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China releases draft allocation plan for 2021 and 2022

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On 3 November 2022, the Chinese Ministry of Ecology and Environment (MEE) released the draft allocation plan (Chinese) for 2021 and 2022. The plan proposes significantly tighter benchmarks values for the approximately 2000 – primarily coal-fired – power plants covered by the national ETS. The process of compliance for the two-year period has also been proposed, with a final compliance deadline of December 2023.  A short public consultation on the plan concluded on 12 November.

As was the case in the first compliance period, the draft plan proposes four separate allocation benchmarks: for conventional coal plants above an installed-capacity threshold of 300 MW; conventional coal plants below this threshold; unconventional coal plants (such as coal gangue, coal slime, and coal water slurry); and natural gas plants. The plan thereby confirms that the scope of the national ETS will remain limited to the power sector.

All four benchmark values have been lowered compared with the first compliance period. The benchmarks for coal-fired power generation have been significantly tightened, with reductions of between 6.5% and 18.8%. In an explanatory document (Chinese), the MEE gave the following rationale for the reductions:

  • The decrease of the benchmarks reflects lower carbon intensity values, which are the result of more accurate monitoring. The number of facilities monitoring the actual carbon calorific values has increased, from 66% in 2019 to 93% in 2022. This has led to a fall in the use of the default carbon calorific value, which was between 10-20% higher than the actual values.
  • More stringent benchmarks are consistent with the aim of the national ETS to reward generators that use large-capacity, high-efficiency, and cogeneration design. Another key consideration in the design of the allocation plan is to maintain a stable electricity supply. Therefore, MEE has set the benchmarks conservatively - almost the same as the balance value[1] - which avoids putting additional pressure on the whole power sector.

In addition to the updated benchmark values, other changes outlined in the plan include:

  • Renewing the use of the load factor adjustment and extending it to cogeneration plants. The load factor adjustment provides additional free allowances to coal-fired power generators that are obliged to operate below 85% of full capacity. Intended to compensate for losses due to inefficiency, this assistance was only provided to 100% electricity generators in 2019-2020 but will now be extended to cogeneration plants for the next period.
  • Updating the base year for determining pre-allocation. Allocation in the national ETS is calculated based on actual output, and as it was with the last compliance period, covered entities shall receive an initial pre-allocation of 70% of allowances based on 2021 verified data, which will subsequently be adjusted once actual production levels for the period are reported. In the last allocation plan, the pre-allocation quantities for 2019 and 2020 were calculated as 70% of 2018 verified emissions. Covered entities will now need to apply for pre-allocation based on 2021 emissions data, which will give market participants more confidence in the accuracy of pre-allocation.

The details of compliance rules remain to be finalized by the MEE. In the first compliance period, compliance obligations were limited, with coal generators only having to submit allowances for 20% of the emissions above their initial allocation amounts and gas-fired generators having no further compliance obligations. It is still unknown whether this approach will continue to apply for the second compliance period. Furthermore, the rules on banking allowances from the first compliance period, offset rules, as well as the timeline for allocation, are also still to be clarified.

[1] The balance value is the theoretical value of the benchmark at which the supply and demand of allowances from covered entities would break-even. At the balance value, the surplus of allowances coming from high-efficiency generators would be equal to the shortage of allowances required by low-efficiency generators. MEE calculates the balance value based on verified 2021 data on emissions, power supply, and heat supply.

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