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China launches national carbon market

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Through a video conference call on 19 December 2017, including both national ministries and provincial governments, China launched its much-anticipated national ETS.

The Chinese market now overtakes the European Union ETS as the world’s largest carbon market. The provisions for the launch and the incremental development of the ETS are laid out in the Work Plan for Construction of the National Emissions Trading System (Power Sector), (the 'Work Plan'), which was approved by the State Council late in 2017. A three-Phase Roadmap  has been adopted (Article 3, Work Plan). Phase one will Focus on market development, Phase two foresees simulation trading, and then starting around 2020, Phase three will be the deepening and expanding phase, with spot trading for compliance and braoder sectoral coverage.

Jointly operated by the National Development and Reform Commission (NDRC) and provincial DRCs, the Chinese carbon market covers some 1700 companies accounting for more than three billion tons of CO2e from the power (including heating) sector in its initial phases. This accounts for around 30% of China’s national emissions. Allowances are expected be initially handed out for free based on sub-sector benchmarks with ex-post adjustments, while detailed allocation rules are yet to be published. Domestic offsets that have also been used by the ETS pilots, known as Chinese Certified Emission Reductions (CCERs), are also expected to be available in the national carbon market post-2020. 

Two years ago, Chinese President Xi Jinping announced the launch of a national carbon market for 2017 in a joint statement with the then-US President Barack Obama. At the time, China was already operating seven subnational emissions trading pilots in economically diverse regions ranging from industrial hubs like Hubei and Tianjin to megacities such as Beijing and Shanghai. This allowed China to experiment with a range of ETS designs and build on the lessons learned from the pilot systems.

The immense challenge of building and launching an ETS of this scale and complexity in just over two years cannot be understated. Data collection for the carbon market was carried out across all 31 provinces for eight sectors of the economy. Collecting robust and reliable emissions data, as well as capacity building among the regulated entities, verifiers and government institutions proved more time-intensive than expected in some provinces. In addition, the legal framework for the national ETS required a number of consultation rounds and revisions before being approved. As trial allocation work in two provinces earlier this year revealed difficulties in developing appropriate allocation methodologies, the initial sector coverage of the national ETS was scaled down to initially focus on the power sector, for which better quality data was available.

This initial phases will allow market participants time to familiarize themselves with the ETS, as well as give regulators the opportunity to improve system design and management over time. The launch is only the first step towards the development of a more robust and fully fleshed out system, with the NDRC recently publishing a notice requiring all local DRCs to begin the MRV process for 2016 and 2017 emissions from eight sectors of the economy (including petrochemical, chemical, building materials, steel, nonferrous metals, paper and aviation). The notice also includes new data collection, categorization and verification requirements. These sectors had previously submitted their historical data for 2013-2015 emissions in 2016. This can be read as an indication that the national ETS will gradually phase in these additional sectors in the long term, as well as continue to improve its key design elements such as MRV and allocation methods. 

See ICAP's Press Release here.

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