On December 18 2017 the National Development and Reform Commission (NDRC) promulgated its Plan for Building the National Carbon Emission Trading Market (Power Generation Industry) (Fa Gai Qihou Gui  2191). The next day, the NDRC held a teleconference to discuss the plan's implementation, in which it:
- highlighted the plan's importance for the establishment of the national carbon market; and
- signalled that its issuance constitutes the official start of the national carbon emission trading system.
According to the plan, the government will use the power generation industry as a starting point and will gradually move beyond the regional pilot projects until the completed national carbon markets cover the entire Chinese economy.
China signed the Kyoto Protocol to the United Nations Framework Convention on Climate Change on May 29 1998 and approved it in 2002. In order to implement the Kyoto Protocol, China:
- adopted the clean development mechanism (CDM) stipulated under the Kyoto Protocol; and
- issued the Interim Administrative Measures for the Operation of Clean Development Mechanism Projects ( 10).(1)
After adopting the CDM, China begain to examine its own carbon emission trading mechanisms.
On October 29 2011 the NDRC issued the Notice on Carrying out the Pilot Scheme of Carbon Emissions Trading (Fai Gai Ban Qihou  2601) and granted approval to Beijing, Tianjin, Chongqing, Shenzhen, the Hubei Province and the Guangdong Province to establish regional carbon emission trading markets as a series of pilot projects. These carbon emission exchanges subsequently established their own trading rules in order to regulate their carbon emissions trading. In 2012 and 2014 the NDRC promulgated the Interim Measures for the Administration of Transactions in the Voluntary Emission Reduction of Greenhouse Gas (Fa Gai Qihou  1668) and the Interim Measures for the Administration of Carbon Emission Trading (Order 17), respectively. It also developed the structure for its carbon emission trading system.
At present, China's carbon emission trading includes three types of transaction:
- CDM transactions;
- mandatory carbon emission quota transactions; and
- Chinese-certified emission reduction (CCER) transactions.
The CDM is one of the flexible mechanisms provided for in the Kyoto Protocol to undertake emission reduction projects which generate certified emission reductions (CERs) that can be traded in emissions transactions.
In accordance with Article 12 of the protocol, the CDM allows the transfer of CERs from countries that are not listed in Annex I to the protocol to Annex I countries. Countries listed in Annex I are industrialised countries, while non-Annex I parties are developing countries. Under this mechanism, Annex I countries can meet part of their emission reduction commitments under the Kyoto Protocol by buying CER units from CDM emission reduction projects in developing countries.
Under the Measures for the Administration of the Operation of the Clean Development Mechanism Projects (Amended) ( 11), project approval can be obtained as follows:
- Chinese-invested enterprises and Chinese capital holding enterprises which apply for CDM projects in China, as well as their foreign partners, should make an application to the national or relevant provincial development and reform commission (DRC).
- The NDRC or provincial DRC will organise a group of experts to review the project after receiving the application and submit it to the CDM project committee for further review.
- After the project has been approved, the project's operating entity will apply to the CDM executive board for registration.
Carbon emission quota transactions
According to the Interim Measures for the Administration of Carbon Emission Trading, the 'carbon emission quota' refers to the quota of carbon emissions that the government allocates to emissions entities within a specified period. Under this mechanism, the NDRC will determine the total quota of the state and each province, autonomous region and centrally administered municipality. The provincial DRCs will calculate the quantity of the quota that will be allocated to all enterprises within their administrative regions and report to the NDRC. After the NDRC has approved the quota, the provincial DRCs will allocate the quota to those enterprises for free. Each year, the relevant enterprises will submit their quota, which cannot be less than the confirmed emissions in the previous year, to the competent provincial DRC. If an enterprise's allocated quota is insufficient to cover its emissions, it must purchase the difference from the trading exchanges.
The voluntary emission reduction (VER) is different from the mandatory quota allocation and refers to emission reduction activities that are conducted voluntarily by enterprises as part of their social responsibilities.
