By Michael Davidson

China’s first mandatory carbon emissions trading system (ETS) pilot debuted last month before a packed auditorium in the southern city of Shenzhen. China’s first official carbon trade was greeted with fanfare and a well-choreographed script of climate officials. Shenzhen is the first of seven cities and provinces expected to unveil cap-and-trade programs in China this year, which drew skeptical reactions from foreign onlookers based on the first day’s low volume – 21,120 tons at 28-30 yuan / ton ($4.55-$5.05).

The ETS pilots are a small market-based component of a broader climate policy that has historically relied on administrative measures carried in five-year plans. The overriding priorities for provincial officials are energy and carbon intensity reduction targets, most recently allocated in 2011. Nationally, these amount to 16% and 17% reductions in energy use and carbon emissions per unit GDP, respectively, by 2015; a 40-45% carbon intensity reduction below 2005 levels by 2020. However, ensuring an early emissions peak (i.e., before 2030) will require more flexible approaches, in particular, market mechanisms, for which the ETS pilots are a useful bellwether. While the merits of the pilots should not be judged by the first trading day, significant obstacles stand in the way of creating a national ETS by 2016, as currently envisioned by the Chinese leadership. Even before the remaining six trading pilots ring the opening bell, we have a good sense of what these obstacles will be. 

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