DOSSIER: China’s emissions markets

Published 19:00 on November 1, 2016  /  Last updated at 22:16 on October 27, 2020  /  Conversations, Dossiers  /  No Comments

This dossier unpacks key details from what is due to become the world’s biggest carbon market. It has an overview of the impending national market, outlining issues yet to be resolved before its 2017 launch. It also presents key details about the seven pilot markets and how they are due to interact with the national scheme.

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Summary (ICAP)

ICAPlogoSummary provided by the secretariat of the International Carbon Action Partnership (ICAP), a multilateral forum working on carbon markets. For more information, visit ICAP’s website.  Copyright © ICAP and reproduced with permission.

China national

General information:

Building on its experience of successfully piloting carbon markets in seven regions, China launched its national ETS politically in December 2017. This launch has been a goal set in 2015 at China’s highest political level, which was reaffirmed by its Nationally Determined Contribution under the Paris Agreement, and the “13th Five-Year Work Plan for Greenhouse Gas Emission Control.”

The provisions for the launch and incremental development of the ETS are laid out in the ‘Work Plan for Construction of the National Emissions Trading System (Power Sector)‘ (the “Work Plan”), approved by the State Council in late 2017.

The ETS’ objective is to contribute to the effective control and gradual reduction of carbon emissions in China and the achievement of green and low-carbon development. The ETS is expected to regulate ~1,700 companies from the power sector (including combined heat and power, as well as captive power plants of other sectors), which emit more than 26,000 metric ton GHG or consume more than 10,000 tce per year. The Chinese system would cover more than three billion metric ton of CO2e in its initial phase, accounting for about 30% of national emissions. The scope is to be further expanded in the future.

The Ministry for Ecology and Environment (MEE) is now responsible for ETS matters.  In 2019,  the MEE conducted a China-ETS Allowance Allocation and Management Training Series in more than 15 cities, to enhance the capacity and readiness of various stakeholders for the national ETS.

The Work Plan foresees a three-phase roadmap for the development of the ETS:

  • First Phase: will focus on the development of market infrastructures;
  • Second Phase: foresees simulation trading; and
  • Third Phase: will be the deepening and expanding phase with allowances spot trading for compliance purposes.

A gradual transition of the Chinese pilots is foreseen by the Work Plan. In the short term, the existing ETS pilots are expected to operate in parallel to the national market, covering the non-power sectors. Over the medium- to long-term, they are expected to be integrated into the national market once it is fully operational.

Background information:

Compliance in the national ETS is mandatory for entities of covered sectors which fall under the inclusion threshold of ~26,000 tCO2/data year.

There is an absolute cap of ~3,300 MtCO2 (2020).

Total emissions and proportion covered:

10,976 MtCO2 (2012); ~30% covered

Liable entities:

~1,700 (2018)

Sector coverage:

Downstream: Power

Gas coverage:

CO2 only

 

Allocation:

Free allocation

 

Offsets and credits:

Domestic

 

Phases and compliance periods:

Phase 1: Developing market infrastructures

Phase 2: Simulation trading

Phase 3: Expanding sectoral coverage and deepening and expanding the system

Compliance period: One year

 

Temporal flexibility:

Expected to allow banking across compliance phases but not borrowing

Market stability provisions:

The National Development and Reform Commission, in cooperation with other ministries, are to develop an adjustment mechanism to prevent abnormal price fluctuations, as well as a risk prevention and control mechanism to prevent market manipulation

For further information, visit the ICAP ETS Map.

 

Pilot markets

Beijing

General information:

The Beijing Pilot ETS was launched in November 2013; to date, it has concluded six compliance years. Beijing is one of the few Chinese pilots with ETS regulation passed by its regional congress. The ETS covers about 40% of the city’s total emissions, including both direct and indirect emissions from electricity providers; heat, cement, petrochemicals, other industrial enterprise; manufacturers; the service sector; and public transport. In cases of consecutively high or low average prices, the government can also auction or buy back extra allowances.

