Two major cities in China will begin pilot cap-and-trade programs in June, Shanghai - China's financial center - and Shenzhen.
"The success or failure of those experiments will to a large extent determine the future of carbon markets development in China," says the Swedish thinktank FORES in a study on the subject.
Shanghai's program will cut energy consumption and carbon emissions by an estimated 3.5% this year per unit of gross domestic product, according to the Shanghai Municipal Development & Reform Commission.
Manufacturers that emit 20,000 tons of carbon a year or more are included, about 200 companies in 16 industries, such as steel, petrochemicals and power plants. Together, they release 110 million ton of carbon each year, about half of the city's emissions.
Shenzhen, the Chinese Special Economic Zone - which is across the border from Hong Kong, will include 635 companies, about 40% of the city's emissions.
Other pilot programs beginning later this year are in Guangdong, Tianjin, Chongqing and Hubei.
Guangdong province, the country's largest carbon emitter, is targeting a cut of carbon intensity of 19% and raising the share of renewables to 20% by 2015.
Pilot cities have set emission caps, allocated allowances and established a dedicated fund to support the carbon market.
Beyond the seven official pilots, 100 other regions and cities want to start carbon exchanges.
Last year, the central government chose seven manufacturing centers to begin cap-and-trade pilot programs as part of its 12th Five Year Energy Plan to cut greenhouse gases 45% per economic unit by 2020.
By 2015, when the country-wide program is fully operational, 800 million to 1 billion metric tons of emissions will be regulated in the world's biggest trading system, forecasts Bloomberg New Energy Finance.
Asia's Energy Challenges
In related news, a report from Asia's Development Bank says radical changes are needed to prevent environmental disaster in the region and a gaping divide in energy access between rich and poor.
To continue its rapid growth in coming decades. the region needs an ample supply of clean, affordable energy, but it will be a complex balancing act to provide energy to all citizens while transitioning away from fossil fuels.
"Asia could be consuming more than half the world's energy supply by 2035, and without radical changes carbon dioxide emissions will double," says Changyong Rhee, Chief Economist of Asia Development Bank. "Asia must both contain rising demand and explore cleaner energy options, which will require creativity and resolve, with policymakers having to grapple with politically difficult issues like fuel subsidies and regional energy market integration."
If Asia merely expands energy access without fundamentally changing the way it consumes, the region will double oil consumption, triple natural gas consumption, and coal consumption will spike 81%, with costly and devastating environmental impacts, says the report.
A far greater focus on green, energy efficient cities and transport
systems, along with scaled up research into clean energy, are critical, the report says.
While renewable energy must be significantly increased, shale oil should be approached carefully because of potential contamination of water supplies. The area could have the largest shale reserves in the world.
The report also recommends that countries create a pan-Asia energy market, saying it's achievable by 2030. Connecting power and gas grids would improve efficiency, cut costs, and take advantage of surplus power.
Asia's Energy Challenge is a chapter in Asian Development Outlook 2013: