China’s Guangdong Province Thursday commenced carbon emissions trading, a landmark pilot project in Beijing’s drive to reduce carbon dioxide emissions by 40-45 percent by 2020 over 2005 per unit of gross domestic product.

The pilot schemes are a milestone for a China intent on building a nationwide carbon trading market and vaulting the country onto the forefront of nations seeking to cut carbon emissions. Beijing is determined to do something about its unenviable position at the top of the world ranking over carbon emissions. It surpassed the United States in 2007 as the biggest emitter of greenhouse gases from the burning of fossil fuels.

The United States, however, has been unable to find the political will to introduce regulatory measures that would have an effect on cutting emissions. The country has been switching over to less-pollution natural gas as an energy source after the development of “fracking” or hydraulic fracturing of underground rock to free up previously unreachable underground deposits although the technology is controversial and environmentalists say it leads to distressing pollution of underground aquifers.

Emissions trading is a market-based mechanism designed to limit greenhouse gases. Cap-and-trade schemes, as they are called, work by having the scheme's governing body set a cap on allowable emissions. It then distributes or auctions off emissions allowances that total the cap. Member firms that do not have enough allowances to cover their emissions must either make reductions or buy another firm's spare credits. Members with extra allowances can sell them or bank them for future use.

China’s carbon trading scheme got underway in 2011 when the National Development and Reform Commission, the country’s top economic planning unit, approved pilot schemes Beijing, Tianjin, Shanghai, Chongqing, Hubei, Shenzhen and Guangdong, where the total carbon emission quota is 388 million tonnes. For 2013 and 2014, 97 percent of the quota will be free. The remaining 3 percent is to be sold at auction.

The total allocation for the seven pilot areas is more than 600 million tonnes of CO2, making China’s carbon market the likely second biggest in the world after the European Union. No. 2 in the world after the EU. However, to expand the emissions trading system nationwide after 2015, the government must draft common eligibility standards.

Guangdong’s initial program involves seven transactions dealing with 120,000 tonnes of carbon on the first day. The transactions are worth RMB7.2 million (US$1.2 million at prices ranging between Rmb60 and Rmb 61per tonne, according to the state-owned Xinhua news agency.

"Our carbon emission quota is not enough. Today we bought a quota of 25,000 tonnes through the system, which is smooth and convenient in operation, just like the stock market,” the manager of an energy company in Zhanhiang City told Xinhua. He said he had bought the quota from another power generation company in Haoguan City, at a price of Rmb 60 per tonne.

"The auction mechanism will increase business costs, but it will save energy and reduce emissions, Xu Yunzhao, an official with the Taiwan Cement Yinggde Co., Ltd told Xinhua.

China has been unable to reduce emissions despite a massive clean development mechanism project. Emissions climbed from 7 billion tonnes of CO2 gases in 2007 to 9..7 billion tonnes in 2011, a four year average rise of 8.5 percent – while emissions in the US and EU actually declined by an average of 2.1 percent and 2.2 percent as the global financial crisis cut deeply into industrial production and miles driven by motorists whose falling incomes curtailed their movements.

China has actually promoted more than 3,000 clean development projects at a cost of more than US$200 billion but the country’s breakneck economic pace has meant greenhouse gases have continued to rise. Coal remains the biggest provider of energy in the country.

The country plans to expand its trading system from the initial seven pilot areas to all of China from 2015 on. Furthermore, in an attempt to resolve issues like the oversupply of CERS on the European carbon market, according to a November report by the Seoul-based Samsung Economic Research Institute, China will allow post-facto adjustment of the allocation, while providing independent recognition of emissions control projects not recognized by the UN to enable trading on the domestic carbon market.

Carbon emissions in the seven areas planned for pilot operation account for approximately 16 percent of China’s total. By 2015, according to SERI, China plans to reduce emissions by 16-19.5 percent against 2010 values. Miscellaneous criteria, including time of implementation in each region, reduction amount, and target industries and businesses may vary, according to the SERI report. Moreover, uncertainty regarding changing global requirements has tended to handicap the system.

Carbon emissions have actually dropped in the US and Eurozone economies since 2008, when the global financial crisis cut into industrial production, leading to a large surplus of carbon emission rights. By the end of 2012, about 2 billion excess tonnes of CO2 emissions were available on the market, cutting into the viability of the program. However, with the recovering global economy and the rising economies of Asia, the situation is expected to change.