The State Council of China has released the first national legal framework for carbon market governance. The new regulatory framework provides clearer and stricter guidelines compared to previous rules, including penalties for falsification of emissions data and institutional support for a functional operation of China’s Emission Trading System (China ETS). The new regulations will take effect from 1 May 2024.
Importance of the China ETS
The China ETS is one of the important Chinese climate policy instruments and plays a crucial role in achieving the country’s carbon peaking and carbon neutrality goals. Since 16 July 2021, the China ETS facilitated online trading and covers 40% of China’s total emissions – an equivalent of 5.1 billion tons of CO2 emissions or three to four times the amount of emissions covered under the European counterpart, the EU ETS. The China ETS currently only covers electricity generation. By 2023, the 2257 generation companies obligated under the China ETS traded a total volume of 440 million allowances amounting to a financial turnover of 24.9 billion CNY. Since its inception, the China ETS experienced two compliance cycles and additional emissions-intensive industry sectors will be included in the coming years.
Challenges of the China ETS
During the first years of the China ETS, major governance issues were exposed. The technical service institutes falsified and manipulated the emissions data during the first compliance cycle. The existing administrative measures issued by the Ministry of Ecology and Environment (MEE) were not sufficient to solve the issue of manipulation effectively. A dedicated legal framework was therefore needed to replace the existing administrative rules, strengthen the governance of China’s rapidly growing carbon market, ensure data quality, and address these challenges.
Key provisions of the new regulation
On 5 February 2024, the State Council released the “Interim Regulations on Carbon Emissions Trading Management” (Regulation). It will take effect starting from 1 May 2024 and aims to strengthen the governance of the Chinese carbon market. Related activities will be overseen by the competent department of MEE, and jointly supervised and managed by other State Council departments. The Regulations lays out five main aspects:
- Institutional responsibilities between MEE and the State Council regarding the registry and the trading system;
- The greenhouse gas (GHG) coverage, sector scope, trading products and market participants will be proposed by MEE for submitting the State council’s approval;
- The local Departments of Ecology and Environment (DEEs) are tasked with collecting lists of the key obligated enterprises and supervising these for MEE as required. DEEs are also responsible for implementing allowance distribution and management and conducting or assigning technical service providers for onsite supervision;
- The allowance allocation plan will be drafted and released by MEE;
- Strengthened and new rules on responsibilities and requirements for key emitters and technical service institutions on emissions monitoring, reporting and verification, surrendering of allowances, eligible offsets and the market transaction mode.
Reducing the risk of manipulation
Accurate emissions data is the foundation for an effective carbon market. To prevent the falsification of emissions data, the companies under the China ETS are required to disclose verifiable and accurate emission information to the public and retain all original records. Technical service institutions in charge of measuring and calculation GHG emissions are required to comply with national technical specifications and are prohibited from issuing false reports or engaging in fraudulent acts. Competent departments of MEE may conduct on-site inspections and can impose strict penalties for fraud, including fines, production suspension, and cancellation of relevant qualifications and business licenses.
Expectations and next steps
This long-awaited national legal framework was submitted by the MEE to the State Council in 2019. After five years of revisions based on experiences from initial compliance cycles, it has been officially released, with provisions for further modification to accommodate the evolving needs of the China ETS. The involved authorities will now prepare the implementation of the Regulation, including the new data quality management requirements to continuously improve the quality of emissions data. The provincial emission trading systems in China also have to modify management rules according to the new national Regulation. The new rules are expected to provide support for an efficient and effective operation and development of the China ETS.
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