China publishes two major policy drafts for national ETS

On 2 November 2020, the General Office of the Ministry of Ecology and Environment (MEE) issued two policy documents on the national ETS establishing regulatory authority and specifying general rules in key areas of market operation and design.
 

The two documents, entitled “The National Measures for the Administration of Carbon Emission Trading (Trial),” hereafter the National Measures, and “The Administrative Measures for the Registration, Trading, and Settlement of the National Carbon Emission Rights (Trial)” are now under public consultation. The deadlines for submitting comments are 1 December 2020 and 11 November 2020, respectively.

The National Measures aim to provide the legal basis for the upcoming national system and supersede interim measures published in 2014. In December 2014, the National Development and Reform Commission (NDRC), the former national competent authority for climate change, had issued the Interim Measures for the Administration of Carbon Emissions Trading (NDRC Order No. 17) to regulate the construction of carbon markets in China. With the re-assignment of climate change responsibilities to the MEE in 2018, the newly drafted National Measures represent an update to adapt to the latest thinking and pathways toward a national ETS.

The release of the National Measures clarifies the level of legislation for the initial phase of the national ETS, which will cover only the power sector. Previously the NDRC had drafted a State Council-level regulation on national ETS (Zanxing Tiaoli), but the legislative process was not concluded before the re-assignment of climate responsibilities as part of a wider government restructuring. MEE has made it clear that the National Measures are to be issued in the form of departmental regulation, which is subject to future review and revision. This level of regulation is lower in the legal hierarchy compared to the State Council regulation, with implications for the level of financial fines it could impose. By stating “matters that cannot be stipulated by the departmental regulation will be arranged by the national regulation (Zanxing Tiaoli)”, it also leaves space for the further development of higher-level legislation as the national ETS expands and further develops.  

The National Measures include general rules and provisions related to allowance management; emissions trading; monitoring, reporting, and verification; compliance; offsets; supervision and management; and accountability. There are seven chapters and 51 articles. Its key points are summarized below.
 

• Multi-level governance structure: MEE is the national competent authority that sets the rules. Its subsidiaries at the provincial level will oversee the implementation of these rules within their jurisdictions. Where entrusted by the provincial-level authority, municipal-level authorities may also be involved in ETS management.
• Covered entities: enterprises or other economic organizations from the covered sector(s) whose annual greenhouse gas emissions reach 26,000 tons of CO₂e (comprehensive energy consumption of around 10,000 tons of standard coal) and above. Entities covered under the national ETS will no longer face compliance obligations in any existing pilot market. For more information on sectors of coverage, see the ICAP factsheet on the China national ETS.
• Allowance allocation: the initial phase envisions mainly free allocation, while auctioning will be introduced gradually, and its share will increase over time. MEE may reserve some allowances for purposes of promoting market stability.
• Data reporting platform: the system will rely on the "National Pollution Permit Management Information Platform" for emission data submission, monitoring plan filing, data management, analysis, verification, and supervision. It will gradually connect with other national information systems covering energy, statistics, power grid, and civil aviation.
• Reporting and verification: covered entities are required to submit the previous year’s emission reports by the end of March each year and shall be responsible for the authenticity, completeness, and accuracy of the reports. Provincial-level ecological and environmental authorities will carry out the verification of GHG reports in a "double random, one open" (random selection of inspection subjects and inspectors, and disclosure of the results to the public) manner. Provincial authorities can also entrust technical service agencies to conduct verification through government purchases of services.
• Voluntary allowance cancelation: covered entities, other institutions, and individuals can voluntarily purchase and cancel emission allowances.
• Offsets: covered entities can use offsets for up to 5% of their verified emissions from domestic emission reduction projects in renewable energy, carbon sinks, methane utilization, and others.
• Trading: entities that can engage in trading include those covered by the national ETS as well as other types of institutions and individuals. Trading products include emission allowances and other financial instruments subject to approval by the MEE. Public bidding, agreement transfer, and other trading methods can be adopted. While further details on participants and types of trading are not yet clear, this signals wider participation than what was envisioned under the 2017 Work Plan for Construction of the National Emissions Trading System (Power Sector).
• Registry and trading platform: To ensure real-time, effective, and safe transmission of data, the registry and the trading platform will be interlinked. The agencies overseeing the two systems will be appointed by the MEE and will not earn profits.
• Oversight: the covered entities and other main actors are subject to credit supervision (Xinyong Jianguan) through the environmental information management platform, societal supervision (e.g. media), and public anonymous reporting (Gongzhong Jubao). Failures in reporting are subject to a fine of 10,000 to 30,000 RMB (~USD 1,500-~USD 4,500), while failures in compliance obligations are subject to a fine of 20,000 to 30,000 RMB. Any gap between verified emissions and allowances submitted could also be deducted from the following year‘s allocation.

The second document, the Administrative Measures for Registration, Trading, and Settlement, is issued in the form of a regulatory document of the MEE, one level lower in the legal and regulatory hierarchy of the National Measures. Composed of six chapters and 38 articles, it applies to allowances rather than offset credits, clarifying the basic elements and oversight system of emission allowance registration, trading, and settlement, as well as the functions of the responsible agencies. The release was complemented by three ancillary documents: the "Registration Management Rules", "Transaction Management Rules", and "Settlement Management Rules".

Specific rules on other key ETS design elements such as cap setting, allowance allocation, and market stability measures will be released as additional technical rules and guidelines.

The publication of the two documents for public consultation is viewed as a signal that the work on the preparation of the national ETS has been accelerated, following the pledge of the Chinese President Xi Jinping in September 2020 that China aims to peak CO₂ emissions before 2030 and achieve carbon neutrality before 2060.