ETS in China

Emission Trading Schemes in China

China ETS Map

Beijing Hubei

Beijing

test area here

Hubei

ETS Basics

Emission Trading is a market-based economic tool to reduce the emission of climate-damaging gases. An Emission Trading System (ETS) works on the principle of cap and trade. The cap specifies how much all participating units combined are allowed to emit, i.e. the sum of all emissions allowances. For every ton of pollution units are emitting, they must hold one of these allowances. The cap can be absolute as well as relative to the GDP. Units receive their allowances according to fixed rules, which can be either be freely allocated or be bought. While the cap is set by the relevant authority, the price of each unit of emissions is generated by the market through the possibility to trade with these allowances. This creates flexibility where and how abatement is necessary and thus ensures that emission reduction occurs in the most cost-effective manner.

It also makes it economically attractive for a company to invest in environmentally friendly emissions and thereby incentivize a low-carbon transformation of the economy. In order to ensure compliance, infrastructure such as Monitoring, Reporting and Verification (MRV), market platforms, registries and enforcement mechanisms are necessary.

The European Union introduced emission trading in 2005 to achieve its climate goal and is thereby the first major carbon market. Since then, ETS has gradually expanded and there are now functioning systems in place in Asia, the Pacific and North America. With the launch of the Chinese national ETS, jurisdictions covered by an ETS account for over 50% of global GDP. (The jurisdictions include systems on the national, subnational and city-level. ) There are several other countries around the world on every continent eager to explore ETS as a climate policy instrument.

China's ETS Pilots

Seven pilot emissions trading systems (ETS) were formally announced in 2011. At that time, China could already benefit from six years of experience from the Clean Development Mechanism (CDM) through which it became familiar with the market-based mechanism to reduce emissions. The pilots have been in operation since 2013 and 2014; including five cities Beijing, Shanghai, Tianjin, Chongqing and Shenzhen and two provinces Guangdong and Hubei. Fujian was selected as the eighth pilot ETS in 2016 by the central government. Each pilot has been formed on the local level with intentionally different designs. The purpose of the pilot ETS practice is to encourage the cities and provinces to try diversified trading methods with different profiles and explore the best practices. They differ in regards such allocation method, MRV provisions and price levels.

However, in all pilots trading activity has soared gradually and almost all companies have followed the rules with a compliance rate of 99%. All information about the pilots can be retrieved from the interactive map above. The gathered experiences from the pilots inform the establishment and implementation of the national ETS and the pilots themselves will eventually transition into the fully functioning national ETS. Hence, the successful course of the pilot phase is crucial for the development of the national ETS. The project “Capacity Building for the Establishment of ETS in China” takes the importance of the pilot phase into account and has accompanied its development since 2012 after representatives in the pilot regions voiced interest in exchanging experiences and best practices with Europe and Germany.

China's National ETS

In 2015, the Chinese government has pledged to reduce emissions by 60 to 65% in comparison to 2005 levels. The national ETS being one of the key pillars of China’s climate change strategy and tool to transform the economy, President Xi Jinping announced in the same year that China’s national carbon market will be launched in 2017. According to schedule, the National Development and Reform Commission (NDRC) officially launched the national ETS on 19 December 2017 with the “Work Plan for Construction of the National ETS (Power Generation Sector)”. Since an ETS is a sophisticated climate policy instrument, several years will be necessary until China’s national carbon market will be fully functioning in all eight mentioned sectors. Starting with the power sector, the coverage will be gradually expanded to the chemical industry, steel and iron, building materials, petrochemical industry, paper making, non-ferrous metals and civil aviation.

The plan specifies the roadmap for the gradual implementation in three stages. The first phase will focus on the completion of the legal foundation and the building of the basic infrastructure such as MRV, a registry system in Hubei and an exchange system in Shanghai. This will be followed by a simulation trading for the power sector in the second phase. Through the experience gathered in this stage, the system can be improved in terms of design and functionality. In the final step, spot trading of allowances in the power sector will be introduced, the coverage will be expanded to the other seven sectors step by step and trading products will be diversified. Furthermore, the initial coverage of the power sector goes hand in hand with power market reform in China, demonstrating the embeddedness of the system in broader policy mixes and developments.