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China - Fujian pilot ETS

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Official name of scheme

China - Fujian pilot ETS

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ETS Status

in force

Jurisdictions

Fujian

Start of operation (year)

2016

Sectoral coverage

Domestic Aviation

Industry

Allocation

Free Allocation (Grandparenting; Output-based Benchmarking) and Auctioning

Offsets and credits

Domestic (national and provincial), with quantitative limits

Cap

116.2 MtCO2 (2022)

GHGs covered

CO2

Average secondary market price (2024)

Average secondary market price: CNY 21.52 (USD 2.99)

Total revenue since beginning

CNY 1.25 million (USD 173,672)

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General Information

The province of Fujian launched its ETS in September 2016. It covers nearly 300 entities across nine sectors: electricity grid, petrochemicals, chemicals, building materials, iron and steel, nonferrous metals, paper, aviation, and ceramics. The ETS covered electricity generation until 2019, after which the sector was incorporated into the national ETS.

Covered entities must surrender allowances for all their covered emissions, and allocation is based predominantly on free allocation, using benchmarking or grandparenting based on production levels. Auctioning may take place when considered appropriate by the ETS authorities.

The Fujian ETS pilot has a special focus on carbon sinks. In 2017, the Fujian government outlined a plan to promote forestry offset projects in the province. By the end of 2023, 4 million forestry offset credits had been traded in the Fujian ETS.

Unlike other Chinese pilots, which were mandated by the National Development and Reform Commission (NDRC), the mandate for the Fujian ETS came from the State Council with the endorsement of the “National Ecological Civilization Pilot Area (Fujian) Implementation Plan”. In the short term, it operates in parallel with the national carbon market. As the national ETS expands to new sectors, covered entities in these sectors will be integrated into the national ETS.

In January 2024, the Fujian Provincial Ecology and Environment Bureau (EEB) released the draft allocation plan for 2023. The draft plan is similar to the 2022 allocation plan, with slightly reduced benchmarks and changes to the base year for the grandparenting method.

Domestic Aviation

Industry

General budget, including debt reduction

Emissions & Targets

299.81 MtCO₂(2021)*

* No data is publicly available for more recent years. Data here is provided by local experts. Previously reported data is based on public sources from the launch year of the ETS in 2014, of 240.0 MtCO₂.

By 2030: Peak CO₂ emissions (Carbon Working Guidance)

By 2060: Achieve carbon neutrality (Carbon Working Guidance)

Average secondary market price: CNY 21.52 (USD 2.99) (updated prices available here)

Size & Phases

CO2

2016-ongoing

A cap limits the total emissions allowed in the system. The cap in recent years has been as follows:

2016 to 2018: ~200 MtCO₂

2019: ~220 MtCO₂*

2020: ~126 MtCO₂

2021: 131.72 MtCO₂

2022: 116.22 MtCO₂

The cap comprises three elements: existing entities’ allowances, the new entrants’ reserve, and the market stability reserve.

* There is no public data on the total cap or its elements. This number is based on an estimate by experts. The cap for 2019 was estimated to cover 87% of carbon emissions.

Petrochemical, chemical, building materials, iron and steel, nonferrous metals, paper, aviation, and ceramics. Electricity production was covered until 2019, after which it transitioned to the Chinese national ETS.

INCLUSION THRESHOLDS:

2016 to 2019: Energy consumption of 10,000 tonnes of coal equivalent (tce) per year, for any year between 2013 and 2019.

2020 to 2021: Emitters with energy consumption of 5,000 tce or more in any year from 2013 to 2020 were also included.

2022: Emitters with energy consumption of 5,000 tce or more in any year from 2019 to 2022 were further included.

Point source (industry, aviation); downstream (indirect emissions from electricity and heat consumption).

Companies

293 (2022)

Allowance Allocation & Revenue

Allowances are distributed for free, using benchmarking or grandparenting. A pre-allocation method is adopted for the annual allowance allocation. Allocation is then adjusted ex-post to reflect the actual production in the respective compliance year.

FREE ALLOCATION:

Benchmarking: Benchmarking is applied to the grid operator cement, ordinary steel (non-stainless), aluminum, plate glass, chemical and aviation sectors.

Grandparenting: The remaining sectors are allocated allowances based on historical carbon intensity. These entities can also apply for more allowances as a reward for early mitigation action.

According to the 2022 allocation plan, compliance obligations are limited. For sectors using the benchmarking method, the minimum allocation is 80% of their verified emissions and the maximum is 120%. For sectors using historical intensity methods, the surplus or shortfall is limited to 3 to 10% of verified emissions, according to their emission levels. On top of this limitation, the maximum amount of surplus or shortfall is 200,000 tCO₂e.

AUCTIONING: Auctioning may take place when considered appropriate by the ETS authorities (see ‘Market Stability Provisions’ section) and may be introduced as a method for allowance allocation over time. Up to 10% of the total cap is reserved for market intervention.

