China publishes rules for national ETS registry and trading

On 19 May 2021, the Chinese Ministry of Ecology and Environment (MEE) issued three rules related to emission allowance registration and trading for its national ETS.
 

The rules came into force immediately and are critical to the regulatory framework of the Chinese national ETS, which launched operations this year with year-end compliance obligations. 

The draft versions of these rules were released in November 2020 for public consultation. Under the guidance of the “National Measures for the Administration of Carbon Emission Trading (Trial)”, released in January 2021, these final management rules provide details regarding the market operation of the national ETS. They  complement rules that were published earlier this year on allocation and monitoring, reporting, and verification (MRV), collectively providing the regulatory infrastructure for the Chinese National ETS. An overview of the market operation rules is summarized below.
 

• Trading participants: initially only compliance entities can trade on the market; other institutions and individuals may also be allowed to trade in the future subject to relevant national trading rules, which are yet to be released.

• Trading products and methods: the main trading products are emission allowances, while other trading products may be added later. Agreement transfer, one-way bidding (multiple buyers, one seller), and other transaction methods can be used. Further details are expected to be developed

• Registration of emissions rights: Through the national registry, centralized and unified registration is implemented for the holding, change, surrendering, and cancellation of carbon emission rights. The information recorded in the registration system is the final basis for judging the attribution of emission allowances. Entities can inquire about the quantity and holding status of emission allowances held via the registry

• Settlement of trades: The national registry agency oversees the unified settlement of the allowance trading, managing the trading settlement funds and preventing settlement risks. It needs to choose a commercial bank as a settlement bank and set up a special account to deposit the transaction funds and related payments of each trading entity

• Opening accounts: to participate in the trading, entities shall open a trading account under their legal name with the trading agency, obtain a trading code, and open a registration account and a funding account in the registry and settlement bank respectively. Each entity can have only one account

• Market stability management: MEE can establish a so-called market regulating and protection mechanism. When abnormal fluctuations in trading prices trigger the mechanism, the MEE can take measures such as buy-back or auctioning of allowances or adjusting the rules of CCER usage to make the necessary market adjustment. The precise triggers for an adjustment are to be specified by further rules

• Risk management: the trading platform operator is required to establish systems for managing financial risk, including an overall risk management system, reserve financing, and an information disclosure and management system. The registry is required to build up sound risk prevention and emergency response procedures and implement risk prevention and control measures. The registry is also required to establish an information management system and a coordination mechanism with the trading platform to realize the interconnection between the two systems to ensure timely, accurate, safe, and effective exchange of relevant data and information

• Institutional set-up: dedicated agencies will be set up to operate the national registry and trading platform. Chinese Media also reported that they will be jointly built by the seven ETS pilot provinces and cities, together with Jiangsu and Fujian, under the guidance of the national government.

A key ongoing technical task to prepare the national ETS to be fully operational is the development of the registry and of the trading platform, which are led by the local governments of Hubei and Shanghai respectively. Chinese media reported that China Electricity Council, together with Hubei Carbon Emission Trading Center and Shanghai Energy and Environment Exchange, organized the joint testing of the two systems in Wuhan earlier this month, demonstrating that they are close to completion. The above rules also provide foundations for developing further detailed rules on trading activities and registry management by the operators of the national ETS registry and trading platform, paving the way for the national ETS to start its trading by the end of June 2021.
 

Besides allowance trading, the national ETS also allows covered entities to use Chinese Certified Emissions Reductions (CCER) credits as offsets. A separate national registry for offsets is currently under development, led by the local government of Beijing. Specific rules related to offsets are also expected to be released. What the current rules have specified is that the CCERs used for compliance need to follow a two-step approach regarding registration. In the first step, they shall be cancelled in the separate national registry for CCERs, which is still under development. As a second step, the respective compliance entity shall submit relevant cancellation supporting materials. After verification of the materials, the national registry agency will handle the offset registration.