China's Emissions Trading Scheme: What it means for Australia

Xunpeng Shi, Principal Research Fellow, Australia-China Relations Institute, University of Technology Sydney

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1. On December 19 2017 China took the first step towards launching a nation-wide carbon emissions trading scheme (ETS).[1] It has been testing emissions trading since 2013 with  seven pilot schemes in five cities (Beijing, Chongqing, Tianjin, Shanghai and Shenzen) and two provinces (Guangdong and Hubei). [2] In December 2016 Fujian launched its ETS becoming the eighth pilot region.[3] Sichuan launched voluntary carbon trading in December 2016.[4]  

2. China’s nation-wide ETS will be implemented in three phases. The first phase will focus on infrastructure construction (approximately one year) and the second phase will be on system testing (another year). Actual trading is not likely to occur until 2020.[5]

3. The ETS will begin with only the power generation sector and gradually extend to cover energy intensive sectors such as iron and steel, cement, and the petrochemical sector. It is estimated that 1700 power plants will be covered initially. [6] Despite only covering one sector, China’s carbon market will cover 3.3 billion tonnes, 1.7 times the size of the EU’s ETS, currently the world’s largest.[7]

4. China’s ETS will change the balance between fossil fuel and renewable energy consumption. The competitiveness of coal will fall. As a result,  Australia’s exporters of coal to China have reason to be concerned.[8] China is currently Australia’s second and third largest customer of thermal coal and metallurgical coal, respectively.[9]

5.  Products with an energy intensive supply chain may also be disadvantaged by the ETS.[10] This means that Australia’s iron ore exports to China could also come under pressure as steel production in China becomes more costly.

6. Australia’s non-energy exports to China could potentially be negatively affected by measures taken to prevent the transfer of production to countries with more lax emissions standards, i.e. carbon leakage.[11] For example, China might impose a carbon tariff, called the Border Tax Adjustment. Such measures are a new form of regulation not explicitly foreseen in the text of World Trade Organization (WTO) agreements. But core WTO principles, such as that of non-discrimination, might be used to justify their implementation.[12] 

7. The share of coal and natural gas in China’s total primary energy supply in 2016 was 62 percent and six percent, respectively.[13] This means the potential for substitution in favour of cleaner Liquid Natural Gas (LNG) is significant. In 2017 China overtook South Korea as the world’s second largest LNG importer[14], while Australia is soon expected to become the world’s largest LNG exporter.[15]

8. Australia could also benefit in other ways from a growing low carbon emission energy market in China. One example is hydrogen exports.[16] China recently became the first country to operate a tram powered by hydrogen fuel cells.[17]

Author

Dr Xunpeng Shi, Principal Research Fellow, Australia-China Relations Institute, University of Technology Sydney