Chinese national carbon trading scheme


The Chinese national carbon trading scheme is a cap and trade system for carbon dioxide emissions set to be implemented by the end of 2017. This emission trading scheme creates a carbon market where emitters can buy and sell emission credits. From this scheme, China can limit emissions, but allow economic freedom for emitters to reduce emissions or purchase emission allowances from other emitters. China is currently the largest emitter of greenhouse gases and many major Chinese cities have severe air pollution. With this plan, China will soon be the largest market in carbon trading. The scheme will limit emissions from six of China's top carbon dioxide emitting industries, including coal-fired power plants. China was able to gain experience in drafting and implementation of an ETS plan from the United Nations Framework Convention on Climate Change, where China was part of the Clean Development Mechanism. From this experience with carbon markets, and lengthy discussions with the next largest carbon market, the European Union, as well as analysis of small scale pilot markets in major Chinese cities and provinces, China's national ETS will be the largest of its kind and will help China achieve its Intended Nationally Determined Contribution from the Paris Agreement in 2016.

Plan specifics

China promised in the Conference of Parties to reduce their carbon intensity per unit of GDP by 60-65% by 2030. To achieve this, they decided to use market-based mechanisms. They developed the Clean Development Mechanism, which consists in a “bottom up” architecture. China has learned from the European Union, whose carbon trading market is currently twice as big, along with California in the United States, to implement mechanisms such as cap and trade. The idea is to create an international market through exchanges where allowances are traded and carbon emissions get monitored and reported.
For now,. the nation has implemented seven pilot carbon markets in various zones that thrive on production of cement, electricity, heat, petroleum and oil extraction. These zones are: Beijing, Chongqing, Guangdong, Hubei, Shanghai, Shenzhen and Tianjin, which represent 25% of China's total GDP. These stationary activities are known for being the most pollutant and emitter of GHG. Since the pilot plan started, it is estimated that 40.24 million metric tons of carbon dioxide has been traded. In July 2017, the official launch of the plan will occur, inviting more Chinese cities and industries to collaborate on the cap and trade.
These pilot zones proved the cap and trade efficiency. Cap refers to a permitted amount of emissions, if the industry exceed said limitation, it would require an allowance. Allowances can be traded, auctioned or even given away for free, depending on the case. Through cap and trade, it is believed that both competitiveness and possibility on carbon leakage would be reduced. Each cap and allowance was assigned to the cities according to their purpose, production rates, or ability to pass along the costs of carbon along the consumer chain. The caps of greenhouse gas emissions vary from 30-350 metric tons of carbon dioxide equivalent per year when the price for carbon varies from $1.4-$13.00 US dollars per ton of carbon dioxide. There also are 2 types of allowances: new entry vs. governmental. The new entry allowances are for those who are in need for growth and are freely distributed, whereas the governmental allowance is a fixed, stable fraction that must be sold or auctioned.
There are also conditions that each zone must uphold, mainly regarding monitoring, reporting and verification. Each zone has their own mechanism of doing so, but they all face the same kind of penalties if failing to do so. These penalties include: a reduction on free allowances, a threat on publicizing said status in order to create social pressure, a 2-year restricted access to special funds for energy research and if an excess of emission were to take place, the zone's government or company would have to pay 3 times the original allowance price.

Difficulties

In order for China to achieve their aforementioned goals, they need to put front to certain challenges. China will have to overlook that there will not be any overlap with already existing policies from prevention, reduction and consumption of pollutants. The country will also have to strictly overlook and enforce the said regime, and make sure that there is ultimate transparency, especially on monitoring and reporting advances all the way throughout. There will also need to be special attention on carbon leakage and on price volatility. Ever since the pilot cities began this project, the price on carbon and caps have been fluctuating. The government will also need to make sure that there is an efficient trade and exchange of allowances in spot. In general, there will also need to be an existent plan on reduction of greenhouse gas emissions to achieve their Paris agreement.
On the other hand, policy makers face the struggle on allowance allocations. For the free allowance, they need to think about whom to give them to. For the auctioned ones, they need to think about the type of auction that is most convenient, and the combined ones, all of the above.