Beijing also has pioneered cross-regional trading with its neighboring provinces. A Framework Agreement for Cooperation on the Study of Cross-regional Carbon Emissions Trading with Tianjin, Hebei, Inner Mongolia, Shaanxi, and Shandong signed in 2013 provided a basis for cooperation. As a consequence of this, several cement companies from the Hebei province and companies from both the cement and power generation sectors voluntarily participated in the Beijing ETS in 2014 and 2015. Several companies from the same sectors in Inner Mongolia also voluntarily participated in 2015.

Background information:

Compliance in the Beijing pilot ETS is mandatory for entities of covered sectors that fall within the inclusion threshold of 5,000 tCO2/year.

There is an absolute cap of 50 MtCO2 (2017).

Total emissions and proportion covered:

188.1 MtCO2e (2016); 40% covered (2019)

Liable entities:

903 (2018)

In addition, 624 entities have mandatory reporting obligation but no surrender obligations.

Sector coverage:

Mixed: Power, industry, buildings,

transport

Gas coverage:

CO2 only

 

Allocation:

Free allocation

 

Offsets and credits:

Domestic

 

Phases and compliance periods:

Trading period: 2013-2019 (Short term: existing Chinese regional carbon markets are expected to operate in parallel with the national Chinese carbon market; medium to long term: expected to be integrated into the national market, once fully operational.)
Compliance period: One year

Temporal flexibility:

Banking is allowed.
Borrowing is not allowed.

Market stability provisions:

The competent authority can auction extra allowances if the weighted average price exceeds CNY 150 (USD 21.34) for 10 consecutive days, and buy back allowances from the market using a special funding source from the municipal budget if the price is below CNY 20 (USD 2.85).

For further information, visit the ICAP ETS Map.

Chongqing

General information:

Chongqing launched its pilot ETS in June 2014 and to date has concluded five compliance years. The system covers enterprises from seven sectors: power, electrolytic aluminum, ferroalloys, calcium carbide, cement, caustic soda, and iron and steel. The 195 enterprises covered by the system in 2018 accounted for ~50% of the city’s total emissions. Among the eight Chinese pilots, the Chongqing ETS is the only one that covers non-CO2 gases.

One unique feature of the Chongqing Pilot ETS is that it has a clear path for cap setting, in which an annual reduction rate is set and applied to the base year emission (i.e., the sum of the covered entities’ highest emission amount of the year from 2008 to 2012). From 2013 to 2015, the annual reduction rate was 4.13% and afterwards 4.85%. The Chongqing Pilot ETS had suffered from low liquidity in past years due to a relatively loose cap in its early years.

Background information:

Compliance in the Chongqing pilot ETS is mandatory for entities of covered sectors that fall within the inclusion threshold.

There is an absolute cap of ~ 100 MtCO2e (2018).

Total emissions and proportion covered:

~300 MtCO2e (2018); 50% covered[i]

Liable entities:

195 (2018)

Sector coverage:

Downstream: Power, industry

Gas coverage:

CO2, CH4, N2O, HFCs, PFCs, SF6

Allocation:

Free allocation

 

Offsets and credits:

Domestic

 

Phases and compliance periods:

Trading period: 2013-2019[ii]

Due to the late start, compliance for 2013 and 2014 were combined in one phase. A one-year compliance period is in place since 2015 (20 June theoretically, although in practice there have been some delays). For vintage 2015, the compliance deadline was postponed to 18 November 2016 and for vintage 2016 the verification deadline has been set as 31 October 2017.

Temporal flexibility:

Banking is allowed.
Borrowing is not allowed.

Market stability provisions:

Exchange Intervention: In case of market fluctuations, the Chongqing Carbon Emissions Exchange can take price stabilization measures.

Sale and Trade Limits: Compliance entities must not sell more than 50% of their free allocation. In addition, the price of trading is subject to increase and decrease limits of 10% or 30% depending on types of trading.

For further information, visit the ICAP ETS Map.

