By Mat Hope
Companies that need to emit more than the allowances they hold can buy them from companies that make the effort to reduce their emissions – setting a carbon price.
In its first year, companies traded the equivalent of 1,608,000 tonnes of carbon dioxide in Hubei's scheme, according to the World Bank's annual review of carbon markets.
In contrast, the Shenzhen scheme aims to improve companies' carbon intensity – their emissions per unit of economic activity.
They then allocate a certain number of permits – normally one per tonne of carbon dioxide emitted – to companies participating in the scheme.
While an absolute cap guarantees emissions will be reduced, overall emissions can still rise under an intensity target – even if companies become less carbon intensive.
Since 2011, China has been developing seven pilot carbon markets with the aim of one day creating a national scheme.
Some schemes force companies that emit more than a specified amount of carbon dioxide each year to take part.
Beijing's carbon price is doing better, but the scheme is hamstrung by the city's lack of industry, limiting its potential to reduce emissions.
The National Development and Reform Commission – the department responsible for the schemes – has long said it wants to include plans for a national market in China's next five year plan.
China has pledged to reduce the carbon intensity of its economy – the level of greenhouse gas emitted for each yuan of GDP generated – by 40 to 45 per cent.
Market regulators set a cap on how much carbon dioxide companies can emit.
At least in the short-term, a carbon market is likely to remain an experiment rather than the backbone of China's climate change response.
Read more here: Business Spectator