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China - Guangdong pilot ETS

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Official name of scheme

China - Guangdong pilot ETS

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ETS Status

in force

Jurisdictions

Guangdong

Start of operation (year)

2013

Sectoral coverage

Domestic Aviation

Industry

Allocation

Free Allocation (Grandparenting; Benchmarking) and Auctioning

Offsets and credits

Domestic (national and provincial)

Cap

265 MtCO2 (2021)

GHGs covered

CO2

Average secondary market price (2022)

CNY 76.53 (USD 11.35)

Total revenue since beginning

~CNY 815.5 million (USD 121 million)

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General Information

The Guangdong ETS was launched in December 2013. It covers around 40% of the province’s emissions. With broad sectoral coverage, the Guangdong ETS is the largest of the Chinese ETS pilots in terms of market size and spot trading volume.

The Guangdong ETS covers emissions from around 180 entities in the cement, steel, petrochemicals, paper, and domestic aviation sectors. Since its launch, its scope has expanded to include ceramics, textiles, and data centers. The ETS has an absolute cap that is announced annually. Allowances are primarily allocated for free, although ad hoc auctions have been held since 2017. In recent years, it has introduced new measures to enhance market liquidity and is one of the regional pioneers for allowance forward trading in China.*

The Guangdong ETS was the fourth largest ETS in the world before the power sector was transferred to the Chinese national ETS in 2020. The Guangdong pilot’s longer-term outlook is to integrate fully into the national carbon market.

*China is still in the exploratory and research stage of carbon futures trading; according to the “Administrative Regulations on Futures Trading” document, futures can only be traded on approved professional futures exchanges. Therefore, regional ETS pilots cannot introduce futures trading; however, a few of them have developed carbon forward trading products with their own characteristics.

In February, the Guangdong provincial Ecology and Environment Bureau (EEB) issued a notice requiring covered entities to complete the verification of emissions reports as well as allowance compliance for the 2021 compliance year. In this notice, the Guangdong EEB also released two revised guidelines on reporting and verification for entities and third-party verifiers. Another set of working guidelines on the use of Chinese Certified Emissions Reductions (CCERs) and Tan Pu Hui (PHCER) offsets were also issued (see “‘Offsets and Credits”’ section).

In April, the Guangdong EEB released regulations regarding the trading management of PHCERs and clarified the methodology. These regulations strengthen the voluntary emissions reduction mechanism for the Guangdong ETS and is aimed at mobilizing society towards emissions reductions and carbon neutrality. In May, the EEB issued a notice to delay the compliance deadline to August and announced in October that only one of 176 entities had not fulfilled their compliance obligations for 2021.

In December, the Guangdong EEB released the 2022 allocation plan. The threshold was lowered from 20,000 tCO₂ per year or energy consumption of 10,000 tce (tonne of coal equivalent)/year to 10,000 tCO₂/year or energy consumption of 5,000 tce/year.

Domestic Aviation

Industry

Emissions & Targets

693.5 MtCO₂*

* As there is no publicly available data for the most recent years, the data here is provided by local experts. Previously reported data was based on public sources from the launch year of the ETS: 610.5 MtCO₂(2012).

By 2025: CO₂ intensity reduction meets the requirement of central government (20.5%, compared to the CO₂ intensity in 2020); (Guangdong Province 14th Five-Year_Plan for Tracking Climate Change)

By 2030: Peak carbon emissions (Guangdong Province Implementation Opinions on Implementing the New Development Concept and Promoting Carbon Neutrality)

By 2060: Climate neutrality (Guangdong Province Implementation Opinions on Implementing the New Development Concept and Promoting Carbon Neutrality)

CNY 76.53 (USD 11.35) (updated prices available here)

Size & Phases

CO2

PHASE ONE: 3 years (2013-2015)

PHASE TWO: 5 years (2016-2020)

PHASE THREE: Ongoing (2021-present)*

*In the short term, the Chinese regional carbon markets are expected to operate in parallel with the Chinese national ETS. Over the medium to long term, they are expected to be integrated into the national market.

Guangdong is one of few pilots in China that announces its annual emissions cap. Within the annual cap, the government also keeps a certain amount as a reserve for new entrants and market stability.

