Applying ETS for incentivising CCS in iron and steel sector in China

Mengfei Jiang, Xi Liang, Francisco Ascui, Qianguo Lin, Ming Lei, Muxin LIU, Li Wang

Research output: Working paper

Abstract

An emissions trading scheme (ETS) is a market-based mechanism that can help to achieve an emission reduction target in a cost-effective way. This report discusses three potential options for incentivising CCS in the iron/steel sector in China via an emissions trading instrument:
• The first option is allowing CO2 stored through CCS to be regarded as ‘not emitted’ for the purposes of ETS compliance, so that covered CCS-fitted steel plant will realise emission reductions at the time of performance, thus effectively generating revenue by selling spare allowances (or not having to purchase allowances) in the market.
• The second option involves a project-based baseline-and-credit approach, where national ETS covered entities can purchase offset credits from CCS-fitted steel plants and use these credits to meet their ETS compliance obligations.
• The third option is to use revenue generated by the auctioning of allowances to support CCS technology development and demonstration in the iron/steel sector.
The first two options require a high price of allowances in the market, meaning that all cheaper abatement options would need to be completely used up before steel sector CCS would become the marginal price-setting option. The currently expected price level in China’s national ETS is unlikely to be able to support a CCS project in the iron/steel sector, without further subsidy from other sources. The third option offers a promising approach to supporting early stage CCS projects, although detailed rules and procedures would need to be established and relevant government finance departments would need to approve this method. The third option is the most flexible option and can also be combined with the other options. The third option, if implemented, could potentially lever much stronger support than options 1 or 2 in the short-term. Eventually, once the carbon price is high enough and the long-term price signal is strong and stable, option 1 on its own would be sufficient. For options 1 and 2, a suitable and robust legal basis and comprehensive MRV system are required. For option 3, the funding from auctioning of allowance could be used in supporting early stage pilot or demonstration CCS projects in the Chinese pilot regulatory framework.
Original languageEnglish
Publication statusPublished - 2019

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