Under the Interim Measures for the Administration of Transactions in the Voluntary Emission Reduction of Greenhouse Gas, domestic and foreign institutions, enterprises, communities and individuals can participate in transactions relating to the VER of greenhouse gas. Projects involving VER transactions will be reviewed by a qualified institution and emission reduction amounts must be filed with the NDRC. Filed emission reduction amounts are known as CCERs.
Under the Interim Measures for the Administration of Carbon Emission Trading, relevant enterprises can use their CCERs to offset part of their confirmed carbon emissions in accordance with the relevant provisions. Under the interim measures, the seven pilot projects must also formulate their own stipulations regarding the offset mechanism according to the specific circumstances of the project.
As mentioned above, the issuance of the Plan for Building the National Carbon Emission Trading Market (Power Generation Industry) indicates that China has completed the overall design of its carbon market and officially initiated its national carbon emission trading system.
Steady and gradual market development
According to the plan, efforts to develop the carbon emission trading market will be steady and gradual and comprise the following phases:
- basic construction – the construction of a national unified data delivery, registration and transaction system will be completed within one year;
- simulation test – quota simulation transactions for the power generation industry will be carried out for one year in order to examine the full effectiveness and reliability of the market; and
- further improvements – the power generation industry trading entities will conduct quota spot transactions.
According to the plan, transactions will be conducted among enterprises in the power generation industry only. When the plan enters a later stage, the market will broaden its scope to encompass other industries with high energy consumption, pollution and resources. The initial trading product in the market will be the quota spot, but CCERs and other trading products will be added when the conditions become suitable.
Participants in transactions will include:
- emissions entities – at present, 'emissions entities' are the enterprises or other types of economic organisation in the power generation industry whose annual emissions are 26,000 tons of carbon dioxide equivalent or more;
- regulatory authorities – the NDRC and other relevant departments will conduct grading control of and survey the carbon market; and
- verification institutions – qualified verification institutions will conduct carbon emission data verification and issue independent verification reports in accordance with the relevant legislations and technical specifications.
The plan has established the following major regulatory systems.
Carbon emission monitoring, reporting and verification system The NDRC and the relevant departments will jointly formulate and revise:
- the emission reporting administration measures;
- the greenhouse gas verification guidance; and
- the technical specifications.
Emissions entities must report their carbon emissions data in a timely manner and will be responsible for its authenticity, accuracy and integrity.
Quota management system for emissions entities The NDRC will be responsible for the formulation of quota distribution standards and measures. Emissions entities must take effective measures to control their carbon emissions and perform their quota settlement duties according to their actual emissions ('quota settlement' refers to the process that an emissions entity uses to cover its actual carbon emissions, regardless of its allocated or purchased quota). Emissions entities that fail to perform the quota settlement obligation will be penalised by the competent authorities.
Market trading system The NDRC will, in conjunction with other departments, formulate the administration measures of carbon emission market transactions and regulate the:
- participants, mode and nature of transactions; and
- the market.
The state will promote the carbon market's transition from regional carbon trading pilot projects to a national market. The regional carbon trading pilot projects will continue to play their existing roles and gradually transit to the national market when the conditions become suitable.
The development of China's carbon emission trading system is positive. However, some shortcomings remain. For instance, participants are limited and lacking in diversity and only simple trading products are available (eg, the quota spot and CCERs). This kind of product structure is unfavourable for entities in terms of long-term risk control and inconvenient for investors that are looking to build an investment portfolio. These shortcomings will also cause a lack of liquidity in the carbon market.
As mentioned in the plan, the development of China's carbon market will enable more carbon trading entities to participate in the market, thus leading to new trading products. In order to improve the carbon market, it is recommended that carbon emission policies remain stable, transparent and predictable, as this will attract more entities to the market. Further, besides the existing carbon spot trading, the government should accelerate the research on carbon emission futures and promote the diversification of carbon trading types and products through financial innovation. Thus, the government still has a long way to go to create a robust carbon emission trading system and a fair and healthy market trading environment for investors.
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(1) The Interim Administrative Measures for the Operation of Clean Development Mechanism Projects ( 10) were revised and replaced by the Measures for the Administration of the Operation of the Clean Development Mechanism Projects (Amended) ( 11).