{"id":69893,"date":"2021-01-29T18:28:00","date_gmt":"2021-01-29T18:28:00","guid":{"rendered":"https:\/\/chinadialogue.net\/?p=69893"},"modified":"2021-02-12T12:45:45","modified_gmt":"2021-02-12T12:45:45","slug":"chinas-national-carbon-market-is-about-to-launch","status":"publish","type":"post","link":"https:\/\/dialogue.earth\/en\/climate\/chinas-national-carbon-market-is-about-to-launch\/","title":{"rendered":"China\u2019s national carbon market is about to launch"},"content":{"rendered":"\n

China\u2019s national carbon market will start operating on 1 February, as mandated by a key regulatory document. Although it will take time for the pricing to be meaningful, eventually the system is likely to have a substantial impact on investment decisions.<\/p>\n\n\n\n

\u201cMeasures for the Administration of National Carbon Emissions Trading\u201d (hereafter \u201cMeasures\u201d) appeared earlier this month, 5 years after the 2015 joint statement on climate change between President Xi and then US president Barack Obama established a cornerstone for the carbon market to move forward. It lays out how carbon emissions \u201callowances\u201d are to be allocated, how trading should be conducted and how measurement and verification should be done. It also represents the culmination of many years of speculation among industry players, environmental advocates and the international community.<\/p>\n\n\n\n

As the Measures were issued by the Ministry of Ecology and Environment (MEE) they carry lower legal authority than that of a State Council regulation. But a ministry-level ordinance is considered the fastest way to trigger the early operation of an ETS. It is likely to play a transitional role until higher-level legislation is developed. Last month, Vice Minister Zhao Yingmin of the MEE also announced that it will push for a Climate Change Law, which may fill this higher-level role.<\/p>\n\n\n\n

Taken together with the ambitious climate targets announced by President Xi<\/a> in September, the timing of the publication of this regulation suggests that 2021 will be the year that China\u2019s carbon market finally comes of age.<\/p>\n\n\n\n

A decade-long journey to a national carbon market<\/h2>\n\n\n\n

Beginning at the end of 2011, eight regional emissions trading systems were consecutively introduced in different parts of China (Shenzhen, Shanghai, Beijing, Guangdong, Tianjin, Hubei, Chongqing and Fujian). These provided valuable experience for the central government in developing a national carbon pricing mechanism. They have adopted caps based on carbon intensity (emissions per unit of GDP) rather than an absolute emissions cap. This approach is consistent with a number of other emissions trading systems, including in the United Kingdom (during the first phase of the EU ETS) and Alberta, Canada. It has been adopted by the Chinese government as best suited to achieve both economic growth and emissions reduction.<\/p>\n\n\n\n

\"The<\/div>
The launch of Shanghai’s regional carbon market in 2013\u00a0(Image:\u00a0Shen Chunchen \/ Alamy)<\/div><\/div><\/div><\/div>\n\n\n\n

In December 2017, the National Development and Reform Commission (NDRC) released a \u201cDevelopment Plan\u201d for an ETS in the power sector. The plan outlined a roadmap with three phases: foundational; simulation trading (without compliance obligations); and market operation.<\/p>\n\n\n\n

In 2018, China undertook a major governmental restructure<\/a>, after which responsibility for the ETS fell to the MEE. Simulation trading was originally expected to begin around 2020, with the market operation phase starting approximately one year after that. But Covid-19 delayed the process. Nevertheless, several major policies or drafts were issued in the second half of last year, leading ultimately to the publication this month of the Measures and other key regulatory documents, which will directly kick-start the 1 February launch of the market operation phase.<\/p>\n\n\n\n

For context, the European Union\u2019s ETS was first regulated in 2003 and went through a pilot phase before becoming a functional market in 2008. It experienced turbulence following the global financial crisis, and it is only in the last 12 months that the market has seen carbon prices considered substantial enough to impact on investment decisions. Emissions trading systems aren\u2019t simple to introduce. But they can be very important drivers of change over the long term. This makes them of keen interest now that Europe and China have introduced net-zero carbon emissions targets for 2050 and 2060 respectively.<\/p>\n\n\n\n

How will the system work?<\/h2>\n\n\n\n

In its initial stage, the national ETS system will cover China\u2019s power sector, which roughly accounts for 30% of China\u2019s total emissions, with over 2,000 power-generation facilities enlisted. In time, industries such as cement, steel, aluminium, chemicals and petrochemicals will be integrated.<\/p>\n\n\n\n

30%<\/p>

The power sector accounts for roughly 30% of China’s total emissions.<\/p><\/div><\/div>\n\n\n\n

Enterprises covered by the national ETS will be excluded from the regional pilots, to avoid double counting and double taxing, according to the Measures. Of course, those entities that have experience trading and developing compliance strategies at the regional level may have some first-mover advantage.<\/p>\n\n\n\n

At the beginning, all emissions allowances are to be allocated for free. The Measures state cautiously that the auctioning of allowances will be \u201cintroduced at the appropriate time according to the situation\u201d. This represents a change from an earlier draft that suggested the share of allowances to be auctioned would increase over time. Free allocation makes it difficult for companies to conceive of the price as representative of a true cost. This is a key factor in why the regional markets have not been very active, and consequently not led to genuine price discovery. At the same time, state-owned enterprises and financial institutions have advised government that the ratio of paid allowances is a highly sensitive factor for their profitability and credit risk respectively. This may have resulted in the more cautious approach reflected in the final version of the Measures.<\/p>\n\n\n\n

Carbon financial derivative products, such as repurchase agreements and futures, will not be allowed at the beginning of the national market (only direct exchange of allowances will). This will disappoint some players who believe such products have helped to increase liquidity in the regional carbon markets, and also created additional stakeholders in the healthy development of the market. Regulators are likely to take a cautious approach to derivatives for the sake of market stability and to ensure that speculation does not get out of hand.<\/p>\n\n\n\n

The biggest change in the Measures compared with the original NDRC plan is that verified company-level emissions must be disclosed to the public. This should help to increase transparency of the system, raise the level of compliance by emitters and verifiers, make important information available to financial markets, and possibly allow for prosecutors and the public to challenge non-compliance.<\/p>\n\n\n\n

Even though the Measures have laid out the fundamental regulatory framework for a national ETS, there are a few key issues still waiting for further clarification, such as the rules and procedures for companies to interact with the exchange platform and registry.<\/p>\n\n\n\n

What might be the impact on carbon emissions?<\/h2>\n\n\n\n

The 2020 China Carbon Pricing Survey<\/a> was undertaken in July\u2013August last year, shortly before Xi\u2019s 2060 carbon neutrality pledge. It obtained expectations about the future of carbon pricing in China from 567 market participants and related experts, the largest such exercise to date.<\/p>\n\n\n\n