In order to increase market liquidity and price discovery, the Fujian DRC organized a discriminatory (non-uniform price) auction of 50,000 allowances in 2016 from the government reserve, with the settlement prices ranging from CNY 26.50 (USD 3.68) to CNY 30 (USD 4.17). No further auctions have taken place to date.

CNY 1.25 million (USD 173,672) since beginning of program*

* The Fujian ETS has held only one auction, in 2016, which provided 50,000 allowances at a floor price of CNY 25 (USD 3.47) per tonne. The exchange did not disclose the final volume and price. The calculation here assumes that all allowances were sold at the floor price.

Revenues are attributed to the central treasury.

Flexibility & Linking

Banking is allowed.

Borrowing is not allowed.

The use of domestic project-based carbon offset credits (CCERs) and Fujian Forestry Certified Emission Reduction credits (FFCERs) is allowed.

QUANTITATIVE LIMITS: The use of CCERs is limited to 5% of the annual compliance obligation. The limit is increased to 10% for companies that use both FFCER and CCER offset credits.

QUALITATIVE LIMITS: Eligible offset credits are restricted to those generated in Fujian province from entities not regulated under the ETS, and from CO₂ or CH₄ reduction projects. Hydropower-related offset credits are not eligible. FFCER projects from three project types (afforestation, forest management, and bamboo management) are eligible if implementation took place after mid-February 2005 and if the project developers have independent legal status.

The Fujian ETS is not linked with any other system.

ETS: Chinese national ETS

Domestic crediting mechanisms: Local Forest offset credits in Fujian (FFCER)

Domestic crediting mechanism (national): China Certified Emissions Reduction (CCER)

Compliance

Covered entities must surrender one allowance per tCO₂e emitted for all their covered emissions, and allocation is based primarily on free allocation.

One calendar year. Covered entities have until the end of June of the following year to surrender allowances.*

* This is according to the “Interim Measures of the Fujian ETS”. In practice, the provincial government releases executive notices to guide the timeline of the annual compliance cycle.

MONITORING: Covered entities are required to set up monitor plans and monitor their emission based on these plans.

REPORTING: Annual reporting of CO₂emissions to the competent authority before the end of February of the following year.

VERIFICATION: Third-party verification is required for all annual emissions reports. In addition, further validation is carried out by government-assigned experts for ~30% of the reports to further enhance accuracy; this process is also called “fourth-party verification” in China.

FRAMEWORK: The Fujian DRC and the Fujian Statistical Bureau jointly released a guiding document on monitoring and reporting that includes a monitoring plan template, using national measuring and reporting guidelines. In addition, the Fujian DRC and the Fujian Quality and Technical Supervision Bureau jointly released criteria for the administration of third-party verifiers.

REGULATED ENTITIES: Penalties for failing to submit an emission or verification report on time, providing false information, or disturbing the verification process range from CNY 10,000 (USD 1,389) to CNY 30,000 (USD 4,168). Companies failing to surrender enough allowances to match their emissions are fined between one to three times the average market price of the past 12 months per missing allowance, with a maximum limit of CNY 30,000 (USD 4,168). Additionally, twice the amount of the missing allowances can be withdrawn from the account of the company or deducted from the following year’s allocation.

TRADING INSTITUTIONS:Penalties for misconduct, such as not publishing relevant trading information, failing to establish and implement a risk management system or leaking commercial secrets, can range from CNY 10,000 (USD 1,389) to CNY 30,000 (USD 4,168).

THIRD-PARTY VERIFIERS:Penalties for misconduct, such as publishing false reports, reporting with errors, leaking commercial secrets, or participating in the market, can range from CNY 10,000 (USD 1,389) to CNY 30,000 (USD 4,168).

In addition, in 2018, the Fujian DRC released guidelines concerning ETS non-compliance information management, providing further details on recording and misbehaviors and corresponding incentives and penalties. Incentives for ETS compliance include priority lending, priority approval for project administration, and reduced frequency of inspections. Punishments for non-compliance include restrictions on approval of new projects, increased frequency of inspections, and a record in the bank credit system.

Market Regulation

MARKET PARTICIPATION: Compliance entities and institutional investors (domestic only) that meet the requirements of the emissions trading rules set up by Fujian EEB.

MARKET TYPES:

Primary: While most allowances are allocated for free, the Fujian Haixia Equity Exchange organizes ad hoc auctions for the primary market. So far, only one auction has been held.

Secondary: Spot trading of Fujian Emission Allowances (FJEA), CCERs and FFCERs takes place on the Fujian Haixia Equity Exchange.

LEGAL STATUS OF ALLOWANCES: Allowances are not considered financial instruments.

RESERVE

Instrument type: N/A

Functioning:

5% of the sum of the calculated allowance from covered entities is kept as a government reserve for market stabilization. The Fujian EEB can organize irregular auctions according to market demand, no fixed triggers are envisaged.

EXCHANGE

Instrument type: Price-based instrument

Functioning: The exchange limits day-to-day price fluctuations to a 10% move in either direction for listed trading, as well as 30% for block trading. Only transactions within this price range can be successfully completed on the exchange.