Chinese policymakers have indicated that the country’s Emissions Trading System (ETS) — which will be the largest system of its kind globally and the centerpiece of Chinese climate change policy — is likely to launch in November 2017 “at the very earliest”. The delay will enable China to announce the launch at the next UN Climate Change Conference in Bonn, Germany. However, Chinese officials have privately indicated that this likely will be a “formal” launch only, with allocation of emissions allowances and compliance obligations coming into effect during 2018. As a result, several of the existing ETS pilot programmes in Chinese provinces and major cities have begun to announce new allowance allocations for 2017, including for sectors covered by the national ETS.

The delay reflects a number of policy challenges that regulators at the National Development and Reform Commission (NDRC), China’s primary economic policy-making body, have struggled with in designing the ETS. For example, difficulties in obtaining accurate emissions data for each industrial sector covered by the system, determining benchmarks for the allocation of free allowances to industry, and whether pilot programmes may use offset credits (Chinese Certified Emissions Reductions) to satisfy compliance obligations during the initial compliance period. Verifying emissions data has been an issue for regulators managing China’s eight pilot programmes, with the Hubei Province recently delaying its compliance deadline due to problems verifying total emissions for 2016. The carbon market remains concerned about a potential oversupply of offset credits and reports that policymakers will exclude offset credits from the initial compliance phase of the new National ETS.

In addressing these challenges, China has sought to learn from the experience of California, which recently extended its cap-and-trade system through 2030. California’s system has faced challenges also, including several auctions at which allowances have failed to sell at the minimum price, but the system is widely considered to be the strongest and best-designed emissions trading programme globally. As a result, California’s system is the ideal model for China to analyse in designing its own system.

Given the magnitude of the problems climate change poses and the significance of China’s ETS in addressing them, Chinese regulators’ cautious and patient approach is an encouraging sign of their continued commitment to the current climate change policy. However, the regulators have much work to do. In addition to finalising their approach to the issues described above, NDRC regulators must obtain approval for the programme from the State Council, China’s highest policy-making body.