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China publishes framework for carbon peaking and neutrality, confirming plans to strengthen and expand national ETS

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In the lead up to COP 26 in Glasgow, China released three important policy documents in its ‘1+N’ framework for carbon peaking and neutrality, confirming plans to strengthen the national ETS and expand it to more sectors.
Overarching guidance: The 1 in the 1+N policy framework
On 24 October 2021, the Central Committee of the Communist Party of China and the State Council jointly released a high-level policy framework to peak carbon dioxide emissions and achieve carbon neutrality. The long-awaited document, titled ‘Working Guidance for Carbon Peaking and Carbon Neutrality in Full and Faithful Implementation of the New Development Philosophy‘ (hereafter the Guidance), also available in English, was an important breakthrough ahead of COP 26 in Glasgow. It is the ‘1’ in the so-called ‘1+N’ policy framework, setting out the overarching principles for a number (N) of forthcoming policies to facilitate China’s peaking and neutrality goal. The new development philosophy (mentioned in the title of the document) refers to the concept of innovative, coordinated, green, open, and shared development.
The Guidance specifies China’s targets to peak emissions by 2030 and to achieve carbon neutrality by 2060. The headline targets include an increase in the use of non-fossil fuels to about 25 percent of total energy consumption by 2030 and to more than 80 percent by 2060. Furthermore, by 2030, CO2 emissions per unit of GDP should be reduced by more than 65 percent compared to 2005 levels. The Guidance also foresees a rapid growth in renewable energy and forest carbon stocks, so that by 2030 the total installed capacity of wind and solar power should reach over 1200 gigawatts, forest coverage should extend to about 25%, and the forest stock should increase to 19 billion m3.
Article 34 of the Guidance specifically addresses the development of market-based mechanisms in section XII ‘Improving Policy Mechanisms’. It confirms the planned coverage expansion, the diversification of trading instruments, and the improvement of the allocation and management of allowances for the national ETS, in line with previous policy documents such as the trading rules and the new draft national ETS legislation. An important announcement is the planned incorporation of ‘carbon sink trading’ into the national carbon market and the establishment of an ecological compensation mechanism that reflects the value of carbon sinks. Article 34 of the Guidance indicates that the forestry sector is to play a strong or even dominant role in generating offsets for the national ETS. The Ministry of Ecology and Environment is currently developing detailed rules for the use of  offset credits are in the national ETS.
Action Plan for Carbon Peaking Before 2030
Two days later, on 26 October, the State Council released another key milestone document, titled ‘Action Plan for Carbon Peaking Before 2030’ (English version) that is referred to as the first N in the ‘1+N’ policy framework. It outlines key tasks in ten fields and 43 items covering power, industry, building, transport, circular economy, and carbon sinks, and others. It further underlines the role of the national ETS as a market-based mechanism for climate mitigation, and reaffirms the plan to enhance its supporting systems (such as the registry) and expand its scope over time.
Updated Nationally Determined Contribution
On 28 October, China then submitted its updated Nationally Determined Contribution (NDC), reaffirming the targets outlined in the Guidance. The updated NDC also highlights the importance of China’s carbon market and the commitment to improve and expand it. Both the Action Plan and the NDC also emphasize the importance of coordinating the various market-based approaches to climate and energy in China. Alongside the ETS, these include electricity trading  (in 2015 China launched a new round of reforms to develop  a competitive electricity market at national and provincial levels), and energy-use rights trading (based on tradable units of  total energy consumption. The policy is being piloted in four provinces with the intention to develop a national scheme).