EMISSIONS TRADING

In December 2017, the Chinese government launched the first phase of a national emissions trading program for carbon dioxide. When fully implemented in the 2020s, the program is expected to cover more than 5 Gt of annual emissions—by far the largest emissions trading program in the world. The extent to which the program will be an important factor in reducing Chinese emissions remains to be determined.1

History

Chinese experience with emissions trading dates to at least 2005, when NDRC authorized Chinese companies to participate in the Clean Development Mechanism (CDM), an international emissions trading program run by the UN Framework Convention on Climate Change. China soon became the world’s biggest supplier of CDM credits, with more than half the world’s CDM projects.2

In 2011, the Chinese government announced plans to develop a domestic emissions trading market for carbon dioxide. Over the next several years, pilot programs were launched in seven cities and provinces—Beijing, Shanghai, Chongqing, Shenzhen, Hubei, Tianjin and Guangdong. (See discussion of these pilot programs below.)3

As these pilot programs were being launched, Chinese experts conducted extensive research on how best to design emissions trading programs, often drawing on experiences in other countries around the world. Chinese and California state officials began working together on these issues in programs that continue today. Chinese and EU officials began working together as well. In recent years more than 1,500 Chinese emissions trading specialists have received training under a China-EU program.4

In 2014, NDRC’s Energy Research Institute released a detailed study of emissions trading program design options. The study recommended taking up to 10 years to build “a nationwide market with valid functions, completed structures and smooth operations.”5 Also in 2014, NDRC released its Interim Measures for Managing Carbon Emissions Trading Rights to start the process of developing standards for a national carbon trading market.6

In September 2015, President Xi Jinping announced that the Chinese government would launch a national emissions trading program for carbon dioxide by the end of 2017. The announcement was made three months before the Paris climate conference, at a summit meeting with US President Barack Obama.7

National Carbon Trading Program

In December 2017, NDRC released its National Carbon Market Development Plan (Power Generation Sector).8 The document sets forth a three-phase plan:

  • Phase 1 (“Basic Infrastructure Establishment”): “Take approximately one year to build unified national systems for emissions data reporting, registration and allowance trading.”
  • Phase 2 (“Simulated Operation”): “Take approximately one year to conduct mock trading of allowances in the power generation sector.”
  • Phase 3: (“Deepening and perfecting”): “Conduct spot trading of allowances among participants from the power generation sector... Once the carbon market for the power generation sector is successfully established, the market shall gradually expand to cover other sectors, trading products and trading types.”

Power sector entities that emit more than 26,000 tons per year of carbon dioxide are subject to the plan. Carbon dioxide emissions from these entities are roughly 3 Gt per year. (The largest emissions trading program in the world today, run by the European Union, covers approximately 1.8 Gt per year of carbon dioxide.)9

Once the emissions trading program is operational (in or around 2020), covered entities
will be required to surrender allowances each year to match their emissions. Entities will be allowed to sell surplus allowances and buy allowances to cover any shortfall. The program will be administered by provincial and municipal climate change departments within the Ministry of Ecology and Environment, which assumed responsibility for climate change functions from NDRC in the government reorganization of March 2018. These climate change departments are directed to impose penalties on entities that fail to surrender sufficient allowances.

One important question not addressed in the National Carbon Market Development Plan is the level of carbon dioxide emissions that will be allowed. According to press reporting and much commentary, Chinese officials have said that emissions caps will be output based (meaning that as the output of covered entities grows, their emissions caps will grow as well). The National Carbon Market Development Plan is silent on this topic.10

Pilot Programs Today

China’s seven pilot emissions trading programs remain in operation, covering provinces and cities with a total of more than 250 million people. Allowance prices are reported daily.11

These pilot programs have several common features. Each is administered by a provincial or municipal government, imposes obligations directly on covered entities, allocates allowances to those entities for free, and covers carbon dioxide but not other greenhouse gases. The programs also have differences:

  • Coverage varies (in terms of both types and sizes of businesses).

  • Methods for determining allowance allocations vary. (In some pilots, allocations are based on historical emissions, while in others allocations are based on historical emissions intensity.)

  • Compliance rules vary. In Beijing, fines are 3–5 times the average market price of an allowance over the past six months for each shortfall allowance. In other pilots, noncomplying businesses are penalized mainly by receiving fewer allowances in the following year.12

More than 160 million tons of CO2 with a value of more than RMB 2.5 billion (roughly US$370 million) have been traded under these pilot programs.13 In 2018 a leading Chinese expert group released an assessment of these pilot programs. The expert group found liquidity in the seven pilots to be very low, with transactions accounting for a low percentage of the overall quotas, and that information disclosure needs to be improved. The group found that, in terms of emissions reductions, the Hubei pilot performed best, with 54 million tons of reductions in 2015, with Guangdong and Shenzhen close behind.14

According to NDRC’s China National Carbon Market Development Plan (December 2017), these programs “shall continue to perform their existing roles and gradually transition to a national carbon market when conditions allow.”15

References

1. Noah Kaufman and Jonathan Elkind, “Can CO2 Trading System Avoid the Pitfalls of Other Emissions Trading Schemes?”, Columbia Center on Global Energy Policy (February 2018), https://energypolicy.columbia.edu/sites/ default/files/pictures/CGEPCanChinaCO2TradingSystemAvoidPitfallsofOtherEmissionsTradingSchemes218_0.pdf.

