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China national ETS commences trading


Beijing, China

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On 16 July 2021, trading under China’s national ETS commenced on the trading platform operated by the Shanghai Environment and Energy Exchange (SEEE).

According to Chinese media, the opening price of the carbon emission allowances (CEAs) was CNY 48 (USD 7.42) per ton. The first transaction occurred in the second minute after the opening at 9:30 local time, with 160,000 tons of CEAs traded at CNY 52.78 (USD 8.15). By the end of the first trading day, according to SEEE, the closing price was CNY 51.23 (USD 7.89) per ton. The total trading volume was 4.1 million tons at CNY 210 million (USD 22.12 million).

Earlier this year, the Ministry of Ecology and Environment (MEE) published a series of policy documents outlining the overall administrative framework and rules about cap setting and allowance; monitoring, reporting, and verification (MRV); and trading and registry. In late June, SEEE further released detailed trading rules. Two days before trading started, the vice minister of the MEE stated in a press conference that the market infrastructure of the national ETS, including the national registry and trading platform, was finalized. Having the foundation in place, this signaled the imminent launch of trading.

China started piloting emissions trading in eight regions starting 2013 and launched the first compliance period of its national ETS this year. In this initial phase, the ETS regulates more than 2,200 companies from the power sector (including combined heat and power, as well as captive power plants of other sectors) from 2019 and 2020, which emit more than 26,000 tCO2 per year in any year over the period 2013-2019. It covers in total more than four billion tCO2, accounting for about 40% of national carbon emissions, making it the largest carbon market in the world by volume.

According to the timeline outlined by the MEE for the first compliance cycle that covers year 2019 and 2020, reporting and verification of emissions for 2020 were completed at the end of April and June 2021, respectively (2019 data already went through MRV process in 2020). The allocation process for both years involves two steps: at first, entities receive allowances at 70% of their 2018 output multiplied by the corresponding benchmark. This will be adjusted to reflect actual generation in 2019 and 2020, resulting in total final free allocation. The final allocation will be completed by 30 September 2021. Auctioning of allowances is not foreseen in the current phase but may be introduced in the near future.

Covered entities need to complete their compliance by 31 December 2021. Compliance obligations are limited at this stage: for gas-fired plants they will be capped at the level of free allocation, while others will need to surrender allowances for up to 20% of verified emissions above the level of free allocation. As for trading, there are rules specified by SEEE that constrain how freely the price will move. There are two major trading modalities (related to whether the transaction volume is above or below 100,000 allowances), which are subject to either +/- 10% or +/- 30% of daily price differences. 

China’s national ETS is expected to be one of the key policy instruments to realize the country’s climate ambition in both the short and long term. The country’s key mitigation targets include peaking carbon emissions before 2030 and achieving carbon neutrality by 2060. The prices of the first transactions of the national ETS are higher than the average price of the regional pilots over the past year. Many believe this is because of future expectations of a more stringent and expansive ETS in line with the 2030 and 2060 targets.
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