10 August 2021
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China’s long-expected national carbon emissions trading scheme (“National ETS”) has become operational on 16th July 2021. The National ETS, though at its initial phase, is the largest ETS in the world, covering more than 2,000 entities with aggregate annual emissions exceeding 4 billion tons of CO2 equivalent.1 China is currently the world’s largest greenhouse gases (“GHG”) emitter whose emissions surpassed those of the US and European Union combined. China has pledged to achieve its carbon emission peak by 2030 and carbon neutrality by 2060. The launch of the National ETS is no doubt an important milestone in terms of institutional development to help achieve these goals. ETS is a “cap and trade” system that promotes cost-effective emissions reductions, and generates a price on emissions to be paid by the heavy emitters. From 2013 to 2014, China launched 7 regional ETS pilots (Hubei, Guangdong, Beijing, Tianjin, Shanghai, Chongqing and Shenzhen), followed by the 8th pilot in Fujian in 2016. Each pilot has its own features in term of sector coverage, emissions thresholds, allocation of allowances, MRV protocols, offsetting regimes, and have resulted in different levels of liquidity and price. The goal of establishing a National ETS was announced by the central government in 2015, with a plan published in 2017. Since 2020, a series of regulations and guidelines have been released paving the way for the launch of the National ETS. In late December 2020, Ministry of Ecology and Environment (“MEE”) published the National Carbon Trading Management Measures (For Trial Implementation) (the “National ETS Measures”), which established the legal framework for the National ETS. Around the same time, the 2019-2020 National Carbon Emissions Trading Allowance Setting and Distribution Implementation Plan (Power Generation Industry) (the “2019-2020 Allocation Plan”) was released, which provides for the scope of sectors and emission thresholds for entities that are covered by the National ETS. Later in 2021, rules on registration of accounts, trading and settlement and guidelines on reporting and verification were also published. The National ETS trading is currently carried out in Shanghai Environment Energy Exchange while the registration centre responsible for registration of accounts and record keeping of allowances is based in Wuhan. During the first week of trading (from 16th July to 23rd July), a total of 4.83 million tons of emission allowances (CEA) were traded, with the highest price reaching RMB 61.07 per ton and the lowest price being RMB 48.0 per ton.2 The key general features of the National ETS of China are further examined below. |
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1. Covered sectors and thresholds Currently, the National ETS only covers the power sector (including captive power generators of industrial plants). Entities with annual emissions of 26,000 tons CO2 or above, or comprehensive energy consumption of 10,000 tons of standard coal or above, in any year between 2013 and 2019 will be captured in the National ETS. For calculating the annual emissions against the 26,000 tons threshold, an entity is accountable for both emissions produced directly by itself (e.g. from the combustion of fossil fuels) and indirect emissions arising from the electricity purchased from third party sources. 2. Covered gases UNFCCC/Kyoto Protocol regulates emissions of 6 types of greenhouse gas (GHGs), namely carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocar-bons (PFCs), sulphur hexafluoride (SF6), and nitrogen triflouride (NF3). Some regional pilots in China have included multiple GHGs in the regime, but most of them only deal with CO2. According to the 2019-2020 Allocation Plan, the National ETS only deal with CO2 emissions at this stage. The National ETS Measures provides that the types of GHGs covered by the National ETS will be determined by the MEE. This leaves the possibility for the National ETS to cover additional types of GHGs in the future. 3. Allocation methods The 2019-2020 Allocation Plan adopts “benchmarking” as the main allocation approach. The amount of allowances allocated to each entity is based on its actual output of the year multiplied by various emissions benchmarks, which depends on the types of the power generation, the method of cooling, heat supply, load ratio, etc. There are 2 phases for allocation: a pre-allocation at the beginning of a compliance cycle and ex-post adjustments after the entity has reported and verified their emissions and based on actual output of the year. For 2019-2020 cycle, all allowances are allocated for free. However, it is contemplated under the National ETS Measures that auctions may be introduced at a later stage for the allocation of allowances. 