China in carbon trading experiment

Shandong province China will pilot its scheme in seven places; Shenzhen, Beijing, Shanghai, Tianjin, Chongqing and the provinces of Hubei and Guangdong

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China, the world's biggest carbon emitter, is to launch its first carbon trading scheme as a pilot project in Shenzhen.

The test scheme, which will be rolled out to seven areas by 2014, could be spread across the country after 2015.

Beijing is aiming to reduce the amount of carbon dioxide emitted per unit of gross domestic product by 40-45% from 2005 levels by 2020.

The government has previously faced pressure to reduce pollution in cities.

Expensive habit?

Carbon emissions trading schemes are meant to encourage companies to reduce their carbon dioxide emissions by setting a limit, called a cap, on the level of carbon dioxide that can be emitted in a region.

Companies are given credits, each equal to one tonne of carbon, which they can then buy and sell according to individual needs.

Watch: China is launching a new carbon trading scheme in the country's southern city of Shenzhen.

The bigger polluters have to bear the added cost of buying more carbon credits, while the less polluting companies can make money by selling their credits.

The Shenzhen Carbon Exchange is set to launch on Tuesday. It will cover 635 industrial and construction companies. A previous statement from the exchange said it expected to add transport firms as well as all major companies that consume oil, gas, coal and power.

Shenzhen is the smallest of the test regions in terms of overall carbon emissions.

China will pilot its scheme in six other places; Beijing, Shanghai, Tianjin, Chongqing and the provinces of Hubei and Guangdong.

Price swings

Carbon trading schemes have encountered problems elsewhere in the world.

Recently the biggest carbon-trading scheme in the world, run by the European Union, nearly collapsed.

Launched in 2008, the system began successfully with the price for carbon emission credits rising to $40 (£25.50) a tonne, encouraging some companies to switch to using cleaner fuels.

However, as Europe entered its prolonged economic crisis, industrial activity fell dramatically, reducing the need for companies to buy emissions credits.

Along with other factors, this caused a gradual fall in the price of carbon credits and in recent weeks the price has fallen below $4 a tonne.

"In Europe there was definitely a lot of speculation around the credits - it was one of the most volatile commodities," said Winnie Tang, a director at Kind Resources an investment and deal advisory firm.

"A lot of traders were speculating that the price will keep going up and up, but then all of a sudden the financial crisis hit and the prices dropped."

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