China's ETS could affect its short-term economic growth: Wood Mackenzie

ETS covered around 40% of China's 11,535 Mt CO2e emissions in 2019.

Wood Mackenzie said China's National Emissions Trading System (ETS) could harm its short-term economic growth. The ETS covers the power sector, which accounted for around 40% of China's 11,535 Mt CO2e emissions in 2019. The ETS sets the China Emission Allowance (CEA) by issuing tradeable allowances to power plants.

Since the launch of the ETS, CEAs have traded at an average price of $7.7/tCO2e (RMB 50.5/tCO2e). The carbon cost accounts for 0.5% to 0.7% of annual generation costs for a typical coal-fired plant with two 300-MW units.

According to Wood Mackenzie Senior Economist Yanting Zhou, "Carbon prices at these levels are unlikely to incentivise generators to improve emission intensity through fuel efficiency, never mind switch to renewables." To comply with the Paris Agreement, Wood Mackenzie estimated that prices need to be in the range of US$100-160/tCO2e. In Europe, carbon prices are trading around €55/tCO2e ($65/tCO2e).

Zhou believes that Chinese policies aimed at controlling carbon emissions in the industrial sector may prove to be more effective than the carbon market. Also, China will have to bear with short term pains to its economic growth. 

China has used production limits and export controls to curb energy consumption and carbon emissions this year.