Did China just become the world’s leading light in climate change?
Corporate, financial and political leaders met for the “One Planet” summit in Paris last month to great fanfare. The conference launched an “ambitious project to win the battle against climate change”, but commitments and statements of intent far outnumbered tangible actions. We found few reasons to change our assessment of the prospects for climate action from events in Paris.
To much less fanfare, on the other side of the world China announced the launch of a national emissions trading scheme which will become the world’s largest. The country’s State Council approved the scheme in December, albeit with many technical aspects still to be finalised. Initially, the scheme will cover 1,700 power companies and over 3 billion tonnes of CO2 emissions, expanding to other sectors and around 5 billion tonnes in coming years. The scheme replaces regional pilot schemes that have operated for the last few years and, even with its scope limited to the power sector, is one and half times larger than the EU Emissions Trading Scheme.
Although the details of the scheme remain unclear, the move strikes us a critical piece in the global climate policy jigsaw. China is the world’s largest source of greenhouse gases (GHG) and has set ambitious goals to lift non-fossil fuels to 20% of its total energy mix by 2020 and to ensure its emissions peak around 2030. After it is rolled out, close to one-quarter of the world’s GHG emissions will face some level of pricing. Commentators have suggested that prices could reach levels comparable with those in Europe, around $5-10 per tonne, and substantially higher than recent prices in pilot trading schemes in the country.
It also alleviates concerns other regions (in particular the EU) have had that tougher action on their part would undermine competitiveness in global industries. Regional trading schemes are increasingly emphasising coordination that will help avoid distortions in local industries’ competitiveness. The EU and China recently agreed a $11.9 million three-year cooperation project.
There are lots of gaps to be filled, but China’s move underlines the momentum in tangible policy actions we are seeing from global policymakers. Furthermore, it is representative of steps which we believe will prove more important than any political aspirations or rhetoric.
We expect carbon pricing will become an increasingly important competitive driver in global industries, if it is to provide incentives to cut emissions on the scale needed. We outlined our estimate that close to 20% of global listed companies’ cash earnings would be affected by carbon prices around $100/t, and our approach to managing the risk it presents, in our recent research on Carbon Value at Risk.
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