The Asian Development Bank (ADB) will help the People's Republic of China (PRC) set up a pilot provincial emissions trading system that could pave the way for a national scheme and lower greenhouse gas emissions in the country.

"Emissions trading encourages companies to increase energy efficiency and renewable energy supply, which would ultimately result in reduced greenhouse gas emissions. This pilot will provide valuable lessons for the design of a nationwide system to reduce the carbon intensity of the Chinese economy," said Pradeep Perera, Senior Energy Specialist in ADB's East Asia Department.

ADB is providing a $750,000 equivalent grant to lay the groundwork for a cap-and-trade based emission trading system (ETS) in Tianjin municipal area which could begin operations as early as 2013. ADB will help design the platform, including the trading rules and regulatory framework, as well as support the commissioning of the trading platform.

Cap-and-trade based emission trading allows market participants to turn emission savings into a tradable commodity and provides market-based incentives for industries to reduce their use of carbon-emitting fossil fuels. It is economically more efficient than a carbon tax, as the carbon price is determined by the market and intended emission reductions are stipulated by the market regulator. Europe has a well-developed cap-and-trade based ETS, which will provide useful lessons for the design of the Tianjin ETS.

The PRC is the world's largest emitter of carbon emissions, but it has been making major strides in recent years to improve energy efficiency and to increase the use of renewable power sources.

Under its current five-year national development plan to 2015, it has set significant carbon and energy intensity reduction targets and is looking at developing market platforms that can provide companies with economic incentives to cut emissions. The government has also earmarked similar pilot emission trading schemes for development in Beijing, Shanghai, Chongqing municipalities, and in Guangdong and Hubei provinces.

ADB's assistance will include a $200,000 grant from its Technical Assistance Special Fund, as well as a $550,000 grant from the Climate Change Fund. The Fund, established by ADB in 2008, aims to stimulate investments in developing member countries which address the causes and consequences of climate change.