[i] Proportion covered and absolute cap share might not align due to the coverage of indirect emissions and the lack of exact data on emissions covered.

[ii] In the short term, the existing Chinese regional carbon markets are expected to operate parallel to the national Chinese carbon market. Over the medium to long term, they are expected to be integrated into the national market, once it is fully operational.

 

Fujian

General information:

Fujian launched its ETS in September 2016 and is the eighth regional pilot ETS in China. Unlike other pilots, which were mandated jointly by the National Development and Reform Commission (NDRC), the mandate for the Fujian ETS came from the State Council with the endorsement of the National Ecological Civilization Pilot Area (Fujian) Implementation Plan. The Haixia Equity Exchange in Fujian was approved by the NDRC as one of nine trading platforms for trading Chinese Certified Emission Reductions (CCERs), demonstrating the recognition by NDRC of the regional market.

The system covers nine sectors: electricity, petrochemical, chemical, building materials, iron and steel, nonferrous metals, paper, aviation, and ceramics. Given the prominence of the forestry sector in Fujian, its ETS pilot has a special focus on carbon sinks. In 2017, the Fujian government outlined a plan to promote forestry offsets projects in the province. By 2020, the selected counties in the province are required to develop forestry projects covering two million acres of forests, achieving an expected one million tons of emission reductions annually.

Background information:

Compliance in the Fujian pilot ETS is mandatory for entities of covered sectors that fall within the inclusion threshold of 10,000 tons of coal equivalent (tce)/year.

There is an absolute cap of ~200 MtCO2 (2017).

Total emissions and proportion covered:

240 MtCO2e (2014); ~60% covered (2017)[i]

Liable entities:

255 (2017)

Sector coverage:

Downstream: Power, industry, domestic aviation

Gas coverage:

CO2 only

Allocation:

Free allocation

 

Offsets and credits:

Domestic

 

Phases and compliance periods:

Trading periods: 2016-2019[1]

Compliance period: One year

Temporal flexibility:

Banking is allowed.
Borrowing is not allowed.

Market stability provisions:                                                          

In case of market fluctuations, severe imbalances between supply and demand, or liquidity issues, the Fujian Economic and Information Center under the guidance of the Fujian Development and Reform Commission (DRC) – in consultation with an advisory committee – can buy or sell allowances in order to stabilize the market. More specifically, high prices may trigger allowance auctions from government reserves through the Haixia Equity Exchange. Low prices may trigger authorities to buy allowances from the market through governmental funds.

For further information, visit the ICAP ETS Map.

[1] In the short term, the existing Chinese regional carbon markets are expected to operate in parallel with the national Chinese carbon market. Over the medium to long term, they are expected to be integrated into the national market, once it is fully operational.

[i] Proportion covered and absolute cap share might not align due to the coverage of indirect emissions and the lack of exact data on emissions covered.

 

Guangdong

General information:

The Guangdong Pilot ETS was launched in December 2013 and is the largest of the Chinese ETS pilots. It currently covers the power, cement, steel, petrochemical, papermaking, and aviation sectors, accounting for more than 60% of the province’s emissions. This is the result of an expansion of its scope back in 2016, which introduced two new sectors (domestic aviation and paper) and adjusted allocation methods. In 2019, the Guangdong Pilot ETS had 37 new entrants.

The Guangdong Pilot ETS has one of the most active markets among Chinese pilots with the largest market share. Unlike other pilots, Guangdong auctions a small share of allowances.  The auctioning has been moved from mandatory (2013) to voluntary participation (since 2014) and has been held ad hoc (rather than quarterly) since 2017. Guangdong and Shenzhen are the only two Chinese pilots open to foreign investors. In November 2016, Guangdong increased the maximum position of institutional and individual investors from three to eight million allowances. Guangdong also allows unincorporated organizations, such as funds and trusts, to trade in its carbon market. As of 2018, it had 72 institutional investors.

In 2019, the Department of Ecology and Environment of Guangdong released an allocation plan that includes revision such as the expansion of benchmarking to co-generation, and refinements to benchmarks for the iron and steel sector. The number of allowances available for auction has also increased to five million tons in 2019.

