The eight Chinese regional ETS pilots have continued their operation and policy modifications in 2020, with little price impact from the COVID-19 crisis. Meanwhile, national authorities are continuing preparations for the Chinese national ETS, most recently updating the draft allocation plan for the power sector.

Compliance

Some pilots have wrapped up 2019 compliance, while others have postponed deadlines due to the COVID-19 crisis. On 1 September 2020, the Tianjin pilot completed its 2019 compliance period with a 100% reported compliance rate, becoming the first pilot to finish 2019 compliance work. However, most of the pilot systems have shifted their key program dates due to COVID-19. For example, the Beijing municipal government has pushed back the 2019 compliance deadline for its system from 15 June 2020 to 31 October 2020 and has decided to  delay introducing obligations for its aviation sector. Similarly, Shenzhen ETS has postponed the 2019 compliance deadline for its system to the end of September 2020.

Auctioning

Three pilots have held auctions so far this year. The Guangdong pilot ETS held the first of two planned auctions for the 2019 compliance year on 27 April 2020 with a floor price of RMB 25.84 per tCO2e (USD 3.78), selling 400 thousand allowances at the price of RMB 28.2 (USD 4.13). The Tianjin pilot held two auctions this year: the first auction for the 2019 compliance year was held on 4 June, with two million allowances sold at prices between RMB 17.31 (USD 2.53) and 21.55 (USD 3.15). The second, held on  28 August, sold 800 thousand allowances at RMB 26.14 (USD 3.83). Shanghai held its first auction on 28 August, with 200 million allowances sold at the floor price of RMB 39.61 (USD 5.80).

Price and trading

Prices in the secondary market have not shown a clear impact of the COVID-19 crisis. While trading volumes are down significantly (18 million allowances in the first half of 2020 compared to 42 million during the same period last year), the weighted average price across all pilots was 18% higher in the first half of 2020, according to the carbon market data provider Refinitiv. Measured from the launch of operations, Hubei and Guangdong have the highest cumulative transaction volumes, followed by Shenzhen, Shanghai, and Beijing.

2019 allocation plans

It is a typical feature of the Chinese pilots that annual allocation plans are released within, rather than before, the compliance period. As of 14 September 2020, most of the pilots have announced their 2019 allocation plans outlining the facilities covered and methodologies, including Guangdong, Tianjin, Beijing, Shanghai, Shenzhen, and Hubei, although only Guangdong, Shanghai, and Hubei have announced their total caps. Most pilots announced their allocation plans in 2020. For example, on 20 June 2020, Shanghai published the "List of Entities under Shanghai Carbon Emission Allowance Management (2019 Version)” and the "Shanghai 2019 Carbon Emission Allowance Allocation Plan". A total of 313 entities are named, with 33 of them newly added, totaling 158 million tons CO2e (including free allocation and reserves), the same as 2018 levels.

Policy modifications and fine-tuning regional ETSs

Some pilots have modified their ETS regulations to further develop their operations. For example, on 10 June 2020, the Tianjin municipal government released the updated "Tianjin Interim Measures for the Administration of Carbon Emissions Trading", extending the operation of its carbon market until 2025. Compared to its previous version, it also gives administrative oversight of the ETS to its Ecology and Environment Bureau, in line with a similar shift at the national level. In late August 2020, Fujian also modified the interim measures for its ETS, forbidding people affiliated with certain institutions deemed to have conflict of interest from trading, such as ETS-related government agencies, among other changes.

In addition, technical and market rules of some ETS pilots have been updated. For example, the Beijing pilot ETS continues to increase the stringency of its benchmark values for the power sector and is shifting from historical emissions based free allocation to benchmarks for the heat and cement sectors. Guangdong revised the rules of its offsetting program, the Pu Hui Certified Emission Reductions (PHCER) scheme, in June 2020, with some new quality and price provisions.

Guangdong introduced a new method of allowance transaction in June 2020 to improve market efficiency in the province: covered entities can now entrust the Guangzhou Carbon Emission Trading Center to organize auctions of any planned sale of allowances rather than pursue bilateral trading, determining the minimum price, timing of sale, and other transaction rules in conjunction with the Center.

Developments at the national level

Meanwhile, the national ETS continues advancing toward the start of trading. The Work Plan for Construction of the National Emissions Trading System (Power Sector), released in December 2017, envisioned a three-phase approach  first focusing on market infrastructure, followed by testing trading for the power sector, then deepening and expanding the market to other sectors. Each phase was planned to be roughly one year. The timeline, however, has been delayed due to national institutional reform shifting climate change responsibility from the National Development and Reform Commission (NDRC) to the Ministry of Ecology and Environment (MEE) at the national and local levels. With the shift of responsibilities now complete, the MEE is working to finalize the first phase of ETS preparations.

A key task at this phase is the market infrastructure development. Construction and operation of the registry and trading platform are led by Hubei and Shanghai respectively, under the supervision of the MEE. The systems have now been developed and are under review. On 12 May 2020, an expert review meeting was held in Beijing by MEE’s Climate Change Department. Experts received reports from Hubei and Shanghai and put forward some suggestions for further improvement of the systems’ functionality.
 
Meanwhile, preparations for the second phase (test trading for the power sector) are also underway. Most recently, the MEE circulated an updated version of the draft allocation plan for the power sector in late August 2020, building on the trial plan released last year. The document was sent for consultation among key stakeholders until end of August. The MEE has not published the document on its website, but details of it have been covered by international and domestic media. It provides details of the allocation methods and benchmark values; allowance issuance and surrendering; price stability measures; a list of covered entities; provisions for closure, merger, or separation of plants; and plants covered by the regional ETS pilots, among other topics.
 
No specific timeline for the start of the testing period for the power sector has been confirmed by the government but is expected by the end of 2020.