Emerging Economies Lead the Charge with China’s Innovative Carbon Market Model

As the world races against time to meet the Paris Agreement’s goal of limiting global temperature rise to 1.5°C, emerging economies in Asia and Latin America are taking bold steps by embracing carbon markets to combat climate change. This dynamic shift, highlighted in a recent report by the International Carbon Action Partnership (ICAP), shows how these vibrant economies are becoming central players in global carbon trading. At the forefront of this movement is China, whose innovative approach to regulating CO2 emissions through carbon intensity rather than absolute reductions is inspiring other nations to develop tailored, hybrid carbon markets. These pioneering efforts not only balance environmental and economic goals but also offer a promising pathway to a sustainable future for emerging economies worldwide.

Emerging economies, particularly in Asia and Latin America, are rapidly embracing carbon markets to tackle climate change, marking a dynamic shift in global environmental strategy. This exciting trend is vividly captured in a recent report on the global status of greenhouse gas emissions trading, co-authored by my colleagues and me at the International Carbon Action Partnership (ICAP). As developed nations steadily cut their emissions and emerging economies launch and expand their carbon markets, we are witnessing a remarkable transformation where the heart of global carbon trade is shifting towards these vibrant economies.

China, a trailblazer in this arena, has designed its carbon markets to regulate CO2 emissions based on carbon intensity (emissions per unit of production) rather than the absolute reductions favored by many developed countries. This innovative approach aligns seamlessly with China’s rapid industrial growth and complex environmental challenges.

Other emerging nations, recognizing the similarities in their growth trajectories and environmental hurdles, are finding inspiration in China’s model. They are not just replicating it but are also infusing their own creativity to develop unique, hybrid carbon markets. These new systems are breaking away from the established European Union model, offering fresh and tailored solutions that reflect their specific needs and aspirations. This wave of innovation signals a promising future for global carbon trading, driven by the ingenuity and determination of emerging economies.

Pioneering Carbon Markets Focused on Reducing Carbon Intensity

While most carbon markets around the world strive to cut total emissions, China has charted an innovative course by targeting carbon intensity. Amidst a period of explosive economic growth and surging energy consumption, China’s regional carbon-trading pilots emerged. Faced with the challenge of setting absolute emissions allowances, pilot governments instead tied them to carbon intensity, offering a flexible yet effective approach.

China’s carbon market caps were crafted using a “bottom-up” strategy. The government set carbon-intensity targets (benchmarks) for companies, which then calculated their absolute carbon emissions allowances based on actual output. These individual allowances were combined to form the market’s overall carbon emissions cap. This ingenious approach has not only proven successful in China but has also inspired similar strategies in emerging economies like India and Indonesia, as well as in Canadian provincial markets. The EU carbon market, after 2021, also incorporated a method to adjust allowances based on carbon intensity per product, enhancing its traditional absolute allowance system.

China’s regional carbon markets have continually evolved, extending their reach from power generation and industry to include public buildings, shipping, public transport, and data centers. This expansion offers a treasure trove of insights, especially in collecting emissions data from diverse sectors. By widening the scope of its carbon markets, China has amassed invaluable experience that can guide global efforts.

Another bold move by China is its inclusion of “scope 2” emissions—indirect emissions—within its carbon markets. Unlike the largely deregulated electricity and heat markets in the EU and US, China’s prices are still regulated, making it tough for energy providers to transfer carbon costs to consumers. By covering scope 2 emissions, China incentivizes energy efficiency, prompting organizations to save on electricity and heat.

Globally, carbon markets are increasingly embracing more sectors and emission sources, influenced by China’s pioneering efforts. The EU and UK carbon markets now cover shipping, while markets in India, Thailand, and Japan are incorporating indirect emissions. This global shift underscores a growing appreciation for innovative and flexible carbon trading models that can effectively address the multifaceted challenge of climate change.

A bustling urban skyline in China, illustrating the country's dynamic approach to carbon market innovation and sustainable urban development.

China’s Blueprint Guiding Emerging Economies Toward Sustainable Success

The clock is ticking for the world to meet the Paris Agreement’s ambitious goal of limiting global temperature rise to 1.5°C above pre-industrial levels. With last year being the hottest on record and the World Meteorological Organization confirming that we are perilously close to exceeding 1.5°C, urgent action is needed. This calls for accelerated and robust emissions reductions globally, particularly in emerging economies.

The global carbon market is poised to play a pivotal role in this endeavor. It’s crucial to develop carbon market models tailored to the unique needs of emerging economies, rather than waiting for these economies to mature before implementing such systems.

China, the world’s largest emerging economy, offers valuable lessons. Its experience is already being applied in new carbon markets in countries like India and Indonesia. China’s current challenges—rising emissions, unstable business statistics, limited personnel capacity, nascent power and energy marketization, and an underdeveloped financial system—mirror those faced by many emerging economies.

China’s carbon markets strike a delicate balance between addressing climate change and fostering economic development. By promoting the adoption of low-carbon technologies, China provides a blueprint for other emerging economies. This approach not only helps establish a global carbon price but also guides the formation and evolution of carbon markets worldwide.

Moreover, government revenues generated from carbon markets in emerging economies can significantly enhance public welfare. These funds can be invested in low-carbon industries, spurring economic development and improving livelihoods in sustainable ways. China’s model demonstrates how emerging economies can leverage carbon markets to drive both environmental and economic progress, offering a pathway to a greener and more prosperous future.