Background information:

Compliance in the Guangdong pilot ETS is mandatory for entities of covered sectors that fall within the inclusion threshold of 20,000 tCO2/year or energy consumption 10,000 tce/year.

There is an absolute cap of 465 MtCO2e (2019), of which 27 MtCO2e are kept as government reserves for new entrants and market stability.

Total emissions and proportion covered:

610.5 MtCO2e (2012); 60% covered (2018)

Liable entities:

242 entities (2019)

 

Sector coverage:

Downstream: Power, industry, domestic aviation

 

Gas coverage:

CO2 only

Allocation:

Free allocation (~96%) and Auctioning (~4%) (2016)

 

Offsets and credits:

Domestic

 

Phases and compliance periods:

Trading period: 2013-2019[1]

Compliance period: One year.

Temporal flexibility:

Banking is allowed.
Borrowing is not allowed.

Market stability provisions:

Reserves: The Guangdong province set aside 5% of all allowances for government reserves for new entrants and market stability. The specific rules for market stability are provided by its Trial Measures for ETS.

Auction Floor Price: Auctions under the Guangdong Pilot ETS are subject to an auction floor price. In 2017, the policy reserve price was set at 100% of the weighted average price for allowances over the previous three months. No auction took place in 2018 or 2019.

Offset Auctions: Guangdong also introduced auctioning for Pu Hui Certified Emission Reductions with an auction price floor set by the Emissions Exchange Guangzhou on behalf of the project developers. In the latest auction (28 November 2019), the reserve price for one offset project was set as CNY 19.61/tonne (USD 2.79) (80% of the weighted average price for allowances over the previous three months). For the other two, it was set as CNY 24.51/tonne (USD 3.49) (100% of the weighted average price for allowances over the previous three months).

For further information, visit the ICAP ETS Map.

[1] In the short term, the existing Chinese regional carbon markets are expected to operate in parallel with the national Chinese carbon market. Over the medium to long term, they are expected to be integrated into the national market once it is fully operational

 

Hubei

General information:

The Hubei Pilot ETS was launched in April 2014; to date, it has concluded six compliance years. Hubei has been one of the most active regional markets in China in terms of trading and has the second-largest market size when considering spot trading only, after Guangdong. When spot forward trading is also considered, Hubei has the largest market share as of end 2018, with its total secondary market transaction volume and value both accounting for over 60% of the sum of all pilots together. The system initially covered 138 of the most carbon-intensive companies in the province, accounting for approximately 35% of the province’s total carbon emissions.

Hubei has also expanded its scope several times. In 2016, it lowered the thresholds of seven sectors from 60,000 to 10,000 tons coal equivalent (tce) and in 2017 further lowered the thresholds of all the other sectors to 10,000 tce. A government reserve with 8% of the total cap is available for market stabilization, and the government can also intervene in cases of market fluctuations, severe supply-demand imbalances or for liquidity reasons. The most recent allocation plan released (2018) outlined scope expansion to the water supply sector.

According to the compliance notice by the Hubei Development and Reform Commission (DRC) in July 2017, the Hubei Pilot ETS will continue to run after the National ETS commences. However, only allowances that were traded can be banked into later years. The transition of Hubei allowances into the National ETS will be based on rules to be defined by the national competent authority. In December 2017, Hubei was selected to lead the development of the registry for the national ETS.

Background information:

Compliance in the Hubei pilot ETS is mandatory for entities of covered sectors that fall within the inclusion threshold (see above).

There is an absolute cap of 256 MtCO2 (2018).

Total emissions and proportion covered:

463.1 MtCO2e (2012); 45% covered (2018)

Liable entities:

338 (2018)

Sector coverage:

Downstream: Power, industry

Gas coverage:

CO2 only

Allocation:

Free allocation

 

Offsets and credits:

Domestic

 

Phases and compliance periods:

Trading period: 2014-2019[1]

Compliance period: One year.

