• Chinese ‘carbon trading’ system to be performance based

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      Patrick Lavery

      Combustion Industry News Editor

Keeping with China, and a blog post by Harvard energy economist Robert Stavins has looked at the carbon trading market that the country is poised to announce this year. The market, which would be the world’s largest at around 150% larger than the size of the EU ETS, is likely to be somewhat different from the European market in that it will not be a trade in carbon dioxide emissions permits by volume only, but in emissions per electricity output (known as a tradable performance standard). Under such a system, the government will set a benchmark emissions rate per unit of electrical output (with different benchmarks for different types of generation), assign permits accordingly to each facility depending on its output, and then allow facilities to trade. This approach aims to reduce negative effects on the economy by rewarding greater output, though it has the downside of having a smaller effect on marginal production costs, therefore sending less of a price signal to consumers. Such performance standard trading systems have been put in place before, as in the case of the US leaded gasoline phasedown in the 1990s, as the blog describes. The Chinese system will start with the electricity generation sector but may be expanded to include building materials, iron and steel, non-ferrous metal processing, petroleum refining, chemicals, pulp and paper, and aviation.  When and how permits will decrease under the system, how permits will be priced, monitoring and enforcement, and a range of other issues remain publicly unknown at present, but whatever system is finally put in place (operation is unlikely to commence until 2020), it is sure to be of global significance.