Emission Trading Schemes in China
China ETS Map
Emission trading is a market-based instrument to reduce or control 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 entities (companies or installations) combined are allowed to emit, i.e. the sum of all emissions allowances. For every ton of emissions they emit, they must surrender one emission allowance by the end of a compliance cycle. The cap can be absolute as well as intensity-based. Entities covered by the ETS receive allowances according to fixed rules, which can be through free allocation or auctioning, or some combination of the two.
Allowances are tradable and while the cap is set by the relevant authority, the price of each allowance is determined by the market. 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 creates an incentive for companies to invest in environmentally friendly technology and thereby contributes to a low-carbon transformation of the economy. In order to ensure environmental integrity and compliance, an ETS requires a robust system for monitoring, reporting and verification (MRV) of emissions, trading platforms, registries and enforcement mechanisms.
ETS in practice
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
The Chinese government announced the establishment of seven regional pilot ETS 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 started operation in 2013 and 2014 and are located in five cities, namely Beijing, Shanghai, Tianjin, Chongqing and Shenzhen, and the two provinces of Guangdong and Hubei. In 2016, an eighth pilot ETS was launched in the province of Fujian.
Each pilot has its own unique design that takes into account local circumstances and the respective economic profile. The purpose of the pilot ETS practice was to encourage the cities and provinces to test different design options and explore best practices. The pilot ETS differ in regards to the scope, allocation methods, MRV provisions and price levels among others. Detailed information on the different design features of each pilot can be retrieved from the interactive map above. The experiences from the pilot ETS informed the establishment and implementation of the national ETS and the pilots themselves will eventually be merged into the national ETS.
China's National ETS
Building on the successful implementation of pilot ETS at the regional level, China announced the launch of its national ETS in December 2017. This launch has been a goal set in 2015 at China’s highest political level, which was reaffirmed by its Nationally Determined Contribution (NDC) under the Paris Agreement, and the “13th Five-Year Work Plan for Greenhouse Gas Emission Control.”
According to the “Work Plan for Construction of the National ETS (Power Generation Sector)” that was published with the official launch, the national ETS will be introduced gradually in three phases. Starting with the power sector, the scope shall be expanded to further sectors at a later stage, namely chemical industry, iron and steel, building materials, petrochemical industry, paper making, non-ferrous metals and civil aviation.
TThe first phase will focus on the completion of the legal foundation, establishment of institutional arrangements and the building of the basic infrastructure such as MRV, the registry in Hubei and the trading platform in Shanghai.
This will be followed by simulation trading for the power sector in the second phase. Through the experience gathered in this stage, the system shall be improved in terms of design and functionality.
In the final step, spot trading of allowances in the power sector shall be introduced, the coverage expanded and trading products diversified.