On June 18, China's first mandatory carbon emissions trading scheme was launched in the city of Shenzhen by the National Development and Reform Commission. The Shenzhen ETS is the first of seven pilot exchanges, with Beijing, Shanghai, Tianjin, Chongqing, Guangdong, and Hubei to follow. The seven pilots will account for 700 million tons of carbon by 2014, and the trading schemes are expected to play a key role in meeting China's long-term goal of establishing a national carbon trading system by early 2016.

The rules for each scheme will vary so that China can test different designs for its national program. Shenzhen's market will be based on an absolute emission limit—mimicking the schemes in other major economies—set at around 32 million tons. Companies will be allocated a quota of carbon emissions, and companies will need to purchase additional credits should they wish to exceed their quota. For now, 635 enterprises and 200 public buildings will participate in the Shenzhen market, which will account for about 38 percent of the city's emissions. The scheme will cover 26 sectors, including electricity and natural gas, water supply, and industrial manufacturing.

China is determined to offer a sophisticated carbon trading market, and the Shenzhen emissions trading scheme signifies a first for the institutionalization of carbon markets in China. However, the scheme is still in its early stages, and the need for an effective system to record carbon emissions, as well as legislation to give legal recognition to carbon trading, are only some of the unresolved issues.

Ostiane Goh-Livorness