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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; Benchmarking) and Auctioning

Offsets and credits

National and provincial

Cap

~132 MtCO2 (2021)

GHGs covered

CO2

Average secondary market price (2022)

Average secondary market price: CNY 22.74 (USD 3.37)

Total revenue since beginning

CNY 1.25 million (USD 185,460)

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General Information

The province of Fujian launched its ETS in September 2016. It covers around half of the province’s emissions and nearly 300 entities in 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 it was incorporated into the national ETS. Allowances are distributed for free, 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 offsets projects in the province. By the end of 2020, 2.8 million forestry offset credits had 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 will operate in parallel with the national carbon market. Over the longer term, it is expected to be integrated into the national market.

The Fujian Provincial Ecology and Environment Bureau (EEB) released the 2021 allocation plan for public consultation in November 2022. The plan introduces benchmarking as the allocation method for the power grid company. The EEB also revived the market stability reserve in the 2021 allocation plan, which equals 5% of the sum of existing entities’ allowances and new entrants’ allowances.

In January 2023, the Fujian EEB announced full compliance for 2021, with all 296 covered entities having submitted allowances as required on time.

The Fujian Province Communist Party Committee and the Provincial Government published “Working Guidance for Carbon Dioxide Peaking and Carbon Neutrality in Full and Faithful Implementation of the New Development Philosophy” (hereafter, “Carbon Working Guidance”) in August. It set up the carbon neutrality roadmap for Fujian Province (see ‘GHG Reduction Targets’ section).

Domestic Aviation

Industry

Emissions & Targets

245.4 (2020)*

* As there is no publicly available data for the most recent years, the data here is provided by local experts. The previously reported data based on public source in the launch year of the ETS is 240.0 MtCO₂(2014).

By 2025: MEE determined the carbon intensity reduction target (Carbon Working Guidance)

By 2030: Peak CO₂ emissions (Carbon Working Guidance)

By 2060: Achieve carbon neutrality (Carbon Working Guidance)

17.24 CNY (USD 2.50) (updated prices available here)

Size & Phases

CO2

2016-ongoing*

* In the short term, the existing Chinese regional carbon markets are expected to operate in parallel with the Chinese national carbon market. Over the medium to long term, they are expected to be integrated into the national market, once it is fully operational.

2016-2018: ~200 MtCO2₂).

2019: ~220 MtCO₂*

2020: ~126 MtCO₂

2021: ~132 MtCO₂

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

Electricity grid, 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:

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

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

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

296 (2021)

Allowance Allocation & Revenue

Allowances are distributed for free, using benchmarking or grandparenting. A pre-allocation method is adopted for the annual allowance allocation. At first, entities receive 70% of the allowances each year, based on their production levels in the previous year. Allocation is then adjusted ex-post to reflect the actual production in the respective compliance year.

FREE ALLOCATION, BENCHMARKING: Benchmarking is applied to grid, cement, aluminum, plate glass, chemical and aviation sectors.

FREE ALLOCATION, GRANDPARENTING:

The other sectors are allocated allowances based on historical carbon intensity. These entities can also apply for more allowances as reward for early mitigation actions. From 2020, for the plate glass and ceramics sectors, a so-called energy structure adjustment mechanism was introduced. This mechanism sets an energy structure adjustment factor based on the share of gas in the total energy consumption. It has four levels, ranging from 0.9 (0% of gas usage) to 1.03 (50% to 100% of gas usage). As such, entities with a higher use of gas would receive more allowances. The aim of the mechanism is to promote the use of gas to transform the energy mix.

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 3.93) to ~CNY 30 (USD 4.45). No further auctions have taken place to date.

CNY 1.25 million (USD 193,829)*

* The Fujian pilot has held only one auction, in 2016, which provided 50,000 allowances at a floor price of CNY 25 (USD 3.62) per tonne. Nevertheless, 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 provincial general budget.

Flexibility & Linking

Banking is allowed.

Borrowing is not allowed.

QUANTITATIVE LIMIT: Domestic project-based carbon offset credits (CCERs) and Fujian Forestry Certified Emission Reduction credits (FFCERs) are allowed. 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 credits.

QUALITATIVE LIMIT: Eligible offsets are restricted to those generated in Fujian province from entities not regulated under the ETS, and from CO₂ or CH₄ reduction projects. Hydropower-related 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 personality.

There is currently no link with other carbon markets.

Compliance

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 circle.

REPORTING FREQUENCY: 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 a measure for the administration of third-party verifiers, which specifies criteria for the verifiers and their staff. Both documents are still valid.

* In recent years, the deadline has been postponed.

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 1,484) to CNY 30,000 (USD 4,451). 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 allowance, with a maximum limit of CNY 30,000 (USD 4,451). 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 the misconduct of trading entities and their staff, 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 1,484) to CNY 30,000 (USD 4,451).

THIRD-PARTY VERIFIERS: Penalties for misconduct, such as publishing false reports, reporting with errors, leaking commercial secrets, or participating in the market, could range from CNY 10,000 (USD 1,484) to CNY 30,000 (USD 4,451).

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

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, 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 Fujian Haixia Equity Exchange.

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

RESERVE: 5% of the total cap is kept as a government reserve for market stabilization.

INTERVENTION: According to the (trial) “Implementation Rules of Emissions Trading Market Management in Fujian Province”, the Fujian Economic and Information Center under the guidance of the competent authority – in consultation with an advisory committee – can buy or sell allowances in order to stabilize the market under certain conditions. These conditions include: market fluctuations (i.e., if the cumulative increase or decrease of allowance prices for ten consecutive trading days reaches a certain percentage); severe imbalances between supply and demand; or liquidity issues. More specifically, high prices may trigger allowance auctions from government reserves through the Haixia Equity Exchange. Low prices may trigger authorities to buy allowances from the market through governmental funds.

Other Information

Fujian Provincial Ecology and Environment Bureau: Authority responsible for establishing the Fujian ETS after governmental restructure in 2019.

Fujian Haixia Equity Exchange: Responsible for operating the trading platform.

Fujian Economic and Information Center: Responsible for operating the registry, market management, and MRV administration.