Provinces should draw up their own individual allocation plans under China’s national carbon market, which would ultimately be subject to Beijing’s approval, according to a study by a Tsinghua University professor who advises the government on carbon markets.

The paper, written by Duan Maosheng, a former CDM EB chair and part of China’s delegation to UN climate talks, is the first detailed proposal on allocation rules for the national scheme, which is set to begin next year.

The study was published in Wuhan University Journal, and written in Duan’s capacity as a researcher, not as a government advisor.

Though not part of the government, Duan is one of several academics that have been working closely with central and local government officials on drawing up carbon trading schemes in China, and the paper is seen as an indication of how leading ETS designers currently think about the national market.

The rules outlined in the paper would allow each province to decide which of their sectors should participate and then assign permits to each facility based on either historical emissions or industry benchmarks.

But the central government would set an overall emission cap for the scheme, and if the accumulated number of permits proposed by the provinces exceed the national cap, it would be up to Beijing to make cuts in the provincial plans.

Duan’s paper stressed the need to factor in the major differences in economic structure and development between provinces.

By using an adjustment factor as part of the allocation formula, targets would be stricter for facilities in rich regions, or in industries where over-capacity is a major problem.

Provinces would be ranked and sorted in groups according to the mitigation capacity in a bid to minimise the possibility of over-allocation. The level of flexibility for local governments to make adjustments to their allocation plans within a pre-defined range set by Beijing would depend on the group they were assigned to.

The central government would also decide how big a share of the permits would be auctioned and how much would be made available to new entrants.

A government plan for allocation rules is not expected for several months.

The NDRC expects China’s national ETS to cover 3-4 billion tonnes of CO2 in 2020, making it the world’s largest carbon market.

It is uncertain which provinces will participate from the start, but Gansu, Hunan and Shaanxi have indicated in recent weeks that they will join, in addition to the seven pilot regions.

By Stian Reklev – stian@carbon-pulse.com