China’s national carbon market, to be launched in 2017, will be tightly controlled by Beijing and include strict penalties for non-compliance and cheating, while efforts are being made to avoid the design flaws that have plagued other emissions trading schemes worldwide, draft regulations seen by Carbon Pulse showed.

The draft law, penned by Chinese planning agency the National Development and Reform Commission (NDRC), will be submitted to a legislative council before being passed on to the State Council, China’s cabinet. Approval there will lead to a public consultation.

Significant changes may still be made to the text when other powerful institutions weigh in, but the document showed the NDRC’s intent to remain firmly in charge of the emissions trading scheme (ETS), partly to deter regional governments from over-allocating to local emitters, and partly to ensure big state-owned companies comply – a perennial concern with environmental policies in China.

Key matters such as the size of the overarching emissions cap, which regions or sectors will participate from the start, and how China’s seven existing regional pilot carbon markets will transition to a national scheme were absent from the draft law.

The NDRC has previously identified the power, metallurgical, non-ferrous metals, building materials, chemical and aviation sectors as the main candidates to be initially covered under a national ETS. Automakers and paper manufacturers could also be included from the start, national media reported in August.

The draft pointed to some free allocations as well as auctioned units, the share of which it said would rise over time.

It also confirmed that emitters will be allowed to use Chinese carbon offsets, called CCERs, to meet an unspecified share of their compliance obligations, and that futures trading would be allowed.

The text said the NDRC is to set aside an unspecified number of allowances in a price stability reserve from the outset in a bid to avoid the woes experienced by the European carbon market, which is bringing in a similar mechanism in 2019 after being inundated by oversupply for years.

China has been planning the national carbon trading programme since 2011. President Xi Jinping confirmed last month that the ETS, which will likely succeed the EU scheme as the world’s largest, would kick off in 2017.

Since 2013, five Chinese cities and two provinces have opened pilot markets to gain experience before the launch of the national scheme. However, the results of these experimental programmes have been mixed, as a focus by most of the local governments on achieving high compliance rates has trumped the underlying goals of reducing emissions or fostering the development of transparent, liquid trade.

Trading in the new national market will likely need to wait for the government to adopt the underpinning legislation.

Below are Carbon Pulse’s key takeaways from the draft:

REGULATION AND ALLOWANCE MANAGEMENT

– The NDRC will decide which sectors are to be included in the market and the threshold for participation. Regional Development and Reform Commissions will provide the NDRC with a list of large emitting facilities in their jurisdictions. The final list of all scheme participants will be made public.

– The NDRC will assign emission caps to each province or region based on the national emissions target. Provincial/regional governments can propose a detailed distribution plan for free allowances within their jurisdictions, but those proposals will be subject to final approval by the NDRC.

– China has pledged internationally to cut the carbon intensity of its economy to 40-45% below 2005 levels by 2020 and 60-65% by 2030, but has shown indications it is willing to enforce more ambitious policies at home.

– An initial set of market rules circulated last year said local governments could enforce stricter rules than the national regulations if they wished, but there was no mention of this in the draft law.

– If local governments don’t use all the free allowances allocated to them by the NDRC, they can set them aside in a new entrants reserve or auction the surplus. Revenue from such sales must be used to set up regional low-carbon funds.

– The NDRC will handle allowance auctions, with a bigger share of permits to be sold each year. Revenue will go to an “incentive fund for national low-carbon development”.

– Manufacturers of clean energy vehicles will be covered by the scheme, but the NDRC will release separate regulations for those.

TRADING

– “Emissions trading products include allowances, CCERs, carbon futures and other trading products,” the draft said. The final decision on whether to allow futures trading rests with the China Securities Regulatory Commission. China’s regional pilot schemes currently allow only spot trading.

– The NDRC will appoint one or more exchanges to host trading. The chosen exchange(s) will be in charge of proposing trading rules, with any final decisions resting with the NDRC.

MRV AND COMPLIANCE

– The NDRC will be in charge of accrediting emissions auditors, who will handle measuring, reporting and verifying (MRV) duties.

– Regional governments would pay for emissions verification at all installations.

– Allowances will be surrendered annually to the provincial or regional governments, which in turn will report the numbers to the NDRC.

TRANSPARENCY

– The NDRC will be responsible for publishing key information including the list of covered facilities, allocation methodologies, annual compliance statistics, and a “determined” list of the trading institutions allowed to participate.

– The draft did not mention whether the NDRC would publish carbon permit allocation data. The lack of transparency in the regional pilots has been identified by participants as being a major issue that is restricting liquidity and further involvement by entities outside the schemes.

PENALTIES

– Companies that fail to surrender allowances by the compliance deadline will be fined three-to-five times the average market price of the permits in the 12 months prior, and a corresponding number of allowances will be deducted from the firms’ allocation for the following year.

– If they fail to pay the penalty by a certain deadline, companies will be fined an additional 3% per day. The fines will be issued by the provincial/regional governments.

– Companies that miss the annual deadline for reporting emissions will be fined up to 1 million yuan ($157,000). A similar fine will apply to verifiers that have submitted false or incorrect data, or who are found to have been involved in the “unauthorized disclosure of commercial secrets”.

– Financial penalties and/or administrative punishments will also be handed out to the exchanges or to government officials if they violate the regulations.

By Stian Reklev – stian@carbon-pulse.com

Not yet signed up to CP Daily? Subscribe to our free newsletter here