China officially launched its national carbon emissions trading scheme (ETS) on Friday, creating the largest carbon market in the world.

The ETS aims to contribute to the country’s efforts to control and reduce carbon emission, and foster low carbon development. While planned for several years, the ETS is being initiated shortly after China set long-term climate goals, which include achieving climate neutrality by 2060, and an interim goal to reach peak emissions prior to 2030.

China produces more greenhouse gases (GHGs) than any other country, with emissions nearly double those of 2nd place U.S., as of 2016. The ETS is one of the country’s key tools aimed at achieving its climate ambitions.

The new trading scheme initially covers more than 2,200 companies from China’s power sector, responsible for approximately 40% of the country’s carbon emissions, with more sectors expected to be added over time. Each entity is allocated a fixed amount of carbon emissions allowances, based on an industry benchmark for the type of energy production and site size. Allowances can be bought or sold on the ETS.

Unlike most carbon trading systems which apply an absolute, and typically declining, emissions cap, China’s new system will not apply an absolute cap at launch, but will instead apply a cap based on the total allowance allocations that adjusts over time based on actual production levels.

The carbon price under the ETS also appears to be significantly below that on other carbon markets. According to a Reuters report, the closing price on the first day was 51.23 yuan ($7.92) per tonne, compared to over $60 on the EU Emissions Trading System.

Despite these limitations, market observers see the launch of the market as a milestone in China’s efforts to reduce emissions. Roman Kramarchuk, Head of Future Energy Analytics at energy and commodities markets information, benchmark and analytics provider S&P Global Platts S&P Global Platts, commented: 

“China will be launching the largest carbon trading program in the world, and will look to more cautiously gain experience with its operations before relying on it as the primary mechanism to drive decarbonization. The fact that clean energy policy targets through 2030 should largely be met, aligns with China’s desire for more modest and stable carbon prices in the near to medium term – particularly given current price strength across commodities sectors. Carbon pricing can be among the more important tools China can employ to the daunting challenge of bending the curve after 2030.”

According to Platts, Chinese commodity buyers have already begun to seek out supplies that account for and offset carbon emissions, with the launch of the carbon market potentially adding incentive to look for supplies with lower environmental impact.

Platts’ Head of Energy Transition Pricing, Alan Hayes said:

“The start-up of a carbon market in China could open the door to the development of a whole raft of new carbon neutral products. We have already seen the development of carbon neutral LNG assessments. There is no reason similar carbon neutral products can’t be developed in China incorporating the price of carbon generated by this new trading scheme.”