Temporal flexibility:

Banking is allowed, but only for allowances that were traded at least once. Borrowing is not allowed.

Market stability provisions:

Reserve: 8% of the total cap is kept as a government reserve for market stabilization.

Ecology and Environment Bureau (EEB) Intervention: In case of market fluctuations, severe imbalances between supply and demand or liquidity issues, the Hubei EEB–in consultation with an advisory committee consisting of government institutions and other stakeholders–can buy or sell allowances in order to stabilize the market. Specifically, if the allowance price reaches a low or high point six times during a 20-day time span, the Hubei EEB takes action.

Exchange: The exchange limits day-to-day price fluctuations to between -10% and +10% respectively.

For further information, visit the ICAP ETS Map.

[1] In the short term, the existing Chinese regional carbon markets are expected to operate parallel to the national Chinese carbon market. Over the medium to long term, they are expected to be integrated into the national market, once it is fully operational

 

Shanghai

General information:

Shanghai was the second Chinese region, after Shenzhen, to start its pilot ETS in November 2013 and has concluded five compliance years so far. The pilot covers more than half of the city’s emissions, including power, industry, and non-industrial sectors such as building, aviation, and shipping. It is the only pilot that has achieved almost 100% compliance rate continuously since its launch. In 2016 Shanghai expanded its ETS coverage by adding the shipping sector, as well as lowering the threshold of exiting power and industries (which were included in the 2013-2015 phase) to 10,000 tCO2/year.

Shanghai is the most active among the Chinese pilots in terms of offset credits trading. It also pioneered allowance spot forward trading in China. In January 2017, the Shanghai Environmental and Energy Exchange and Shanghai Clearing House jointly launched the over-the-counter Shanghai Emission Allowance Forward contract, with central counterparty clearing, as an innovative financial product that serves a purpose similar to carbon financial derivatives. Shanghai has also carried out various other carbon finance innovations such as repurchases, green bonds, carbon funds, carbon trusts, CCER mortgages, and allowance borrowing.

In December 2017, Shanghai was selected to lead the development of the trading platform for the national ETS.  ETS-related responsibilities in Shanghai are now those of the Ecology and Environment Bureau (EEB), as a result of the governance restructuring across China.

Background information:

Compliance in the Shanghai pilot ETS is mandatory for entities of covered sectors that fall within the sector-specific inclusion thresholds.

There is an absolute cap of 158 MtCO2 (2018).

Total emissions and proportion covered:

297.7 MtCO2e (2012); 57% covered (2018)

Liable entities:

298 (2018)

Sector coverage:

Downstream: Power, industry, domestic aviation

Upstream: Buildings, transport

Gas coverage:

CO2

Allocation:

Free allocation

 

Offsets and credits:

Domestic

 

Phases and compliance periods:

Trading period: 2013-2015; 2016-no specific ending year[i]

Compliance period: One year

Temporal flexibility:

Banking is allowed both within and across compliance periods, with some restrictions for the latter. For banked allowances from the first trading period (2013-2015), only one-third can be used per year between 2016 and 2018 by compliance entities; allowances are fully bankable for institutional investors, with some restrictions for OTC deals.

Borrowing is not allowed.

Market stability provisions:                                                          

Exchange: Depending on transaction types, if prices vary more than 10% or 30% in one day, the Shanghai Environment and Energy Exchange can take price stabilization measures such as temporarily suspending trading or imposing holding limits.

Reserve: In addition, a small share of annual cap could be kept in a reserve for auctioning before the end of the annual compliance cycle as a market stability measure.

For further information, visit the ICAP ETS Map

[i] – In the short term, the existing Chinese regional carbon markets are expected to operate parallel to the national Chinese carbon market. Over the medium to long term, they are expected to be integrated into the national market, once it is fully operational.

