Draft plan to propose mix of grandfathering and benchmarks, ex-post adjustments for China’s national ETS

Published 07:30 on November 18, 2015  /  Last updated at 07:33 on November 18, 2015  /  China, China's National ETS  /  No Comments

Researchers drawing up a draft allocation plan for China’s national carbon market will propose China use a mix of historical emission data and industrial benchmarks to decide how many CO2 allowances emitters will get, according to Tsinghua University researcher Zhang Xiliang, a key expert assisting the NDRC in the design process.

Researchers drawing up a draft allocation plan for China’s national carbon market will propose China use a mix of historical emission data and industrial benchmarks to decide how many CO2 allowances emitters will get, according to Tsinghua University researcher Zhang Xiliang, a key expert assisting the NDRC in the design process.

Zhang gave a presentation on the status of the allocation process last Friday as Tsinghua opened a new research center on China’s carbon market, and documents seen by Carbon Pulse showed ETS designers expect a draft allocation plan to be ready in December, with the final version due in Sep. 2016.

The presentation offered crucial insights into current thinking among market designers on how to distribute CO2 permits in what will eventually become the world’s biggest emissions trading system, although it is early in the process and there is room for major changes to be made by policy-makers.

BENCHMARKS & GRANDFATHERING

According to the presentation, the draft plan is set to propose that some sectors get permits based on their historical emission levels, while others will be allocated using industrial benchmarks.

The NDRC has not yet made a final decision on which sectors will be included in the market from the start, but Zhang and his team of experts proposed the following division:

Power generators, oil refineries, clinker producers, chemical manufacturers, glass makers and aviation would be given allowances based on industrial benchmarks.

Copper smelters, steel makers, paper producers, airports, power and heat cogenerators and power grids would receive permits based on historical emissions, also known as grandfathering.

  • For benchmark allocation, the guiding formula would be: industrial benchmarks x adjustment factor x production output.
  • For grandfathering it would be: historical CO2 intensity x reduction rate x adjustment factor x production output.

The adjustment factor would be an option for provincial governments wishing to achieve steeper emission cuts than proposed by Beijing.

EX-POST ADJUSTMENTS

Both options would include the opportunity for the government to adjust the initial allocation levels based on actual production data, an approach that is also used in several of the pilot markets.

In Europe, Germany pushed for such an option in 2004 and 2005, but it was eventually rejected by the European Commission, who saw it as undue government intervention in the market.

Amid China’s economic slowdown and plummeting industrial production numbers, China is likely to be keen to include an ex-post adjustment option to avoid a repeat of the EU ETS, which is stuck with around two billion surplus permits as production levels tanked after the financial crisis.

The reduction rate would be set by Beijing, based on China’s INDC pledge to cut carbon intensity 60-65% below 2005 levels by 2030 as well as considerations related to reduction potential and cost.

By Stian Reklev – stian@carbon-pulse.com

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