09 November 2021

ESG - Understanding carbon markets in China

This article was written by Richard Mazzochi, Minny Siu, Gu Jieyu and Leonie Tear.

China Mainland (“the Mainland”) has now launched its National emissions trading scheme (“ETS”), anticipated to become the world’s largest carbon market by trading volume and value.

Whilst a unified National ETS is new to the Mainland, the concept and operation of a carbon market is not.  The Mainland started to explore carbon emission trading a decade ago when the National Development and Regulatory Commission approved several regional pilot markets for trading carbon emissions allowances (“CEAs”) in 2011.  Those pilot schemes have been successful and continue to operate in parallel with the new National ETS.  The long term goal is for the regional pilots to be consolidated into the National ETS which will be a cornerstone in the Mainland’s policy for combatting climate change.

In this article, we explain how the National ETS works and consider what’s ahead, looking at the key questions our clients are asking:

  • how does the National ETS work;
  • how will the regional pilot schemes be consolidated into the National ETS;
  • what barriers are there to foreign investor participation and how will these be overcome;
  • what we can expect to see in relation to the development of innovative financial and derivative products for trading on the National ETS; and
  • how does the National ETS compare to the current largest carbon market in the world – the European Union’s ETS?

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