China will launch two new pilot carbon trading schemes this week in Beijing and Shanghai as it strives to cut soaring rates of greenhouse gas, reduce choking smog and determine the best system for a nationwide roll-out.

China, the world’s biggest source of climate-changing carbon emissions, is under domestic pressure from its population to counter air pollution and has pledged to cut the 2005 rate of CO2 emissions per unit of GDP growth by 40-45 percent by 2020.

As U.N.-led climate talks stumbled in Warsaw last week, the country’s chief negotiator Xie Zhenhua was keen to push the country’s CO2 cutting credentials, challenging developed nations to match the efforts being made by China to tackle global warming.

The new platforms, which will force industrial firms to buy credits to cover any CO2 they emit above allocated quotas, also underscore Beijing’s commitment to “market mechanisms” to slow emissions growth, in line with an ambitious raft of reforms outlined earlier this month.

“It is definitely a move in the right direction, but there are concerns about activity – these are pilot schemes and are used as a learning experience, and local governments might not be particularly concerned by volumes,” said Shawn He, a climate lawyer with the Hualian legal practice in Beijing.

Trading is likely to start slowly as the government treads cautiously and tries to learn lessons from Europe, where an excess of credits has left carbon prices in the doldrums.

Hualian’s He said there were concerns how effective the pilot schemes would be, as no binding carbon caps would be imposed on enterprises and there were no legal means of forcing them to participate.

Policy reform slate

China’s government hopes climate targets will help meet other policy goals on pollution, sustainable development and industrial restructuring.

The pilot markets would not only allow China to reduce CO2 but would also help “upgrade industries”, Xie said in Warsaw last week.

Officials have suggested carbon credits could provide a financial incentive to close down inefficient steel or cement plants. Closures would free up the carbon credits to sell on the market.

The schemes are expected to draw in some of the country’s largest companies, including leading steelmaker Baoshan Iron and Steel in Shanghai. The Beijing exchange will include oil giant Sinopec’s Yanshan refinery, coal miner Shenhua Group and giant utilities like Huaneng.

While the fines for noncompliance are minimal, Hualian’s He acknowledged the state-owned companies are expected to participate fully given political pressure to take part and the close relationship with local governments.

In the first phase, credits will be distributed to member firms free of charge, meaning participants will face additional costs only if they exceed their quotas and have to buy.

The Beijing platform is expected to force bigger polluters to buy more credits in coming years.

China is set to launch seven pilot carbon trading schemes in total, with one already in operation in the southeast city of Shenzhen. Another platform will be established for the province of Guangdong before the end of the year, and another three are due to go into operation in Hubei province and the cities of Tianjin and Chongqing next year.

Officials have said China’s policy on emissions markets has been to “let a hundred flowers bloom” and see which one works best before a nationwide scheme is established.

Each regional-level platform has ambitions to dominate nationwide trade, with the Shenzhen platform already branding itself as the China emissions exchange and hoping its early start will give it an advantage.

“We don’t know how all the schemes will develop but if I have to choose one I would look to Shanghai – it is the most commercially friendly and active city in the country and is where market mechanisms will work the best,” said He.