 

Shenzhen

General information:

The Shenzhen Pilot ETS, which began in June 2013, was the first of the Chinese pilot ETSs to start operation. To date, it has concluded six compliance years. It is the only Chinese pilot at the sub-province-level, and it covers a broad scope across the energy, industry, building, and transport sectors. The Shenzhen Pilot ETS covers a total of 794 entities (2017). A unique feature of the Shenzhen Pilot ETS is its legal basis. While the majority of pilots are regulated by subnational government orders by the executive body of the government, the Shenzhen Pilot ETS is regulated by a dedicated ETS bill passed by its municipal legislator, the Shenzhen People’s Congress. This provides more legal stability. The Shenzhen ETS is one of the most active regional markets in China, despite its relatively small size.

Shenzhen also has pioneered cross-regional cooperation. In 2014, Shenzhen and Baotou signed the ‘Memorandum of Strategic Cooperation on the Construction of Carbon Trading Systems.’ As a consequence of this, six companies in Baotou city of the Inner Mongolia Autonomous Region were covered in Shenzhen market on a voluntary basis as of June 2016.

ETS-related responsibilities are now undertaken by the Ecology and Environment Bureau, due to government restructuring across China.

Background information:

Compliance in the Shenzhen pilot ETS is mandatory for entities of covered sectors which are captured by the inclusion threshold of 3,000 tCO2e/year.

There is an absolute cap at 31.45 MtCO2 (excluding buildings, 2015).

Total emissions and proportion covered:

83.45 MtCO2e (2010); 40% covered (2017)

Liable entities:

794 (2017)

Sector coverage:

Downstream: Power, industry, transport, buildings

Gas coverage:

CO2 only

Allocation:

Free allocation

Offsets and credits:

Domestic

 

Phases and compliance periods:

Trading period: 2013-2019[1]

Compliance period: One year

Temporal flexibility:

Banking is allowed.

Borrowing is not allowed.

Unlike other pilots, Shenzhen releases its annual allowances before the compliance date of the previous vintage but does not allow them to be used for the purpose for previous vintage compliance.

Market stability provisions:

Intervention: In case of market fluctuations, the Shenzhen Ecology and Environment Bureau (EEB) can sell extra allowances from a reserve at a fixed price. Such allowances can only be used for compliance and cannot be traded. The EEB can also buy back up to 10% of the total allocation.

For further information, visit the ICAP ETS Map.

[1] In the short term, the existing Chinese regional carbon markets are expected to operate parallel to the national Chinese carbon market. Over the medium to long term, they are expected to be integrated into the national market, once it is fully operational.

 

Tianjin

General information:

Tianjin launched its pilot ETS in December 2013 and has concluded six compliance years so far. The system covers enterprises including heat and electricity production, iron and steel, petrochemicals, and chemicals, as well as oil and gas exploration. The papermaking, aviation, and building materials sectors were also added in 2019. Covered entities account for 50-60% of the city’s total emissions. Despite not having any financial penalties in place, Tianjin has achieved full or close to full compliance since its launch. The Ecology and Environment Bureau (EEB) is now responsible for Tianjin’s ETS.

Background information:

Compliance in the Tianjin pilot ETS is mandatory for entities of covered sectors that fall within the inclusion threshold of 20,000t CO2/year.

There is an absolute cap of 160-170 MtCO2 (2017).

Total emissions and proportion covered:

~215 MtCO2e (2012); ~55% covered (2017)

Liable entities:

113 (2019)

Sector coverage:

Downstream: Power, industry, domestic aviation

Gas coverage:

CO2 only

Allocation:

Free allocation

 

Offsets and credits:

Domestic

 

Phases and compliance periods:

Trading period: 2013-2019[1]

Compliance period: One year

Temporal flexibility:

Banking is allowed.
Borrowing is not allowed.

Market stability provisions:

EEB Intervention: In case of market fluctuations, the Tianjin EEB can buy or sell allowances in order to stabilize the market.

For further information, visit the ICAP ETS Map.

[1] In the short term, the existing Chinese regional carbon markets are expected to operate parallel to the national Chinese carbon market. Over the medium to long term, they are expected to be integrated into the national market, once it is fully operational.

 

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