China’s Ministry of Ecology and Environment announced plans last week to add the cement sector to the country’s emissions trading scheme (ETS) by the end of 2024. The ministry has started the consultation process to also add steel and aluminium production to the system. 2024 will be used as a control year for the new industries entering the scheme, an implementation phase will run in 2025 and 2026 and then the quota allocated to companies will start to be reduced from 2027 onwards. Plants that emit 26,000t/yr of CO2 or higher will be included in the ETS.
Clearly this is a big deal for the cement industry worldwide, as China produces around half of the world’s cement. As Ian Riley the CEO of the World Cement Association commented, "The inclusion of cement in the Chinese ETS is a critical and long-awaited step. As we have seen in Europe, a well-implemented carbon ETS can be beneficial by not only curbing emissions but also catalysing industry restructuring that favours the most efficient and lowest-emitting producers. This move signals China’s intent to prioritise sustainability in high-emission sectors…” In 2023, for example, China produced 2.02Bnt of cement compared to a global output of 4.10Bnt. This compares to the 176Mt of cement produced in the European Union (EU) in 2022. The EU, of course, is the home of the world’s second largest ETS.
China’s National ETS originally started in 2021 focusing on the power generation sector. It followed several pilot markets in eight regions, which continue to operate in parallel with the national system. At present the National ETS covers more than 2000 companies with emissions exceeding that 26,000t/yr of CO2 figure mentioned above. These are mostly generation businesses, but it does also cover captive power plants. Overall, the scheme is estimated to cover around 5Bnt/yr of CO2 and accounts for over 40% of the countryʼs CO2 emissions. The current targets are an 18% reduction in carbon emissions per unit of GDP compared to 2020 levels by 2025, peak CO2 emissions by 2030 and net zero emissions by 2060. Following the addition of the cement, steel and aluminium sectors, however, the ETS is estimated to grow to 8Bnt/yr of CO2 and it should account for 60% of the country’s CO2 output.
In April 2024 the average spot price of emissions traded on the Shanghai Environment and Energy Exchange reached €12.7/t of CO2. This was a notable milestone because in the local currency it exceeded the ‘psychological’ 100 Chinese Yuan threshold. Meanwhile, the EU ETS CO2 price started to increase in 2021 finally making it just past Euro100/t of CO2 in early 2023. Since then, it has declined somewhat but remains at €50-75, well above the levels of the 2010s.
In practical terms the real significance of China’s National ETS for the cement sector should begin to be felt once the government starts to tighten up the allocated quotas from 2027 onwards. It is at this point that it will become apparent how the system is being used to drive the pace of decarbonisation. The other part of this to watch is if or when domestic talk turns to setting up a version of the EU’s Carbon Border Adjustment Mechanism (CBAM) to stop imports. It is at this point that one might be able to tell if the ETS has ‘bite.’
The government has not been shy in regulating industry and one of its starkest tools so far in tackling overcapacity has been mandating cement plants to simply stop production for some months of the year through so-called peak shifting. The National ETS gives it another tool to drive policy changes. Yet it is more complicated and with wider implications to other industries than simply telling plants to take a break. How it fits in globally, where there is a significant difference between the ETS price in China and the EU, remains to be seen. Yet, any additional CO2-based burden upon the cement sector in the world’s largest cement producing country is a major step towards decarbonisation.
