China’s Shenyang prepares to launch a local ETS

On 25 August 2021, the municipal government in China’s city of Shenyang, the capital city of the northeast Shenyang province, issued the Measures for the Management of Carbon Emissions Trading in Shenyang. Taking effect on 1 September 2021, it provides a general policy framework and legal basis for its regional ETS.
 

On the same day, the municipal government also organized a press conference. The locally initiated ETS has undergone several years of preparation and is expected to be launched in the coming months. However, it faces uncertainties given the operational launch of the national ETS.

The objectives and key design elements of Shenyang‘s local ETS are summarized below based on the Measures for the Management of Carbon Emissions Trading and the press conference.
 

• The objectives are to promote a green transition and contribute to controlling and reducing the city‘s emissions. The ETS is viewed as an institutional innovation to support the city's low-carbon and ecological development and an important policy tool to achieve its carbon peaking and neutrality goals.
• Institutional setup: the Shenyang Ecology and Environment Bureau (EEB) acts as the competent authority and coordinates with relevant bodies in charge of statistics, finance, treasury, development and reform, and other areas.
• Scope: 500 companies from the city’s major emitting industrial sectors that are not covered by the national ETS, including machinery and equipment manufacturing, heating, chemical products, and ceramics. Other emitting companies could also opt into the system.
• Cap setting: EBB will set the cap based on relevant national, provincial, and municipal standards, taking into consideration factors like the city's economic development and energy consumption. The initial total cap is around 27 MtCO₂e, making it about half the size of the smallest existing regional ETS pilot of Shenzhen.
• Allowance allocation: initially allowances will mainly be freely allocated, while auctioning is expected to be gradually introduced over time, with the auction revenue channeled to the general budget. According to the information currently available, initially 5% of the allowances may be auctioned. Banking of allowances is allowed.
• Offsets: domestic project-based carbon offset credits (CCERs) are allowed, though the use of CCERs is limited to 5% of the annual compliance obligation.
• Market infrastructure: the Liaoning Carbon Emissions Trading Center is responsible for developing and operating the trading platform. The EEB is responsible for operating the system’s registry.
• Market participants: besides compliance entities, institutional and individual investors will be allowed to participate in the market.
• Monitoring, reporting, and verification (MRV): annual reporting of CO₂ emissions to the EBB with third-party verification is required. Historical emissions from 2015 to 2019 for the 500 companies have already been reported and verified.
• Market supervision and compliance: no financial fines will be applied for failures in reporting or compliance obligations. Non-financial compliance measures include public exposure and reporting in the enterprise credit management system. In addition, any gap between the compliance obligation and allowances surrendered will be deducted from the following year’s allocation. 

The exact launch date of the Shenyang ETS is not yet specified. How it will co-exist with the national ETS is also unclear. China’s national ETS started its operational phase beginning this year, covering emissions from 2019 and 2020 for the electricity sector. The policy documents underpinning the national ETS, including the most recent draft of the national ETS legislation, call for existing ETS pilots to be gradually integrated into the national ETS, which is expected to expand to industrial sectors such as steel and aluminum in the coming years. This integration for electricity sectors covered under regional pilots is already underway. At a press conference in July 2021, the national Ministry of Ecology and Environment also clearly stated that they do not support any new regional ETS pilots to be set up after the start of the national ETS.