China launches operational phase of national ETS

China has launched its national ETS starting 2021, bringing the world’s largest carbon market online after three years of preparation.  
 

On 5 January 2021, the Chinese Ministry of Ecology and Environment (MEE) published a final version of the “National Measures for the Administration of Carbon Emission Trading (Trial)” (hereafter the National Measures), along with the final allocation plan for the power sector titled “2019-2020 National Carbon Emission Trading Cap Setting and Allowance Allocation Implementation Plan (Power Generation Industry)”, and the list of covered entities. The finalization of these key policy documents, along with an announcement of compliance obligations starting 1 January 2021, mark the operational launch of the Chinese national ETS following the political launch three years ago.

The National Measures were released in draft form in early November 2020 for public consultation and recently approved by the MEE. Taking effect on 1 February 2021, they provide the legal basis for the national ETS and supersede interim measures published in 2014. The final version confirms the three-tiered governance structure outlined in the draft: MEE acts as the national competent authority setting the rules and overseeing the system, with joint oversight of trading activities with other regulators, while its subsidiaries at the provincial level oversee the implementation of these rules and the municipal-level authorities take on some management duties locally.

The final allocation plan adopts benchmarking as the main allowance allocation approach and includes processes for pre allocation and ex-post adjustments. The final version maintains the four distinct benchmarks based on type of power generation and benchmark values as the draft version released in November 2020 for public consultation. The final version also includes an adjustment factor that allocates more allowances for entities operating at output below 85%. However, the final version excludes a regional adjustment factor giving regional governments the opportunity to tighten allocation in line with regional climate targets.

Compliance obligations are limited: for gas-fired plants they will be capped at the level of free allocation, while other covered entities will need to surrender allowances of up to 20% of verified emissions above the level of free allocation. These measures aim to promote gas-fired units and reduce the overall compliance burden.

The first compliance cycle of the national ETS will run from 1 January to 31 December 2021 and will cover emissions from 2019 and 2020 for 2,225 entities in the power sector, according to official Chinese media outlets (Xinhua News and CCTV). The threshold for inclusion is 26,000 tons of CO₂ annually. Domestic experts estimate that the national ETS covers over four billion MtCO₂, accounting for around 40% of national carbon emissions.

Policy documents outlining other key areas of the ETS design are expected to be finalized in the coming months, with some already released for public consultation. In addition to the draft “Administrative Measures for the Registration, Trading, and Settlement of the National Carbon Emission Rights (Trial)”, two draft documents on MRV were released in December 2020. The “Guidelines on Enterprise Greenhouse Gas Emissions Accounting and Reporting − Power Generation Facilities” build on two existing technical guidelines and aim to establish the MRV foundation for the national ETS. The “Guidelines for Enterprise Greenhouse Gas Verification (Trial)”  build on a previous document from 2016 and provide further details on verification.

China’s national ETS is expected to be one of the key policy instruments to realize the country’s climate ambition in both the short and long term. Key mitigation targets for the country include peaking carbon emissions before 2030 and achieving carbon neutrality by 2060. These goals, first announced by President Xi Jinping in September 2020, were added to China’s enhanced NDC in December 2020 (the table below summarizes the key elements of it in comparison with the previous NDC).
 

	Previous NDC	Updated NDC
Carbon intensity reduction	60-65% (against 2005 levels)	Over 65% (against 2005 levels)
Non-fossil share in total energy consumption	Around 20%	Around 25%
Non fossil fuel generation capacity	Not specified	Total installed wind and solar power capacity over 1,200 GW
Forest stock volume increase	around 4.5 billion M3 (compared to 2005)	6 billion M3 (compared to 2005)

 

China is in the process of developing its 14^th Five Year Plan (2021-2025) and 2030 carbon emissions peaking plan. The Director General of the Climate Change Department of the MEE, Li Gao, also reaffirmed the importance of the national ETS in meeting the country’s 2030 and 2060 targets as it gradually expands to other sectors.