4. Emissions cap Like other ETS pilots in China, the emissions cap of the National ETS is an “intensity” cap rather than an “absolute” cap. Accordingly, the cap of the National ETS (i.e. the total emissions allowed), is calculated bottom-up, which is the sum of the total allowances allocated to all covered entities based on their annual output. At the launch of the National ETS, it was reported that the aggregate annual emissions of the 2,225 covered entities exceeded 4 billion tons of CO2, which accounted for around 40% of the total emissions of the country. 5. MRV guidelines Monitoring, reporting and verification (“MRV”) guidelines and technical specifications are important to ensure the accuracy of emissions data and integrity of the market. In this regard, MEE has published the Corporate Greenhouse Gases Emissions Reporting and Verification Guidelines (for Trial Implementation) and the Corporate Greenhouse Gases Emissions Accounting Methods and Reporting Guidelines – for Power Generation Facilities. The MRV guidelines specify the ways to determine emission boundaries (the scope facilities whose emissions will be accounted for), principles for monitoring emissions and energy consumption data, the emissions conversion factors, data quality control and other reporting requirements. 6. Compliance cycle Entities covered by the National ETS shall follow an annual procedure of monitoring – reporting – verification – compliance cycle. Covered entities shall report their annual emissions to the provincial environmental authorities by the end of March following the end of relevant year. The original data and records of the emissions shall be kept for at least 5 years. Provincial environmental authorities shall then proceed with the verification of the reported emissions data. For this purpose, the authorities may commission technical services agencies to provide verification services. Once verified, each entity under the ETS must surrender the equivalent number of allowances. It is currently unclear the deadline for such surrender, but in the regional ETS pilots, it is typically between May and July. For the first compliance cycle covering 2019 to 2020, the timelines are specified as follows: the submission of emission reports by 30 April 2021, verification by 30 June 2021, final decision on allocation by 30 September 2021, and surrender of allowances by 31 December 2021. The compliance requirement is also relaxed for the first compliance cycle:
It is not clear whether the similar relaxations will be offered in subsequent years. 7. Offset and credits National ETS Measures allow for the use of emission reduction credits, i.e. the China Certified Emissions Reduction (“CCER”), for offsetting up to 5% of entities’ verified emissions for compliance with the ETS. CCERs are certificates evidencing the reduction of carbon emissions generated from qualified emissions reduction projects, such as reforestation or certain renewable projects. However, specific rules on the use of CCER in the National ETS have not been published, and it is not clear whether further limitations will be imposed on the use of CCER in the National ETS. It is worth noting that in some regional ETS pilots, CCERs generated from large hydro power projects are not recognised for emission offsetting in the ETS. 8. Banking and borrowing Rules on banking of allowances (unused allowances to be used in the following years) and borrowing of allowances (borrow allowances from a future year) are not yet published. It is generally expected by the market that banking of allowances may be allowed in the National ETS, but not for borrowing. 9. Enforcement A covered entity falsely reporting or concealing its emissions data, or refusing to report its emissions can be subject to fines between RMB10,000 and 30,000. A covered entity which does not duly fulfil its obligation to surrender sufficient allowances at the required timeline can be ordered to rectify within a required period, and can be subject to fines between RMB20,000 to 30,000. If not rectified within such required period, the deficient amount can be deducted from the following year’s allocation. 10. Interactions with regional ETS pilots The regional ETS pilots are not superseded by the National ETS, and they remain operational under their respective rules. If an entity is captured by both a regional ETS pilot and the National ETS, then such entity shall participate in the National ETS and be excluded from the regional ETS pilot. However, entities who have already been allocated allowances for 2019-2020 period under regional ETS pilots will not participate in the National ETS during this period. In the long term, it is expected that the National ETS will either be linked with the regional ETS pilots, or as the National ETS expands to other high emitting sectors, it will be able to absorb part or all of the ETS pilots.
For further information, please contact: Monica Sun, Partner, Herbert Smith Freehills Monica.Sun@hsf.com 1 " 2 "全国碳市场“开张”6天看点满满", available at: http://www.gov.cn/xinwen/2021- |
