How does the Chinese Emission Trading System (ETS) work?
The Chinese Emission Trading System (ETS) is a carbon trading system that aims to reduce greenhouse gas (GHG) emissions in China. The Chinese ETS is currently in a pilot phase, and it is expected to be gradually expanded to cover other sectors in addition to power, including petrochemical, chemical, building materials, steel, nonferrous metals, paper, and domestic aviation. The Chinese government has not provided a specific timeline for this expansion.
The power sector is currently the only sector that is included in the Chinese ETS. Compliance obligations are currently limited, and the compliance period is one year (1 January to 31 December). Entities are expected to surrender allowances in 2021 for the years 2019 and 2020. The GHGs covered in the Chinese ETS are carbon dioxide (CO2), and the allocation method used is benchmarking. Four distinct benchmarks are used for allocation: conventional coal plants below 300 MW, conventional coal plants above 300 MW, unconventional coal, and natural gas.
The Chinese ETS journey, from pilot to national implementation, has provided some valuable lessons. One of the most important lessons is that every ETS needs to be designed with regard to other measures that may also lead to emissions reduction. In China, the effects of a range of policies, including energy efficiency standards, mandatory closure of facilities, pollution mitigation policies, and economic slowdown, have informed the design of its ETS.
During the pilot ETS phase, and going into the national system, China has developed a compromise solution in which large electricity consumers, such as industry as well as public and private institutions, are provided with an emissions cap and allowance allocation in the carbon market in relation to their indirect electricity consumption. While the lack of complete cost pass-through means that efficiency incentives are downstream, it does help to protect consumers from the cost impact.
Another important lesson from China’s ETS journey is the importance of engaging industry representatives throughout the process. Companies and sectoral associations sit on committees together with think tanks, government representatives, and policy design advisers. This collaboration helps to ensure that the ETS is effective and equitable, and that industry concerns are taken into account.
Here’s a tabular summary of the Chinese ETS system:
|Sectors and Threshold||Power sector (including combined heat and power, as well as captive power plants of other sectors). Compliance obligations are currently limited. The scope is expected to be gradually expanded to cover seven other sectors in addition to power: petrochemical, chemical, building materials, steel, nonferrous metals, paper, and domestic aviation. There is no specific timeline for this expansion.|
|Number of Entities||The Chinese regional ETS pilots covered power sector entities, which may also fall under the national ETS. These entities are transitioning into the national market. It is estimated that 2225 power sector entities are part of the ETS in 2021.|
|Compliance Period||One year (1 January to 31 December). Nevertheless, entities are expected to surrender allowances in 2021 for the years 2019 and 2020.|
|Allocation||Free allocation: Benchmarking is used as the main allocation method, with four distinct benchmarks: conventional coal plants below 300 MW; conventional coal plants above 300 MW; unconventional coal; and natural gas. Currently, allocation is to take place mainly through free allocation, but the National Measures clarify that auctioning may be introduced at a later point in time.|
In conclusion, the Chinese Emission Trading System is an important tool for reducing greenhouse gas emissions in China. Although it is still in a pilot phase, it has already provided valuable lessons that can inform the development of other ETSs around the world. The Chinese government’s commitment to gradually expanding the scope of the ETS to cover other sectors is a positive development, and it will be interesting to see how this process unfolds in the coming years.