Paris holds the key to China-EU ETS link-up

A survey of participants in China’s carbon markets flagged that prices in a national emissions trading scheme (ETS) to be launched in 2017 are expected to steadily rise from about 40 yuan/t CO2 equivalent (€5.63/t CO2e; $6.27/t CO2e) emitted at the start, to about Yn70/t CO2e in 2025.

A slow ramp-up in prices will give participants time to become accustomed to accounting for the cost imposed by the scheme and to find ways to improve their energy efficiency — a start-up model also used by the EU ETS when it launched in 2005.

But prices in the scheme are difficult to predict and will depend on a number of factors, with the three main ones being the overall level at which any cap is set; the number of free permits; and the continuing strength of the economy. Unexpected developments in all three of these areas caused prices in the EU ETS to fall from €17/t CO2e in March 2011 to under €5/t CO2e just two years later, a situation that the Chinese have experienced to a lesser extent in some of their pilot schemes and are keen to avoid in a nascent national scheme.

The national scheme is in the planning phase and much uncertainty remains. Officials from main economic planning agency the NDRC have been touring the seven regional pilot schemes to gather feedback on teething problems over the past two years of operation. The schemes have largely seen healthy levels of compliance, and the Beijing and Shanghai schemes are the two most likely to form the basis of a national ETS.

Those involved with the pilot schemes say that much depends on the outcome of global climate talks in Paris in December. If China’s leadership judges that a strong deal has been agreed in Paris, then an ETS with an ambitious cap will be prioritised as policy.

EU ETS officials hope that if this proves to be the case then a linkage between the Chinese and EU schemes could be achieved as early as 2020. The two schemes — covering two of the largest areas of economic activity in the world — would then likely become the basis for a global carbon price as other domestic schemes are linked up over time.

The relative homogeneity in price levels between the Chinese and EU schemes — the EU allowance price closed at €8.23/t CO2e on 8 September — will be a major factor in facilitating potential future linkage between the two. But other barriers remain.

It is not yet clear whether China’s scheme will have a hard cap as the EU ETS does — a key factor if the strength of the EU ETS is not to be diluted. And the recently passed market stability reserve also makes linking more complicated by, in effect, adjusting the size of the EU ETS cap. Furthermore questions of governance would need to be decided, in particular whether the European Commission or the NDRC would have final say over any legal adjustments to either scheme.