Emission Trading Mechanisms in CAREC Region: Progress, Challenges, and Solutions

In the 21st century, one of the most pressing global issues is the escalating threat of climate change, driving countries to adopt innovative mechanisms that maintain a balance between economic growth and environmental sustainability. In this quest, one such tool is the emission trading mechanism (ETM), which is a market-based strategy that caps greenhouse gas emissions while permitting the trade of emission allowances. The ETM has already proven effective and successful in developed economies such as the European Union, New Zealand and South Korea. However, in developing economies, the ETM face various challenges, such as limited awareness, cap stringency, market liquidity, and allowances allocation (Figure 1). In the same context for the CAREC (Central Asia Regional Economic Cooperation) region, the question arises: what are the unique challenges and opportunities to implement EMT in this region? This blog delves into the progress, challenges and potential solutions for the implementation of ETM in CAREC nations, with insights from China and Kazakhstan. 

Figure 1: Potential Challenges in the ETM lifecycle

A Global and Regional Overview of ETMs

ETMs have emerged as a cornerstone of modern climate policy to control GHG emissions, combining environmental goals with economic incentives. By comparing the key metrics with the well-established ETMs in the European Union, South Korea, and New Zealand, this blog presents disparities and opportunities that arise due to the varying levels of economic growth and institutional development. The effective implication of these ETMs is the cornerstone of their climate policies, robust financial architecture, regulatory competencies and technological capabilities. Globally, the EU’s emission trading system      (EU ETS) is leading, covering more than 38% of EU GHG emissions and generating substantial revenue for the reinvestment in green projects and innovations. Asian most advanced ETM of South Korea launched in 2015, covering 89% of national emissions, employing the hybrid pricing mechanism to ensure market stability. While New Zealand ETM is the first economy-wide mechanism covering all sectors with flexible carbon pricing, it highlights the balancing between sustainability, economic competitiveness and global carbon market integration.

Within CAREC, Kazakhstan and China have shown promising developments in ETM. China has the world’s largest national carbon market, launched in 2021, focusing initially on the power sector, where the ETM covers 40% of GHG emissions (Figure 3). Regardless of the limited sectoral coverage, the ETM of China made USD 546 million in investments in green transition in 2022, demonstrating high potential for scaling financial mechanisms in driving the green transition. Kazakhstan stands out as the regional pioneer, having launched ETM in 2013, focusing on key sectors such as power and industry. Its ETM covers 47% of national GHG emissions; however, the ETM’s reliance on free allowances and low carbon prices reflects the need for expansion in financial architecture and sectoral coverage. Meanwhile, within the remaining CAREC region, Pakistan is at an early stage (in progress) in the adoption of ETM (Figure 2).

Figure 2: Status of Emission Trading in the CAREC and neighbour countries

Key challenges for ETM Implementation and progress in the CAREC region

The ETM’s broader implication across the CAREC region faces significant challenges, Such as low carbon prices and market maturity. This is a critical challenge as compared to the EU carbon price of USD 90/ton, the Kazakhstan carbon price hovers around USD 1.04/ton (Figure 3). This price disparity highlights that the low pricing fades the potential impact of ETM due to the lack of incentives for industries to invest in emission-reduction technologies. Moreover,  the region faces policy inconsistencies and a lack of a harmonized regulatory framework, which depresses the effectiveness of ETMS. Likewise, the low stakeholder awareness, poor industry participation, and outdated monitoring, reporting, and verification (MRV) infrastructure are the significant barriers to ETM progress,  market transparency, and efficiency. Additionally, due to the heavy reliance on most energy-intensive industries in the CAREC region, the transition to the low-carbon model poses significant economic and social challenges, such as a shift in industrial structure, public investment and job markets. 

Figure 3: Different dimensions of ETM, Carbon markets key metrics

Source: ICAP (Emissions Trading Worldwide: Status Report 2024)

The  CAREC region has high exposure to trade competitiveness risk in its industries due to the EU’s Carbon Border Adjustment Mechanism (CBAM). For instance, Kazakhstan, with 14% of its products exported to the EU, has a high exposure to trade risk (Figure 4: CBAM exposure index of 0.0158); therefore, the country has to cover and implement effective ETM on the highly carbon-intensive sectors such as cement and steel. However, the legacy infrastructure and evolving regulatory frameworks pose significant barriers. Similarly, China also faces challenges in maintaining competitiveness under CBAM due to the coverage of a single sector under its ETM.

Figure 4: CBAM exposure index

Source: World Bank. 2023.

Strategic Recommendations as the Solutions

For the effective and successful implementation of the ETM in the CAREC region, a set of strategic recommendations offers practical solutions to address the discussed challenges. For example, the financial architecture must be optimized following the hybrid pricing mechanism (fixed and market-based carbon pricing approach) of the EU and South Korea. Moreover, the insertion of international funding sources, such as green bonds and public-private partnerships, supports the adoption of low-carbon technologies and investments in green energy projects to ensure a sustainable green transition. Besides, to obtain transparency and efficiency in the carbon markets, securing trading platforms and advanced MRV systems investments is crucial. Likewise, the strength of the regulatory framework is the key to aligning national policies with international standards; it helps to protect trade competitiveness under the EU’CBAM. Therefore, the establishment of a robust legal structure is essential to enforcing compliance and streamlining the carbon market functions.

Further, to obtain maximum benefits and effective operations of ETM, it is vital to build stakeholders’ capacity and foster higher participation and compliance rates. This involves conducting awareness and training workshops and creating exclusive platforms for stakeholders’ feedback, which ensure adaptive and participatory policy generation. Additionally, for the uniform implementation of the ETM framework, regional cooperation and collaboration between the CAREC countries is necessary, which supports the sharing of best practices, enhancement of liquidity, establishment of regional carbon market and fostering collective progress toward emission reduction goals. These recommendations provide the roadmap to overcome the challenge and improve progress. By learning from the globally leading ETMs and employing the experiences of Kazakhstan and China, the CAREC region can build effective and resilient carbon markets to achieve global sustainable development goals.

References and Links

ADB. (2016). Emissions Trading Schemes and Their Linking : Challenges and Opportunities in Asia and the Pacific. In Asian Development Bank. https://www.adb.org/publications/emissions-trading-schemes-and-their-linking

CAREC Energy Outlook, 2022. (2022). Carec Energy Outlook 2030 (Issue December), https://www.adb.org/publications/carec-energy-outlook-2030

CBAM exposure index, World Bank. 2023 https://www.worldbank.org/e/data/interactive/2023/06/15/relative-cbam-exposure-index#4.

ICAP. (2023). Welcome to the ICAP ETS Map | International Carbon Action Partnership. https://icapcarbonaction.com/en/ets

ICAP. (2024). Emissions Trading Worldwide: Status Report 2024. Berlin: International Carbon Action Partnership. https://icapcarbonaction.com/en/publications/emissions-trading-worldwide-2024-icap-status-report

IEA. (2021). The Role of China’s ETS in Power Sector Decarbonisation. https://www.iea.org/reports/the-role-of-chinas-ets-in-power-sector-decarbonisation

Tsevegjav, B. (2023). Regional cooperation in promoting low-carbon energy development in the CAREC region: Challenges and opportunities. Asia-Pacific Sustainable Development Journal, 30(2), 63–88. https://doi.org/10.18356/26178419-30-2-4