But China's huge carbon market potential may not immediately lead to big money flows. That's because polluters under the system will obtain most of their needed allowances for free in coming years. This helps smooth their transition to carbon trading but hampers the market demand. Additionally, futures and other financial products will not be traded in the Chinese carbon markets at the current stage.
Lack of practice and a database
The decision to restrict the involvement of the financial sector has sparked debates among carbon trading professionals. Supporters view it as an essential safeguard to control risks, while opponents argue that prohibiting financial products from the Chinese carbon market will lower trading activities, making the trial run a useless exercise.
On top of that, there is concern over whether China's carbon trading pilot regions are prepared.
One key problem that experts are wrestling with is the absence of accurate records on what polluters have emitted -- crucial information for deciding emissions caps.
Chinese authorities have recorded energy consumption of polluters for years and used it to estimate emissions, but different institutes often come up with different results, due to a lack of unified methods, said Chen Hongbo, associate professor at the Chinese Academy of Social Sciences, a key government think tank in Beijing.
"So even if some emissions data are available, we can't rely on it," Chen added.
The Chinese government launched a program in 2010 to regulate how to measure and calculate greenhouse gas emissions. Chen says this ended the mess but didn't end the work of getting individual polluters' emissions data right.
More work is also needed in consulting with polluters under the system, according to Alvin Lin, climate and energy policy director for China at the Natural Resources Defense Council, an environmental organization based in New York. As polluters are major participants, Lin worries that lacking their input in the market buildup will affect the success of carbon trading.
"As environmentalists, we are happy to see that China's carbon trading progresses quickly," Lin said. "But if China starts carbon trading without adequate preparation, there could be problems, and that could hurt the public's confidence on this new mechanism."
But figuring out the right time to start carbon trading remains tricky, said Jeff Swartz, international policy director at the International Emissions Trading Association, a nonprofit industry group headquartered in Switzerland.
"This is a bit of a chicken-and-egg situation," Swartz said. "Do we start trading even if we are not exactly ready, or do we wait until we get everything ready? I think we have to take risks because the more experience we have, the more learning process there is, the better market design will be later on."
Why trading trumps carbon taxes
Cap and trade entered China's political agenda in 2009, when the government here promised a 40 to 45 percent cut in its emissions per unit of economic output by 2020 against 2005 levels. At that time, Beijing viewed it as the best option among all the emissions reduction measures, including carbon taxes, recalled Lu Xuedu, a former Chinese official and an adviser at the Asian Development Bank.
That's because cap and trade fits emerging economies better, Lu said. Unlike Europe, China is still in the middle of industrialization, and that requires space for further emissions. Lu says Chinese policymakers believe it is relatively easier to balance development concern and emissions cuts through a trading system than a tax-based system.
Besides that, industries here have faced tougher competition in export markets because of a growing production cost and a stronger Chinese currency. Putting a price on carbon will increase the difficulty.