On 3 April 2019, the Ministry of Ecology and Environment (MEE) of China released the Interim Regulations on the Management of Carbon Emissions Trading (Draft for Comment) (Chinese) for public consultation. Any agencies, enterprises, institutions and individuals may submit comments and suggestions to the draft with a provided template by 2 May 2019. The draft regulation represents a major step for MEE since it took on responsibility for climate policy (including ETS development) about a year ago. Passing an ETS regulation at national level is one of the key tasks needed to prepare for China’s national ETS in 2019.

According to the “Work Plan for Construction of the National Emissions Trading System (Power Sector)”, released end 2017 , China is currently in the first phase of national ETS implementation - the infrastructure completion phase - and is expected to begin simulation trading for the power sector later this year (see more details in the article “Learning by doing: China’s dynamic approach to ETS” in the recently released ICAP Status Report 2019).

Already in 2016, a first draft of the ETS regulation (Chinese) was prepared by the National Development and Reform Commission, the ministry responsible at the time. Compared to this, while still not yet specifying a start date for the national ETS, the new MEE draft regulation has the following differences: (1) the text is more consolidated, changing from 35 to 27 articles; (2) non-compliance punishment is 2-5 times the average market price (instead of 3-5 times in the previous draft); (3) Many of the detailed policy settings related to cap-setting and allocation were specified in the previous version but not in the current one.  It is clear that the regulation, as it is drafted, will therefore need to be supplemented with specific allowance allocation rules. (4) In addition to covered entities, institutions and individuals who meet certain criteria would be allowed to participate in trading.

Regarding the governance of the national ETS, a two-tier structure will be applied, with responsibilities shared between the central and regional governments. At the central level, MEE is in charge of rulemaking and oversight, and will work in conjunction with other relevant ministries on issues such as GHG and sector coverage, as well as cap-setting and allocation standards and methods. Decisions on coverage are further subject to the approval of the State Council. The draft also calls for a central emissions trading coordination mechanism to be established, responsible for research and coordination of overarching carbon market issues, however without giving details of its composition. Provincial governments will be in charge of rule implementation and oversight within their regions. MEE will manage the trading system and registry, as well as a verification agency list, while the exact verifier accreditation and management system is not yet defined.

Regarding transparency, MEE is to publish an updated list of covered entities annually, as well as regular reports on allowance surrenders and market transactions. Market adjustment and risk management mechanisms are to be developed, which might include provisions related to price rise/fall limits, risk warning system, abnormal transaction processing, rule infringement and dispute management. The draft also mentions that allowance auctions might be used to stabilize the market, with revenues going to the central government general budget.

Regarding MRV and enforcement, the draft regulation sets no specific schedule for monitoring and reporting, only mentioning that there will be an annual MRV cycle. Covered entities may chose verifiers from an MEE approved list, while the cost of verification will be borne by the central government budget rather than the entities themselves. Within 30 days upon receiving the verified emissions reports, the regional governments shall further verify and approve the emissions data. Covered entities shall be obliged to make up any shortfall in their compliance obligations for the previous year by purchasing and surrendering additional allowances by 31 December of the current year. Specific punishments are applied to covered entities, verifiers, trading entities, as well as the government agencies for misconduct. For example, companies that fail to monitor emissions or that submit false data and not make corrections by a given deadline will be fined 50,000-200,000 CNY. Verifiers that are found to have falsified their verification process, that collect fees from covered entities or leak commercial secrets, for example, will be fined 20,000-100,000 CNY. Such misconducts would also be recorded in the centralized credit management system, thereby affecting their credibility.