After running pilot projects at the local level for over a decade, China officially launched its long-awaited national carbon emissions trading market on Friday.
According to China's Ministry of Ecology and Environment (MEE), China's Emissions Trading Scheme (ETS) has replaced the EU's as the world's largest emissions trading system.
Here's everything you need to know about China's carbon market.
What is a carbon market?
A carbon market is where greenhouse gas emitters can buy and sell greenhouse gas emissions permits or allowances.
The government sets the cap on the total amount of carbon emissions for the year, then companies receive or buy emissions quotas within the cap. A company must provide enough allowances to cover all its emissions yearly or face a fine. They can trade carbon emission allowances with one another on the trading platform.
In China's ETS, the majority of the allowances are given to emitters for free; however, in most of the other carbon markets, they are purchased.
Also, China's version targets intensity rather than capping emissions.
In the EU and U.S. versions, an overall cap is set on the number of carbon credits. This is the amount of carbon the signatories of the agreement are happy to emit over a given period. China's scheme will set benchmarks for each separate power plant, which will vary between facilities. As before, those that do not exceed their quota can sell it to those that do.
In the first phase, the system only covers the power sector. Over 2,000 power companies, emitting more than 4 billion tonnes of greenhouse gases per year or 40 percent of the country's yearly total, have participated.
According to MEE, seven more high energy-intensive industries, including iron and steel and construction materials, will be covered by the carbon market in the future.
Why build a carbon market?
The country is trying to use the trading scheme to reduce greenhouse gas emissions, as part of its effort to peak its emissions by 2030 and achieve carbon neutrality by 2060.
"For the first time, the responsibility for controlling greenhouse gas emissions at the national level is left to the enterprises," said an earlier statement released by the MEE.
What's the price?
Carbon pricing is a crucial component in deciding how effectively the carbon market can help reduce carbon emissions.
The first deal in China's ETS was sealed at 52.78 yuan ($8.16) per tonne, with a total of 160,000 tonnes of emissions worth 7.9 million yuan traded while the average carbon price on the European Union ETS between 2021-2025 is 47.25 euros ($55.67) a tonne, according to a survey by the International Emissions Trading Association.