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China strengthens legal foundation for national ETS

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On 4 February 2024, the State Council of China published a new regulation that establishes a robust legal foundation for the national ETS, set to take effect on 1 May 2024. The change elevates the governance of the China ETS to the State Council level, up from its previous Ministerial-level oversight.

The initial draft of the "Interim Regulations for the Management of Carbon Emissions Trading" underwent consultation in 2016 under the National Development and Reform Commission (NDRC). In 2018, the Ministry of Ecology and Environment (MEE) took over climate change policy responsibility and published a second draft in 2019, which was open for consultation. The final draft, subject to additional public input in 2021, was officially adopted in 2024.

Previously, the legal framework for the ETS operated under the Ministerial-level National Measures on emissions trading, established by the MEE in 2021. The newly adopted State Council regulations, positioned one level higher in the Chinese legal hierarchy, replace the National Measures, signaling an elevated regulatory status.

The key modifications of the new regulation are summarized below.

  • ETS governance framework: new authorities become national-level regulators. The National Development and Reform Commission, the Civil Aviation Administration of China and other relevant departments join the MEE in deciding coverage, cap-setting, and allocation plans. The MEE also coordinates with the State Administration of Market Supervision and Administration, People's Bank of China, and China Banking and Insurance Regulatory Commission in supervising the registry and trading platform operators. Information sharing and law enforcement collaboration mechanisms will be established. Previously other relevant departments, not specified, only jointly supervised national ETS activities with the MEE.
  • Enhanced enforcement measures and penalties for covered entities: the regulations introduce a comprehensive liability framework for covered entities, combining financial and non-financial enforcement measures. They set up a fine for failures or cheating in reporting, ranging from CNY 500,000 (USD 70,582) to 10 times the illegal gains. Failures in compliance obligations result in fines ranging from 5 to 10 times the market value of the gap, a significant increase from the previous maximum fine of CNY 30,000 (USD 4,234).  For those who refuse to surrender allowance after receiving a warning, deductions from the following year’s allocation and potential production suspension are now implemented.
  • New enforcement measures and penalties for technical services and market participants: consultant firms, third-party verifiers and testing organizations involved in MRV data fraud may face penalties up to 10 times of their illegal gains, as well as business disqualification. Similar punishments also apply to market manipulation behaviors. The regulation rectifies the previous absence of penalties for technical services and market participants.
  • Allowance auctioning: auctioning, one of the two allocation methods alongside free allocation, is to be introduced and gradually expanded, though no timeline has been specified. 
  • Trading: China Emission Allowances are indicated as eligible trading products, but other spot products may be approved by the State Council going forward. Participants in trading include covered entities, but other entities may be approved by the State Council in the future. Various transaction methods such as agreement transfers, one-way bidding (multiple buyers, one seller) are allowed. Additional trading protocols are established by the Ministry of Ecology and Environment (MEE) in conjunction with the exchange. In contrast to the current administrative measures, ETS regulators, registry and trading platform operators, and verification service agencies and their staff are prohibited from engaging in trading within the national carbon market.
  • Offsets: offset credits are allowed in the national ETS, but the Interim Regulations do not specify qualitative or quantitative limits. MEE is responsible for developing specific rules. According to the current Ministerial-level National Measures on emissions trading, the quantitative limit is 5% of the verified emissions.
  • Information disclosure: covered entities are required to disclose their annual emissions information, which provincial authorities will publish along with the verification result and possible irregularities. The registry and trading platform operators will establish information disclosure rules.
  • Regional market integration: Existing regional emissions trading systems shall improve relevant market management rules according to this regulation. The State Council doesn’t allow any new regional emissions trading systems in China. Previously, there was no policy for regional emissions trading systems.

Launched in July 2021, the China national ETS is the largest carbon market in the world, covering 5 billion tons CO2 from more than 2200 fossil-fuel power plants. The new regulation signals an increased focus on emissions trading as part of China’s long-term climate change strategy.

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