PHASE ONE (2013-2015):

2013: 388 MtCO₂(including 38 MtCO₂reserves)

2014: 370 MtCO₂(including 38 MtCO₂reserves)

2015: 408 MtCO₂ (including 38 MtCO₂reserves)

PHASE TWO (2016-2020):

2016: 386 MtCO₂(including 21 MtCO₂reserves)

2017: 422 MtCO₂(including 23 MtCO₂reserves)

2018: 422 MtCO₂(including 23 MtCO₂reserves)

2019: 465 MtCO₂(including 27 MtCO₂reserves)

2020: 465 MtCO₂(including 27 MtCO₂reserves)

PHASE THREE (2021-present):

2021: 265 MtCO₂ (including 13 MtCO₂ reserves)*

2022: 266 MtCO₂ (including 13 MtCO₂ reserves)

*The drop is mainly due to the transfer of the power sector into national ETS.

PHASE ONE (2013-2015): Power, iron and steel, cement, and petrochemicals.

PHASE TWO (2016-2020):

2016: Power, iron and steel, cement, aviation, and petrochemicals

2017-2020: As above, plus papermaking

PHASE THREE (2021-present):

2021: Iron and steel, cement, papermaking, aviation, and petrochemicals

2022: As above, plus ceramics, textiles, and data centers

INCLUSION THRESHOLDS:

2013-2021: 20,000 tCO₂/year or energy consumption of 10,000 tce/year

2022 onwards: 10,000 tCO₂/year or energy consumption of 5,000 tce/year

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

200 existing entities, 17 new entrants (2022)

Allowance Allocation & Revenue

FREE ALLOCATION: Primarily free allocation through grandparenting based on historical emissions or emissions intensity, or benchmarking.

Benchmarking is applied to industrial processes in the aviation, cement, paper, and steel sectors.

Grandparenting on the basis of total historical emissions is applied to some processes in the cement and steel industries and the whole petrochemicals industry. Grandparenting on the basis of historical emissions intensity is also applied to some products in the cement industry, captive power plants in the steel industry, special paper and paper product manufacturers, enterprises with pulp manufacturing, and other aviation enterprises.

Ex-post adjustments based on real production data of the respective compliance year are also applied for those sectors that use benchmarks and emissions intensity methods.

PHASE ONE (2013-2015):

2013 and 2014: 97% free allocation for all sectors

2015: 95% free allocation for the power sector,

97% free allocation for other sectors

PHASE TWO (2016-2020):

2016-2019: 95% free allocation for the power sector, 97% for other sectors

2020: 95% free allocation for the power sector, 100% for aviation,

97% free allocation for other sectors

PHASE THREE (2021-present):

100% free allocation for aviation,

96% for other sectors

AUCTIONING: Guangdong auctions a small share of allowances. In the first compliance year, entities were required to purchase allowances at auction to be eligible to receive their freely allocated allowances. This requirement was terminated in 2014.

Quarterly auctions were held until 2016; since 2017, they have been held on an ad hoc basis. Auctions are also subject to a reserve price (see “‘Market Stability Provisions”’ section). No auctions took place in calendar years 2018, 2019, and 2021.

The allowance volume available for auction was adjusted from 2 million allowances (until 2018) to 5 million for 2019. The last auction took place in April 2020 for the 2019 compliance year, with a floor price of CNY 25.84 (USD 3.84). Only 400,000 allowances were sold at CNY 28.20 (USD 4.19).

The auction volume for the 2022 compliance year was reduced to 0.5 million. These allowances are expected to be sold at the beginning of 2023 and April 2023.

~CNY 815.5 million (USD 121 million) since the beginning of the program

Revenues are attributed to the provincial treasury.*

*Guangdong has been exploring the establishment of a Low Carbon Development Fund that would use auction revenues to promote further mitigation actions, carbon finance, and low-carbon industrial development.

Flexibility & Linking

Banking is allowed.

Borrowing is not allowed.

QUANTITATIVE LIMIT: The use of offsets is limited to 10% of covered entities’ annual emissions. Chinese Certified Emissions Reductions (CCERs) and Tan Pu Hui Certified Emission Reductions (PHCER), a local offset program introduced in 2017, are allowed.

In addition to the quantitative limit applied to individual entities, Guangdong sets an upper limit on the total volume of offsets allowed. In 2020, entities could use up to 1.5 million offsets (CCERs and PHCERs) towards compliance obligations, with priority given to CCERs and PHCERs from projects within Guangdong. In 2021, entities could use up to 1 million offsets for compliance. The maximum amount for 2022 is not published yet.

QUALITATIVE LIMIT: At least 70% of offsets used by each covered entity must come from within Guangdong province. Pre-CDM credits are not eligible. Credits from hydropower and from most fossil fuel projects are also not eligible. Credits generated in other Chinese ETS pilot regions are not eligible. To be eligible, projects must relate primarily (i.e., more than 50%) to the reduction of CO₂ and CH₄ emissions.

