In 2017, China is expected to launch the world's largest mandatory national cap-and-trade program, also known as an emissions trading scheme ("ETS"). With an estimated quota of between three and five billion metric tons of GHG emissions, China's national ETS will be twice the size of the EU's ETS and larger than all existing carbon markets combined.

How Will China's ETS Work? China's national ETS will apply to all companies or enterprises in China that consumed at least 10,000 metric tons of coal equivalent between 2013 and 2015 in eight major industries: (i) petrochemicals; (ii) chemicals; (iii) building production and materials; (iv) iron and steel; (v) nonferrous metals; (vi) pulp and paper; (vii) power; and (viii) aviation.

China's national ETS will be capped nationally and regionally. Regional caps will be determined by the number of relevant polluting entities in each province. Relevant entities will have to prepare annual emissions reports according to central government guidelines in order to be submitted to regional governments, which will have the power to impose fines and revoke licences. Several foreign entities are already members of pilot schemes launched in 2013 in seven of China's key cities and provinces.

Lessons from the EU. China faces many of the same problems faced by the EU's ETS. Concerns of an oversupply of allowances, due in part to allocation problems and a drop in fossil-fuelled power generation and manufacturing, reflect an issue that has plagued the EU's ETS since its inception. Faced with critical oversupply, the European Parliament voted to remove one billion excess allowances from the EU's ETS in December 2015. With China's pilot schemes already suffering reduced demand due to overallocation, it remains to be seen whether China's national ETS can avoid the same fate.

In addition, both China and the EU have struggled with the question of how carbon is to be adequately priced. A recent report suggested that a price of ¥240 (€32.93) per metric ton of GHG would be required to drive broad emission cuts from China's relevant entities. But so far, the price has been predicted to range between ¥30–¥40  (€4.12–€5.49). In relation to the EU's ETS, the price per metric ton of GHG allowances fell from €29.20 in July 2008 to €4.70 by January 16, 2017.

If China succeeds in implementing its national ETS, the country will be one step closer to satisfying its Nationally Determined Contribution Plan under the Paris Agreement, which includes peaking GHG emissions levels by 2030. The Paris Agreement itself envisaged a harmonized global emissions mitigation mechanism, potentially allowing for a future system to link up ETSs from around the world.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.