On 30 March 2021, the Ministry of Ecology and Environment (MEE) of China published new draft national ETS legislation that refines existing measures and places them on a higher level in the Chinese legal hierarchy.

The “Interim Regulations for the Management of Carbon Emissions Trading”, now open for public  consultation, would establish a more robust legal foundation for the policy moving forward. They mark another key step of MEE’s efforts to set up State-Council level legislation as a more solid legal basis for the national ETS.

Previously, the National Development and Reform Commission (then the ministry responsible for climate change) developed a draft version of this regulation in March 2016, and the MEE developed an initial revised draft in April 2019 after taking over responsibility for climate policy.

Compared to the current National Measures on emissions trading, which is a departmental regulation, the Interim Regulations are one level higher in the Chinese legal hierarchy and will replace the National Measures once they’re finalized. There is no specific timeline for the finalization of the legislative process, while Chinese media have reported a senior MEE official expects it to be by the end of 2021. The key points of the draft are summarized below.

  • Overarching objectives: for the first time, the national ETS is firmly linked to the carbon emissions peaking and carbon neutrality targets.
  • ETS governance framework: besides the three-tier governance structure centered around the MEE, the Interim Regulations grant authorities to other national-level regulators. The National Development and Reform Commission, Ministry of Industry and Information Technology, National Energy Administration, and other relevant departments join the MEE in supervising and managing national ETS activities. The MEE also coordinates with the State Administration of Market Supervision and Administration, People's Bank of China, China Securities Regulatory Commission, and China Banking and Insurance Regulatory Commission in supervising the registry and trading platform operators, with information sharing and law enforcement collaboration mechanisms to be established. In addition, besides provincial-level and municipal-level authorities, county-level environmental and ecology authorities may also participate in the ETS management.
  • Compliance and oversight: a more comprehensive liability framework is outlined, targeting public authorities, covered entities, trading participants, verifiers, and registry and trading platform operators, with a combination of financial and non-financial measures (such as social credit recording and disclosure). This includes higher financial fines, with failures in reporting subject to a fine of CNY 50,000 to 200,000 (USD 7,642 to USD 30,567) and failures in compliance obligations subject to a fine of CNY 100,000 to 500,000 (USD 15,282 to USD 76,412). In the current administrative measures, the fine levels are CNY 10,000 to CNY 30,000 and CNY 20,000 to CNY 30,000 respectively. Any gap between the compliance obligation and allowances surrendered will be deducted from the following year’s allocation. Financial fines are applicable to other offenses, such as violating trading accountability.
  • Cap setting: a cap and allocation plan shall be developed that is subject to State Council approval. This indicates that a national cap is expected to be set top down, moving away from the current bottom-up cap.
  • Allowance auctioning and a new national ETS fund: auctioning is recognized as one of the two allocation methods, alongside free allocation. Auctioning is to be introduced and gradually expanded, though no timeline has been specified. Correspondingly, a new national ETS fund is to be set up, channeling auctioning revenues to support the further development of the national carbon market and key GHG reduction projects.
  • Trading: trading products, participants, and methods are the same as in the National Measures, with the main products as allowances (which may be complemented by other products) and covered entities and other allowable institutions and individuals as participants. Agreement transfer, one-way bidding (multiple buyers, one seller), and other transaction methods could be used. Supplementary trading rules are to be set. In contrast to the current administrative measures, ETS regulators, registry and trading platform operators, and verification service agencies and their staff are forbidden to hold or trade in the national carbon market.
  • Offsets: offset credits are allowed in the national ETS, but the Interim Regulations do not specify qualitative or quantitative limits. Specific rules will be developed by the MEE.
  • Information disclosure: covered entities are required to disclose their annual emissions information, which provincial authorities will publish along with the compliance status. The registry and trading platform operators will publish registration, trading, and settlement related information as well as other relevant information that may affect the market significantly.
  • Pilot integration: The existing regional emissions trading systems shall be gradually integrated into the national ETS, with detailed rules to be developed by the MEE. Regional markets shall also align their rules in areas such as verification, compliance, trading, and risk management with the national ones.

With the MRV framework completed and continued progress on the construction of the registry and trading platform, the national ETS is expected to see the first trading of allowances by the middle of 2021. Recently, the Chinese government published its 14th Five Year Plan (2021-2025), setting a 18% reduction target for carbon emission intensity. More detailed plans for energy saving and emissions reduction as well as 2030 carbon emissions peaking are in process. Moving forward, the national ETS will be aligned with these targets and plans.