Influences

Prior to the conception and design of China's national carbon trading scheme, carbon emission trading had never been executed in China. With no CET experience to draw from, in late 2011 the National Development and Reform Commission approved two provinces and five cities of varying degrees of economic development as pilots. In the Notice on Launching Pilots for Emissions Trading System, the NDRC approved Beijing, Tianjin, Shanghai, Chongqing, Hubei, Guangdong, and Shenzhen as ETS pilots. Shenzhen was the first pilot to launch, on June 18, 2013, and was soon followed by the other designated pilots, which all completed their first compliance period by June 2015. All of the pilots with compliance data had compliance rates of over 96%, with Shanghai having the highest compliance rate at 100% and Tianjin having the lowest compliance rate at 96.5%. In order to aid the design of implementation details in China's national carbon trading scheme, each of the pilots were given the freedom to decide values for trading scheme parameters such as allowance allocation, coverage of sectors, and punishment mechanisms. They also vary in their approach to transactions, issues with price uncertainty, and managing risk. To assess the success of one pilot's trading scheme versus another, market performance was considered.
The pilots' approach to allowance allocation were largely based on historical emissions for most sectors except the power sector, which was calculated an allowance based on benchmarks and production. Guangdong was the only pilot to implement auctioning allowances for its power sector. Additionally, all pilots except Hubei allowed allowance rollover into the next compliance period. To standardize monitoring, reporting, and verification of carbon data, the NDRC issued regulations on monitoring and reporting guidelines. Enterprises were required to monitor and report their emissions, which was compared to a report from a third-party verification agency. Discrepancies in the reports above a threshold would require a re-verification. For most pilots, this threshold was set at a difference of 10% or 100 thousand tons. Funding required for verification was supplied by the local government rather than the enterprise, in order to reduce the compliance burden.
Five of the pilot programs allowed individuals to participate in carbon trading while two only allowed enterprises to do so. Transaction formats varied slightly but were all in spot markets with no carbon futures. In all pilots, enterprises needed to pay the cost of trading, which was a two-way charging scheme. In order to ensure stability in the carbon market, each pilot set a price limit based on the closing price of carbon in the previous compliance period, as well as limits on maximum allowance holdings for enterprises. Each pilot implemented varying degrees of fines for faking carbon data or withholding data. Shenzhen was the only pilot to implement a variable fine, setting it as three times the market clearing price times the excess emissions. Other pilot programs charged a flat fee. All pilots deducted the excess emissions from the next period's allowance for the enterprise in question.
From the pilot program's inception to May 2015, 20.27 MtCO2e had been traded for a total value of 720 million CNY. The carbon price for Shenzhen and Guangdong were the greatest, ranging from 60 to 80 CNY. The price fluctuated more in Shenzhen and Tianjin when compared to other pilots, especially near the compliance period deadline and near the beginning of new periods. The transitive behavior of the carbon market is a result more so of trading entities' understanding of policy and the timing of carbon data acquisition rather than market demand. From the pilot program data, China should improve on the designs of the pilot programs in order to achieve a stable and stimulated national carbon market.

Economic analysis

The scheme set the initial carbon allowances to 3–5 billion tonnes per year. Comparing this to the EU-ETS scheme, it is almost twice as much as the EU allowance. By the time of July 2016, EU-ETS is the world's largest carbon trading system, with a carbon market of two billion tonnes per year. the National Development and Reform Commission announced that eight sectors would be included in this market, these eight sectors are petrochemicals, chemicals, building materials, steel, ferrous metals, paper-making, power-generation and aviation. The companies that participate in this market are compulsory to use more designated amount of energy. The current number is 10,000 tonnes of standard coal equivalent of energy per year. According to seven pilot cities average price, the launch price would be set to be around 5 dollars per ton, which would generate a revenue of $0.17 to $1.16 billion in the first trading year. The expected carbon trading volume would increase to 7–58 billion dollars per year after 2020 since more market would be introduced to the carbon trading system.
The first auction for vintage 2016 allowances happened in Guangdong on September 21. This was held by the China Emission Exchange of Guangdong. The settlement price was $1.48 per ton, exceeding the set floor price of $1.40 per ton for the 500,000 tonnes auctioned. In the future, China's carbon trading allowance would expect to be increase to 3–5 billion tonnes of CO2, which would bring a revenue of around 60–400 CNY.