China Market Insider CO2-Emissions Trading will Change China’s Chemical Industry

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China’s chemical industry has begun trading CO₂ emissions. Analysts expect emissions trading to have a ‘profound impact on the competitiveness of chemical companies in China’ over the next five years, reports the China edition of PROCESS.

Beijing/China – State-owned chemical company Sinopec has purchased more than 200,000 metric tons of CO₂ credits for its captive power plants. The deal took place on the opening day of the new nationwide emissions exchange in Shanghai, China.

The new national Emissions Trading Scheme, or ETS — China’s first nationwide carbon emissions exchange — officially began operations in Shanghai on July 16. Initially, only power generators are participating. But the 2225 listed power plant operators — primarily subsidiaries of large state-owned enterprises — collectively emit more than four billion tons of greenhouse gases into the earth’s atmosphere. That’s about 40 percent of all China’s emissions. This immediately made the exchange the largest of its kind in the world from its very first day.

Because of the sheer volume of the chemical industry in China and its equally gigantic emissions of greenhouse gases, Sinopec’s active participation on only the fifth day of emissions trading is an important signal for the future development of China's chemical industry in terms of sustainability — and at the same time a sign of hope for climate protectionists, because no country on earth releases as many greenhouse gases into the atmosphere as the People’s Republic.

Sinopec positions itself early-on

Sinopec provided ‘more than six percent of the total transaction volume’ on the new exchange on the very first day of official emissions trading, PROCESS (China) reported. Credits for 200,000 plus metric tons were purchased for power plants operated by Sinopec subsidiaries Shengli Oilfield, Maoming Petrochemical, Shanghai Petrochemical, and Zhongtian Hechuang Energy.

On the fifth day of emissions trading, Sinopec stepped up its game by placing its first wholesale order on the exchange, a ‘bulk trade’ of 100,000 metric tons on behalf of its subsidiary ‘China Resources Group.’ More than 30 power plants are listed on the exchange, linked to Sinopec, PetroChina, and the China National Offshore Oil Corporation.

Although only power generators are allowed to trade on the emissions exchange, for the time being, the Beijing central government plans to include the chemical industry and other industries with high greenhouse gas emissions, including the country's steel and construction industries, during the current five-year plan (2021 to 2025).

Market observers in China expect that state-owned enterprises in the chemical industry will have to participate intensively in emissions trading in just a few years, Chinese and international trade media reported. As a result, the pressure on the chemical industry in China to invest in climate-friendly technologies and processes will increase sharply, various analyses agreed.

Sinopec is currently ‘at the forefront of domestic companies’ in managing its captive CO₂ levels, judged PROCESS (China). Since 2013, a total of 21 Sinopec subsidiaries had participated in regional emissions trading pilot projects in various provinces in China.

Through this participation, Sinopec subsidiaries had been able to practice ‘using market mechanisms to tap large potentials of reducing CO₂ emissions,’ PROCESS (China) quoted a Sinopec spokesperson as saying. It is only a matter of time before China's chemical industry begins emissions trading, the report said.

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A ton of CO₂ for 7.86 dollars

Despite its cautious launch, the national CO2 emissions exchange ETS, which is operated by the ‘Shanghai Environment and Energy Exchange,’ has already outstripped the largest emissions exchanges in the world to date in the European Union and the USA on its first day. Companies with excessively high emission levels can buy credits from all these exchanges, which allow them to release more CO₂ into the Earth's atmosphere without facing financial penalties.

Climate activists, especially outside China, complained that the price of CO₂ China is currently still too low. At the end of the first trading day in Shanghai, a ton of carbon dioxide cost 51.23 yuan (about 7.86 dollars). By comparison, on the E.U.'s now smaller emissions exchange, a ton costs an average of about 50 euros (59 dollars).

China’s emissions exchange is also currently less strict than its older sister exchange in Europe when it comes to trading mechanisms. For example, there are still no absolute caps on CO₂ emissions from power generators. China wants to introduce its companies to emissions trading gradually, giving them time for solid preparation, experts argued in Chinese media. Later, the reins could then be tightened. “Market prices for CO₂ will certainly rise,” a professor at the prestigious Qinghua University in Beijing told reporters.

A small step for China, a big step for the global climate?

In China, too, experts agree that emissions trading will increase pressure on the chemical industry to introduce more energy-efficient processes and invest large sums in clean technologies. “Emissions trading could be a ‘more effective and flexible tool’ to encourage companies to reduce their greenhouse gases than classic top-down measures," Chinese Vice Minister of Environment Zhao Yingmin said at a press conference in Beijing.

It is expected that the cost of CO₂ emissions would soon enter the business plans of chemical companies in China as a significant factor - on par with classic factors such as operating and personnel costs.

To be fair, criticism of China's comparatively cautious start to emissions trading must be countered by the argument that all of China’s progress on climate protection, even modest initial progress, has a much more significant impact on the global climate than any efforts in other countries. In 2006, China surpassed the U.S. as the world’s largest producer of greenhouse gases. By 2019, China’s emissions accounted for 27 percent of all global greenhouse gases — more than the following three climate offenders, the U.S., E.U., and India combined.

China's chemical industry accounts for the largest share of the country's emissions of any industry — 18 percent. Of this, in turn, ‘process emissions’ account for around 6 percent and ‘engineering emissions’ for about 12 percent, specify the Chinese chemical newspaper Zhongguo Huagong Bao.

Therefore, a substantial reduction in emissions in the chemical industry will be crucial to whether or not China achieves its ambitious climate protection targets. State and Party leader Xi Jinping announced last year that the People's Republic would peak its CO₂ emissions by 2030 and achieve climate neutrality by 2060.

‘Although the first batch of emission deals only covered the energy industry, eight particularly energy-hungry industries such as petroleum and chemicals are still expected to be gradually included in this market during the 14th Five-Year Plan,’ the Chinese Chemical Newspaper also writes. The country's chemical parks, in particular, have a special responsibility in this regard, the paper comments.

But the success or failure of this emissions exchange will have consequences far beyond the competitiveness of individual chemical companies in China or even the Chinese president's climate goals. “How well this trading works will go a long way toward determining whether the world has a chance to avoid the worst-case scenarios in climate change,” commented the Wall Street Journal after the opening of the emissions exchange in Shanghai.

* Henrik Bork, former China correspondent of the German Süddeutsche Zeitung and the Frankfurter Rundschau, is Managing Director at Asia Waypoint, a Beijing-based consulting agency. ‘China Market Insider’ is a joint project of the Vogel Communications Group, Würzburg, and Jigong Vogel Media Advertising in Beijing.

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