Recent Developments in Emissions Trading in China

At the Carbon Market Development Forum in Beijing (24-25 September 2016), Jiang Zhaoli, Deputy Director General of the Department of Climate Change at the National Development Reform Commission (NDRC), gave a speech (Chinese) outlining the post-2020 trajectory of China’s national emissions trading system (ETS). To be launched in 2017, the Chinese ETS will be the world’s largest carbon market, covering 3-5 billion tons of CO₂e with an expected trading volume of 1.2-8 billion CNY. This could expand to as much as 60-400 billion CNY when carbon futures enter the market.

The national ETS will cover eight sectors in its first phase, with a potential expansion post-2020 to more sectors and/or installations: For instance, by halving the inclusion threshold from 10,000 tons to 5,000 tons of annual energy consumption (coal equivalent). The NDRC is also considering introducing a carbon tax post-2020 for those companies outside of the ETS. Preparation work on the carbon tax is being carried out by, among others, State Council Legislative Affairs Office, Ministry of Finance and State Administration of Taxation.

In parallel, adjustments have also been made in some of the Chinese pilots as they prepare for the introduction of the national system. In late September, the Beijing Development and Reform Commission (DRC) issued the list of entities and reporting companies (Chinese), as well as the allowance allocation plan for 2016, respectively (Chinese). There are a total of 947 covered companies (Chinese) with annual emissions equal to or more than 5,000 tons, with an additional 582 reporting companies (Chinese) with annual emissions of 2,000-5,000 tons per year. Although the allocation method will remain the same, the emissions reduction factors are stricter, particularly for the cement (90%), petrochemical (92%) and “other industrial” sectors (92%), which decreased by 2%-4% comparing to the previous year. Grandfathering for existing entities will also be reduced if 2016 emission levels are significantly lower (20% or 50% depending on the sector) than base years. 

On 28 September, the Shanghai Environmental Energy Exchange and the Interbank Clearing House Co., Ltd. also organized an event (Chinese) showcasing Shanghai’s carbon finance development and use of carbon forward contracts in the pilot ETS. The Shanghai Clearing House will act as the Contract Alternative Party and bear the central counterparty clearing function.

On 21 September, the China Emissions Exchange (Guangdong), under the authorization of the Guangdong DRC, held its first auction (Chinese) for vintage 2016 allowances. Half a million allowances were on offer and cleared above the floor price of 9.37 CNY/ton (USD 1.40) with a settlement price of 9.88 CNY/ton (USD 1.48). 

On 18 September, the Shenzhen DRC released its working plan for the 2016 vintage, including a list of new companies and the 2016 allocation plan (Chinese). The Shenzhen ETS covers a total of 824 entities, including 246 new entrants. Benchmarking is applied to the water, power and gas sectors based on sectoral historical carbon intensity; while grandfathering based on the entity’s historical carbon intensity is applied to port and subway sectors, public buses and other non-transport sectors.