China releases instructions for the first compliance cycle of the national ETS and procedures for offset use

On 26 October 2021, the Ministry of Ecology and Environment (MEE) of China released the ‘Notice on the First Compliance Cycle of Emission Allowance Surrendering for the National ETS’. In line with previous policy documents, this notice directs provincial governments to complete four key actions to manage and complete the first compliance cycle of the national ETS (covering the years of 2019 and 2020). It further specifies rules and procedure for the use of offsets by covered entities. Provincial governments have been instructed to: 

1.  Approve the final allowance allocation for 2019 and 2020 and confirm the compliance obligation:

• As previously covered in the ICAP news, the Chinese national ETS takes a two-step approach for allowance allocation. First, covered entities receive allowances at 70% of their 2018 output multiplied by the corresponding benchmark. These amounts are then adjusted to reflect actual generation in 2019 and 2020.
• Compliance obligations are limited in the current phase. Gas-fired plants only need to surrender allowances up to their level of free allocation as per the benchmark. The compliance obligation of other covered entities is limited to the level of free allocation as per benchmarks, plus 20% of their verified emissions. No allowaces need to be surrendered for verified emissions above this threshold.

2.  Urge the covered entities within their jurisdictions to complete compliance, aiming for 95% compliance rate by 15 December and 100% by 31 December 2021.
3.  Assist those covered entities that are willing to use offset credits from the China Certified Emissions Reduction (CCER) program to register with their respective registry and trading system, and to purchase and cancel the CCERs.
4.  Strengthen market oversight and work closely with the national ETS registry (Hubei Carbon Emission Trading Center) and the national carbon trading agency (Shanghai Environmental Energy Exchange).

The procedure for using CCER offsets is specified in an attachment to the notice.  There are only two restrictions related to CCER use according to the notice – covered entities can only use offsets for up to 5% of their compliance obligation, and these shall not come from emission reduction projects that are included in the national carbon market (meaning that  covered entities cannot generate CCERs for their own usage). There is no restriction on the type of projects accepted, potentially allowing variable-quality credits from old vintages to enter the national market.