EMISSIONS TRADING

Emissions trading programs for carbon dioxide (CO2) are currently operating in eight Chinese cities and provinces. The Chinese central government is in the process of launching a national CO2 emissions trading program, starting with the power sector. When fully implemented in the 2020s, the national 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 these programs will be an important factor in reducing China’s emissions of heat-trapping gases remains to be determined.[1]

History

The Chinese government’s interest in emissions trading dates to at least the late 1990s, when the State Environmental Protection Agency (led by Administrator Xie Zhenhua) explored the feasibility of emissions trading for sulfur dioxide. In 2005, NDRC authorized Chinese companies to participate in the Clean Development Mechanism (CDM), an international emissions trading program for COand other heat-trapping gases 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 COemissions trading market. Over the next several years, pilot programs were launched in eight cities and provinces—Beijing, Shanghai, Chongqing, Shenzhen, Hubei, Tianjin, Guangdong and Fujian. (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 experts began working with experts from California, the European Union and other jurisdictions. Thousands of Chinese emissions trading specialists received training in these programs. Several of these programs continue today.[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 Rightsto 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 COemissions trading program 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 CO2are subject to the plan. CO2emissions 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 1.7 Gt per year of CO2.)[9]

Once the emissions trading program is operational, 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. Entities that fail to surrender sufficient allowances will be subject to penalties.[10]

Implementation of China’s CO2emissions trading program is proceeding slowly. Delays are due in part to the March 2018 government-wide reorganization, in which responsibility for the emissions trading program was transferred from NDRC to the new Ministry of Ecology and Environment (MEE). Delays are also due to data availability and collection challenges. Nevertheless MEE officials insist they will meet the 2020 deadline for full launch of the program and carry out trades between power plants in 2020.[11]

In April 2019, MEE released Interim Regulations on the Management of Carbon Emissions Trading (Draft for Comment).The draft:

  • says MEE will regularly publish lists of covered entities and reports on allowance transfers,
  • discusses the relationship between central and provincial governments in administering emissions trading, and
  • confirms that allowance auctions may be held to stabilize the market.[12]

One issue not addressed by MEEto date is the level of CO2emissions 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 PlanandInterim Regulations are silent on this topic.[13]

Pilot Programs Today

China’s eight 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.[14]

These pilot programs have several common features. Each is administered by a municipal or provincial government and imposes obligations directly on covered entities. Most allocate allowances to covered entities for free. (Guangdong’s program uses auctions). Most cover CO2 only. (Chongqing’s program includes other heat-trapping gases).

The programs have a range of 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.[15]

As of July 2019, 337 million tons of CO2with a value of more than RMB 7.3 billion (roughly US$1 billion) have been traded under these pilot programs. Prices ranged from RMB 71.8 to RMB 87.5 (US$10.50 to US$12.50) per ton.[16]

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 Guangdong and Shenzhen close behind.[17]

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."[18]

References

[1] See generally 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); Frank Jotzo et al., “China’s emissions trading takes steps towards big ambitions,”Nature Climate Change(April 3, 2018); Robert Stavins, “What Should We Make of China’s Announcement of a National CO2 Trading System?”(January 7, 2018); David Roberts, “China is methodically building the world’s most ambitious carbon market,”Vox (December 27, 2017).

[2] The environmental additionalityof some of China’s CDM projects sparked controversy. See Mark Shapiro, “Perverse Carbon Payments Send Flood of Money to China,”Yale Environment 360(December 13, 2010);“Kyoto Protocol ‘loophole’ has cost $6 billion,”New Scientist(February 9, 2007).  With respect to early interest in SOemissions trading, see Wang Jinnan et al., SO2 Emissions Trading Program: A Feasibility Study for China(December 2001).

[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).

[4] “California highlights cooperation with China in combating climate change,”Xinhua News (June 6, 2019); “EU and China: strengthening ties between the world’s largest emission trading systems in 2017,”European Commission-Climate Action (October 21, 2016); EU-China Emissions Trading System.

[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.

[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).

[7] Julie Hirschfeld Davis and Coral Davenport, “China to Announce Cap-and-Trade Program to Limit Emissions,”New York Times(September 2015).

[8] NDRC, “Program for the establishment of a national carbon emissions trading market (power generation industry)”(December 18, 2017).

[9] Frank Jotzo et al., “China’s emissions trading takes steps towards big ambitions,”Nature Climate Change(April 3, 2018); “Emissions trading: emissions have decreased by 3.9% in 2018,”European Commission-Climate Action (April 6, 2019).

[10] See generallyMaosheng Duan, Shaozhou Qi and Libo Wu (2018) “Designing China’s national carbon emissions trading system in a transitional period,” Climate Policy(September 2018).

[11] “China Is Dawdling on Carbon Trading,”Bloomberg (May 7, 2019); “China expects first trade in national emissions scheme in 2020,”Reuters (March 30, 2019); “China admits it still has work to do before carbon trading scheme gets up and running,”South China Morning Post(November 26, 2018).

[12] Ministry of Ecology and Environment, Interim Regulations on the Management of Carbon Emissions Trading (Draft for Comment) (April 3, 2019); “China releases draft Interim Regulations on the Management of Carbon Emissions Trading,”International Carbon Action Partnership (accessed July 21, 2019).

[13] See Nectar Gan, “Will China’s carbon trading scheme work without an emissions cap?,”South China Morning Post (January 3, 2018).

[14] See, e.g., Carbon Pulse.

[15] Zhe Deng et al., “Effectiveness of pilot carbon emissions trading systems in China,” Climate Policy(February 2018); “Looking at the results of the 7 emissions trading pilots,”China Economic Herald(February 2, 2018); ZhongXiang Zhang, “Carbon Emissions Trading in China: The Evolution from Pilots to a Nationwide Scheme,”Australian National University (April 2015) at p.113; 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.

[16] “China carbon trading hits 337 mln tonnes by June,”Xinhua (July 11, 2019).

[17] “Looking at the results of the 7 emissions trading pilots,”China Economic Herald(February 2, 2018).

[18] NDRC, “Program for the establishment of a national carbon emissions trading market (power generation industry)”(December 18, 2017) at section 7.

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