terms of how effective it is as a policy.”

  • Reuters with additional editing by Jim Pollard


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Jim Pollard

Jim Pollard is an Australian journalist based in Thailand since 1999. He worked for News Ltd papers in Sydney, Perth, London and Melbourne before travelling through SE Asia in the late 90s. He was a senior editor at The Nation for 17+ years and has a family in Bangkok.


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