The opening ceremony for carbon trading at Shanghai Environment and Energy Exchange on Tuesday Photo: CFP

As major Chinese cities such as Beijing and Shanghai continue to be shrouded in smog, the central government has launched a new effort to cut emissions of greenhouse gas.

A new pilot carbon trading scheme was established in Shanghai Tuesday and another one was launched in Beijing Thursday.

According to the International Energy Agency (IEA), China is the world's largest emitter of carbon dioxide and made the biggest contribution to the global rise in greenhouse gas emissions in 2012.

China is also facing domestic pressure to grow its GDP in a more sustainable fashion, and it has vowed to reduce the 2005 rate of carbon dioxide emissions per unit of GDP growth by 40 to 45 percent by 2020.

China tried various means to cut its carbon dioxide emissions in recent years. For example, the Ministry of Finance said in February that China would introduce a tax on greenhouse gas emissions, and the country launched its first carbon trading scheme in Shenzhen, South China's Guangdong Province in June.

On the Shenzhen Carbon Exchange, and the newly launched Shanghai and Beijing bourses, a few hundred approved firms that emit more than their government-allocated share of emissions will be able to buy unused quotas on the market from companies that pollute less.

Although the central government appears to be determined to cut its soaring carbon dioxide emission rates, using carbon trading to reach the goal faces certain difficulties.

Pilot projects

The National Development and Reform Commission (NDRC) announced last year that China would launch pilot carbon trading schemes in seven cities, including Beijing, Shanghai,  Tianjin and Chongqing. And Guangzhou, capital of South China's Guangdong Province, will officially launch an online platform for carbon emission quota trading by the end of this year, Xinhua News Agency reported Wednesday.

Zhang Xiaobo, founder of carbon emissions website tanpaifang.com, told the Global Times Thursday that the trading scheme can be more effective than administrative measures such as carbon taxation, as it offers incentives for companies to emit less pollution.

"By being allowed to sell their unused pollution quota on the market, companies will be able to make money if they pollute less. This motivates them to be proactive in drafting plans to cut emissions and upgrading their production facilities," Zhang said. "Such schemes can bring more fundamental and sustainable benefits than administrative measures."

Wang Tao, a researcher working with the Energy and Climate Program based at the Carnegie-Tsinghua Center for Global Policy, told the Global Times Thursday that the trading scheme would be an efficient measure to cut emissions.

"Carbon trading allows enterprises to economically and flexibly fulfill their carbon emission needs and reduces the social cost of cutting emissions," Wang said. "A carbon tax is easier to carry out but it is hard to meet a specific greenhouse gas reduction goal using this measure."

China will become the world's second-largest carbon trading market with annual transactions for seven tons of greenhouse gas emission quotas, after all of the seven cities have launched their carbon trading exchanges, news portal hexun.com reported Tuesday.

The Beijing carbon trading scheme allows some 490 companies, which account for 40 percent of greenhouse gas emissions in Beijing, to buy and sell unused emission quotas.

The Shanghai market involves 191 companies, including the local units of large State-owned enterprises such as the China Petroleum & Chemical Corporation, known as Sinopec, and China Huaneng Group.

Strong start

Several major deals have already been completed on the Beijing and Shanghai carbon trading exchanges.

Beijing Commercial Daily reported Friday that 40,800 tons of emission quotas had been sold with a total transaction volume of 2.04 million  yuan ($334,903) in Beijing on the first day of trading.

In Shanghai, transactions worth more than 300,000 yuan were completed on the first trading day, according to the exchange's website. Six companies contributed to the deals, including a power plant owned by Shenergy Group Co in the city's Pudong district.

China's low-carbon industry is growing rapidly. Xie Zhenhua, deputy director of the NDRC, said in June that China's low-carbon and energy-saving market would be worth 6 trillion yuan by 2015, according to the website of the Shanghai Environment and Energy Exchange.

However, while 12,000 tons of carbon emission quotas covering 2013, 2014 and 2015 were sold in the first day of trading in Shanghai, only 500 tons were sold on the second day and only 200 tons were sold Friday.

Zhang said China's carbon trading scheme is immature compared with those in the US and Europe, where the exchanges have been operated for years, and it is important for China to test the system before rolling it out to other cities.

Challenges ahead

Zang Hongyin, an expert in the carbon reduction industry, told the Global Times Thursday that the launch of the Beijing and Shanghai schemes was "a landmark event" for China to meet the needs of its residents and the requests of other countries.

However, it is a complicated scheme, and "it needs mature technology, a set of industry standards, the law and policies as well as the participants' high moral standards" to support its development, Zang noted, and it "still has room to improve."

The research unit of Yingda Media Investment Group said in a study released Tuesday that China's emission quota trading system is facing many challenges.

For example, companies often fail to report their emission rates accurately, and both they and local governments sometimes prioritize fast economic growth over environmental protection.

Several industry watchers said the Shenzhen market was not effectively fulfilling its goal of cutting carbon emissions, China Business News reported Wednesday.

The Shenzhen market is open to individual investors, while Beijing and Shanghai are only open to companies and some institutional investors. That means that emission quotas can be treated as a tool for speculation in Shenzhen, Zhang said.

"Some individual investors just buy the quotas and wait for the price to soar. However, the price has not increased dramatically and the buyers won't sell, so companies that need emission quotas cannot purchase them," Zhang said.

Wang said Beijing and Shanghai might gradually loosen their rules, so as to increase market liquidity.

Also, the Yingda study suggested the authorities could establish a nationwide and unified carbon trading scheme to boost the liquidity and volume of the market.