China releases allocation plan and compliance arrangements for 2021 and 2022

On 15 March 2022, the Chinese Ministry of Ecology and Environment (MEE) released the retroactive allocation and compliance work plan (Chinese) for the 2021-2022 second compliance period of the Chinese national ETS. This announcement follows a public consultation process held in December 2022 on the draft version of the allocation plan. The final plan includes several significant changes compared to the draft.

The allocation plan sets out a timeline for the second compliance period, which consists of several steps:

1. Provincial Environment Bureaus are required to submit their pre-allocation plans for each province to the China Carbon Emissions Registration and Clearing Co., Ltd. (the ‘Registry’) and the MEE by 30 April.
2. The Registry will then pre-allocate allowances to covered entities.
3. After the verification deadline on 30 June, the Environment Bureaus must submit their final allocation plans to the Registry and the MEE by 15 July.
4. The Registry then adjusts the final number of allowances allocated to covered entities.
5. Finally, the Environment Bureaus are required to ensure that 95% of covered entities in their respective province surrender their allowances before 15 November. The remaining 5% of covered entities must surrender their allowances by 31 December.

The output-based benchmark allocation method described in the final plan is largely the same as the draft version, with minor adjustments made to benchmark values. However, the benchmark values in final version are significantly tighter than those of the first compliance period, with benchmarks for coal-fired power generation reduced by 6.29% to 18.41%. All allowances will be allocated for free.

The final allocation plan also introduces flexibility rules for compliance. In the first period, compliance obligations were limited. Coal-fired generators were only required to submit allowances for 20% of the emissions above their initial allocation amounts, and gas-fired generators had no compliance obligations. Now in the second compliance period, the MEE has maintained these two rules and added a further two. In a recent Q&A session, the MEE stated that these rules have been formulated considering the impacts of the COVID-19 pandemic, the domestic and international economic context, and issues of energy supply. The four rules for the second compliance period are:

• Covered entities with free allowances making up less than 80% of their verified emissions will have their allocation adjusted upwards to 80%, meaning that 20% remains the maximum shortfall, which is similar to the first compliance period.
• Despite the slightly tightened benchmark for gas-fired generators, they continue to benefit, with compliance obligations limited to the number of allowances they were initially allocated.
• Companies with a shortfall of 10% or more can apply to borrow allowances from their pre-approved allocation for 2023, up to 50% of the shortfall.
• In the context of the energy crisis and the risk that covered entities may be unable to meet their compliance obligations even after borrowing from future allocations, the MEE will conduct a study on a potential tailored relief program for covered entities that will “safeguard people’s livelihoods”.

The final allocation plan confirms that ETS participants will still be able to use Chinese Certified Emissions Reductions (CCERs) to meet up to 5% of their compliance obligations. However, the rules on which project types will be eligible for CCERs, as well as banking rules for allowances from the first compliance period, will be released separately.