OFFSET AUCTIONS: Guangdong employs auctioning for PHCERs in addition to the existing secondary market trading, with an auction reserve price set by the local exchange and offset project developers. In 2021, six PHCER auctions were held. No auctions were held in 2022.

Guangdong plans to explore the feasibility of the construction of a joint or linked carbon market within the Guangdong-Hong Kong-Macao Greater Bay Area. Details of such a plan are not yet available.*

*Guangdong and Hubei also explored linking their pilot markets in 2012/2013, but this did not materialize.

Compliance

One calendar year; covered entities have until June/August of the following year to surrender allowances.

REPORTING FREQUENCY: Annual

VERIFICATION: Third-party verification is required. In addition, further verification was initially carried out by government-assigned expert groups in the first three compliance years. Onsite cross re-verification was conducted for entities with questionable verification reports, as well as for randomly selected entities.

A “fourth-party independent evaluation system” has been in place since the 2016 compliance period. “Technical evaluation organizations” selected by the government carry out technical review and evaluation of annual emissions and verification reports and undertake further onsite review and random inspection tasks. These organizations do not undertake regular third-party verification tasks. The government also conducts random checks on emissions reports.

FRAMEWORK: Guangdong EEB revised reporting and verification guidelines for the compliance entities and third-agency verification sectors in 2022.

OTHER: Industrial enterprises with annual CO₂ emissions of 5,000-10,000 tonnes are required to report their emissions. Verification is not required.

ENTITIES: Penalties for failing to submit emissions or verification reports on time range from CNY 10,000 (USD 1,484) to CNY 50,000 (USD 7,418). Furthermore, companies failing to surrender sufficient allowances are deducted twice the number of allowances from the following year’s allocation and fined CNY 50,000 (USD 7,418). Other non-financial penalties include negative impacts on access to bank loans and subsidy programs.

TRADING INSTITUTIONS: Penalties for failing to publish transaction information or failing to establish and implement a risk management system range from CNY 10,000 (USD 1,484) to CNY 50,000 (USD 7,418).

THIRD-PARTY VERIFIERS: Third-party agencies are fined between CNY 30,000 (USD 4,451) and CNY 50,000 (USD 7,418) for issuing false verification reports, material errors in verification reports, or for unauthorized use or publication of confidential corporate and emissions information.

Market Regulation

MARKET PARTICIPATION: Compliance entities; domestic and international institutional investors that meet the requirement of the carbon emission trading rules set by China Emissions Exchange (CEEX).

MARKET TYPES:

Primary: As the first Chinese region to introduce auctioning as a method for allowance allocation, Guangdong held quarterly auctions until 2016. Since 2017, auctions have been held on an ad hoc basis. The CEEX organizes auctions for the primary market.

Secondary: Guangdong Emission Allowance (GDEA) is the main spot trading product in the secondary market. Bidding transfer was introduced in 2020 to organize auctions for covered entities to enhance market efficiency for the secondary market. CCERs and PHCERs are also traded in the secondary market. All products are traded on the CEEX.

Due to the financial market regulations in China, no standardized forward markets or derivatives are allowed. However, with the April 2021 establishment of the Guangzhou Futures Exchange, Guangdong is seeing new momentum to study and explore the launch of carbon futures and other innovative financial products.

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

RESERVES: 5% of allowances are set aside as government reserves for new entrants and market stability. The specific rules for market stability are provided by its “Trial Measures for ETS”.*

AUCTION RESERVE PRICE: Auctions under the Guangdong Pilot ETS are subject to an auction reserve price.

In 2015, a “policy reserve price” was set as an effective reserve price, which links the auction reserve price with the secondary market price. In 2016, the policy reserve price was set at 100% of the weighted average price for allowances over the previous three months. When auctions resumed in April 2020 for the compliance year 2019, the policy reserve price was set at 90% of the weighted average price for allowances over the previous three months, considering the impact of the COVID-19 pandemic. No auctions were held in 2021 or 2022.

*The auctioning ratio may be adjusted in the future, but no concrete plan is available yet.

Other Information

Guangdong EEB Province (EEB): Authority responsible for ETS affairs, including MRV.

China Emissions Exchange (Guangzhou): Responsible for operating the trading platform.

Guangdong Research Center for Climate Change: Responsible for administrating the registry.

No public information about the evaluation or review system is available. However, the Guangdong Research Center for Climate Change has published a biannual/annual report of the Guangdong ETS with an overview of its performance from 2013-2018. In addition, research on improving MRV and allowance allocation has been undertaken, funded by the local government.