2. The environmental additionally of some of these projects sparked controversy. See Mark Shapiro, “Perverse Carbon Payments Send Flood of Money to China,” Yale Environment 360 (December 13, 2010), https://e360. yale.edu/features/perverse_CO2_payments_send_flood_of_money_to_china; New Scientist Environment and Reuters, “Kyoto Protocol ‘loophole’ has cost $6 billion,” New Scientist (February 9, 2007), https://www. newscientist.com/article/dn11155-kyoto-protocol-loophole-has-cost-6-billion/.

3. See generally Yande Dai, Yanbing Kang and Xiaoping Xiong, “Carbon Trading System Research,” Energy Research Institute, NDRC (May 2014); Da Zhang, Valerie J. Karplus, Cyril Cassisa and Xiliang Zhang, “Emissions trading in China: Progress and prospects,” Energy Policy (2014), http://ac.els-cdn.com/S0301421514000275/1- s2.0-S0301421514000275-main.pdf?_tid=3f69c188-6348-11e7-8566-00000aacb35d&acdnat=1499454941_ b2137e7f0e984b539b0322caf7fb1444.

4. Rahul Rana, “China aims to cap 40 percent of its emissions by 2020 under national scheme” (September 2014), http:// californiacarbon.info/china-aims-cap-40-percent-emissions-2020-national-scheme/; “EU and China: strengthening ties between the world’s largest emission trading systems in 2017,” European Commission Climate Action website (October 21, 2016), https://ec.europa.eu/clima/news/articles/news_2016102001_en (accessed June 24, 2018)

5. See Yande Dai, Yanbing Kang and Xiaoping Xiong, “碳交易制度研究” [Carbon Trading System Research], Energy Research Institute, NDRC (May 2014) at Section 5.3 (original in Chinese).

6. NDRC, “碳排放权交易管理暂行办法” [Interim Measures for Managing the Carbon Emission Trading Rights] (December 10, 2014), http://www.tanpaifang.com/zhengcefagui/2014/121340808.html.

7. Julie Hirschfeld Davis and Coral Davenport, “China to Announce Cap-and-Trade Program to Limit Emissions,” New York Times (September 2015), https://www.nytimes.com/2015/09/25/world/asia/xi-jinping-china-president- obama-summit.html?mcubz=2&_r=0.

8. NDRC, “China National Carbon Market Development Plan” (December 2017), English versions at https:// chinaenergyportal.org/en/national-carbon-emissions-trading-market-establishment-program-power-generation- industry/ and http://www.ef.org/wpcontent/uploads/2017/12/China_ETS_Policy_Document_English.pdf. See also Jonathan Elkind and Noah Kaufman, “Can China’s CO2 Trading Program Avoid the Pitfalls of Other CO2 Trading Programs?,” Columbia Center on Global Energy Policy (February 2018), http://energypolicy.columbia.edu/sites/default/files/pictures/CGEPCanChinaCO2TradingSystemAvoidPitfallsofOtherEmissionsTradingSchemes218_0. pdf; Frank Jotzo, Valerie Karplus, Michael Grubb, Andreas Loschel, Karsten Neuhoff, Libo Wu and Fei Teng, “China’s emissions trading takes steps towards big ambitions,” Nature Climate Change (April 3, 2018), https:// www.nature.com/articles/s41558-018-0130-0; Robert Stavins, “What Should We Make of China’s Announcement of a National CO2 Trading System?” (January 7, 2018), http://www.robertstavinsblog.org/2018/01/07/ make-chinas-announcement-national-co2-trading-system/; David Roberts, “China is methodically building the world’s most ambitious carbon market,” Vox (December 27, 2017), https://www.vox.com/energy-and- environment/2017/12/22/16804594/china-carbon-trading-system.

9. Jotzo, Karplus, Grubb, Loschel, Neuhoff, Wu and Teng, “China’s emissions trading” (April 3, 2018). See also Robert Stavins, “What Should We Make of China’s Announcement of a National CO2 Trading System?” (January 7, 2018), http://www.robertstavinsblog.org/2018/01/07/make-chinas-announcement-national-co2-trading-system/.

10. See Nectar Gan, “Will China’s carbon trading scheme work without an emissions cap?,” South China Morning Post (January 3, 2018), http://www.scmp.com/news/china/policies-politics/article/2125896/big-black-hole-chinas- carbon-market-ambitions.

11. See, e.g., Carbon Pulse, https://carbon-pulse.com/category/china-national-ets/.

12. See Dai, Kang and Xiong, “Carbon Trading System Research” (May 2014); Zhang, Karplus, Cassisa and Zhang, “Emissions trading in China” (2014); ZhongXiang Zhang, “Carbon Emissions Trading in China: The Evolution from Pilots to a Nationwide Scheme,” Australian National University (April 2015) at p.113, http://www.tandfonline.com/ doi/pdf/10.1080/14693062.2015.1096231?needAccess=true; Clayton Munnings, Richard Morgenstern, Zhongmin Wang and Xu Liu, “Assessing the Design of Three Pilot Programs for Carbon Trading in China,” (Resources For The Future, October 2014) at p.36, https://www.sciencedirect.com/science/article/pii/S0301421516302981.

13. See Dai, Kang and Xiong, “Carbon Trading System Research” (May 2014); Zhang, Karplus, Cassisa and Zhang, “Emissions trading in China” (2014).

14. See “Looking at the results of the 7 emissions trading pilots,” http://www.tanjiaoyi.com (February 2, 2018), http://www. tanjiaoyi.com/article-23796-1.html.

15. NDRC, China National Carbon Market Development Plan (December 2017) at Section 7.

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