China launched Friday the largest carbon trading system in the world to lower carbon emissions. However, critics and analysts are skeptical about its effectiveness.

China is the largest emitter of greenhouse gases, which drive climate change. The scheme is part China’s efforts to decarbonise the economy by 2060.

Below are some questions and answers about the emissions trading system (ETS).

How does it all work? 

The scheme, which was launched on July 16, puts a price on carbon emissions.

It allows provinces to set pollution limits for large power companies for the first time, and permits firms to buy the right of polluting from other countries with a lower carbon footprint.

The scheme’s first phase covers only the electricity sector. It involves 2,225 power producers that emit four billion tonnes of carbon annually — roughly 30 percent of China’s total emissions.

Officials claim they will add some cement companies to the scheme and some aluminum producers next year.

For every tonne carbon dioxide or equivalent greenhouse gas emitted by a company, a certificate is issued by the local government. Companies are subject to fines if they fail to comply.

Zhang Jianyu, vice president of Environmental Defense Fund China, stated that companies can either reduce their emissions or pay for pollution. However, the former will become more expensive as governments issue fewer pollution permits.

In rare moves to increase transparency, trading companies will be required to make their pollution data available and allow third parties to audit the emissions records.

Random checks carried out by the environment ministry found that one third of companies emitted more CO2 than they reported. Analysts said that fines for non-compliance are too low to discourage pollution.

– Does it reduce emissions? 

It didn’t take as long or as fast as we had hoped.

Initial plans that were more comprehensive would have covered 70-80 percent of China’s emission. These included heavy polluters from seven other sectors, including steel and petrochemical production.

Also, pollution permits are being distributed free of charge instead of being auctioned — unlike the schemes in California or the European Union — which makes it less likely that emissions will be reduced quickly.

The market opened with a trade at 52.8 Yuan ($8) per ton, far less than the $57 required by the EU scheme.

Greenpeace China’s Li Shuo stated that these low carbon prices are not enough to encourage companies to invest in greening operations.

The ETS’s ability to reduce emissions over the long-term will depend on how strict the caps are applied, its expansion and strict enforcement.

The 2017 commission on carbon prices, headed by economists Joseph Stiglitz & Nicholas Stern, stated that carbon must be priced in the $50-100 range by 2030 to ensure that investment decisions are influenced by markets and prices.

– How does China set emissions caps? 

China’s environment ministry issued new rules in December urging businesses to reduce carbon intensity (or the amount of pollution per unit of GDP) instead of cutting total greenhouse gas emissions.

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Lauri Myllyvirta is a Centre for Research on Energy on Clean Air’s lead analyst. She said that it was a subtle but significant difference which could make new coal power plants more economically attractive.

The country’s powerful coal lobby is exerting pressure on efforts to reduce emissions.

China is dependent on coal for 60% of its energy needs and has used more coal since 2011 than all of the world, according to the US Center for Strategic and International Studies.