The Road of Carbon Emissions Trading from Pilots to a Nationwide Scheme in China

1. The Road of Carbon Emissions Trading from Pilots to a Nationwide Scheme in China Dr. Xianbing Liu Senior Policy Researcher/Task Manager Kansai Research Centre, IGES, Japan E-mail: liu@iges.or.jp

2. Structure of the presentation • Background • A brief overview of global carbon pricing progress • GHG ETS pilots in China • The progress to a nationwide scheme • Perspective of Chinese businesses to ETS • Summary of the presentation

3. Alternative tools to control emissions A: Command-and-control approaches: • For limited number of participants • Easy to control but little space for innovation • Tools that China usually adopts B: Market-based instruments: • E.g., carbon taxes and GHG ETS • Large number of participants • Possible technology innovation • Control of the emissions objective • Largely used in developed economies • Chinese ETS pilots in the 12th FYP C: Voluntary agreements: • For limited number of participants • No security to achieve the objective • Desire to not impose obligatory regulation • Already in place in many countries but not sufficient to achieve strong reduction effort Integrative Policy Frame for Enhancing Business Environmental Performance

4. Global existing and emerging carbon pricing • About 40 national and over 20 sub-national • jurisdictions are putting a price on carbon. • Together these carbon pricing instruments cover • almost 6 Gt-CO2 or about 12% of the annual • global GHG emissions. • The world’s two largest • emitters are now home to • carbon pricing instruments. • Source: (WB, 2014)

5. Prices in existing carbon pricing schemes • 168 US$/t-CO2 in the Swedish carbon tax • Price signal at 95 US$/t-CO2 for Tokyo Cap-and-Trade Program • Prices in the EU ETS remained in the depressed range of about 5-9 US$/t-CO2 • Source: (WB, 2014)

6. Coverage of existing ETS in the world

7. China on the way to set up an ETS National commitment to reduce emissions intensity by 40-45% in 2020 compared to 2005 level at COP15 Dec., 2009 State Council further clarified tasks to establish the ETS during the 12th FYP Dec., 2011 Aug., 2010 NDRC designated low-carbon development in 5 provinces and 8 cities and encourages carbon trading as part of the strategy Jun., 2012 NDRC set interim measures to support voluntary GHG reduction transactions and Indicates that CCERs can be used as offsets in the pilots Oct., 2010 State Council mentions plans to establish an ETS for the first time 2012-2013 Design of ETS pilots, incl. review and approval of NDRC on emissions limits, allocation methods and detailed implementation plan for each pilot Nov., 2010 The 12th FYP was announced and lists the ETS as a central part of the country’s energy and climate policy 2013- Operation of pilot ETS with ongoing efforts to establish a national ETS after 2016 Nov., 2011 NDRC officially approved carbon trading Pilots in 7 provinces and cities

8. Locations of 7 Chinese ETS pilots

9. Background of the pilot regions • The pilot regions cover an area of 480,000 km2with a total population of 199 millions. • The pilot regions have different industrial structure and economic development level, produce 30% of China GDP and release more than 20% of the country’s CO2 emissions.

10. Chinese ETS pilot designs • Cap – Difficult to calculate; • GHGs coverage – Direct and indirect CO2 emissions • Company coverage – Heavy polluters (SOEs, private) • Allocation method – Principally ‘Grandfathering’

11. Chinese ETS pilot designs • Large number of sectors covered • Big difference in sector coverage between pilot regions • Certain difficulties in future nationwide scheme

12. Chinese ETS pilot designs • Registry infrastructure • Each pilot develops its own registry • Very similar with the EU-ETS registry • Compliance • Surrounded allowance shall equal to verified emissions • Penalty for non-compliant companies: • Fines about 3 times of carbon price • The next year allowance shall be deducted for 2 times of the excess emissions • Offsetting • Offsets – China Certified Emission Reduction (CCER) • Including forestry carbon offset • Limited to about 10% of total verified emissions

13. Chinese ETS pilot designs • MRV • Each pilot develops the MRV guidance • Lack of reliable data and regulation • Third-party entities conduct the validation and verification →Without accurate MRV system, ETS can not function • Market platform • At beginning, financial institutions are not allowed to enter the market →With Hubei as an exception →Only spot market

14. MRV guidelines in the pilots

15. Process of MRV in China’s pilots Accounting and reporting (by enterprises) Verification (by third parties) Spot-checking (by governments) Final reporting (by enterprises) Re-accounting (by enterprises) Re-verification (by third parties)

16. First year experience (2013-2014) • Legal penalty to be applied is rather low and inefficient at current stage. • The information is not available for the public in most time. • Allowances were short in the first year according to some multinational companies.

17. Credit prices of the pilot markets Shenzhen Beijing Guangdong Chongqing Shanghai Tianjin Hubei • Prices do not represent the offer and demand; • The pilots are more as compliance policy for the moment rather like market instrument.

18. The market of Beijing pilot • Very low traded volume; • Active trading around the compliance date; • Carbon price is stable at around 50 Yuan/t-CO2.

19. The market of Shanghai pilot Around 30 Yuan/t-CO2

20. The market of Shenzhen pilot Around 40 Yuan/t-CO2

21. The market of Tianjin pilot Around 25 Yuan/t-CO2

22. To a nationwide ETS in China • To be set up by 2016 • Probably the regulation framework by 2016 • Implementation at provincial level might be started by 2016 for the most advanced regions • Delay for the other areas • Standardization • Common allocation rule and registries • National standards • Chinese heterogeneity • Already large differences in design and provincial economic structure for the 7 pilots • Even stronger difference between all the provinces • Difficulty of linkage between provinces in the future (Is the local government willing to do this or not?)

23. Interim management measures of carbon trading in China • Issued on December 10, 2014 by NDRC • Six chapters and supplementary (48 articles) • General principles • Allowance management • Emissions trading • Verification and quotas clearance • Supervision management • Liability • Supplementary • Enacted since 30 days after the issuing date

24. Interim management measures of carbon trading in China • Overall, general rules regulated with the details to be specified for operation • An example: emissions allowances allocation • Provincial authorities propose the key entities to be covered for NDRC approval (The thresholds?) • Cap setting by NDRC in consideration of national target, provincial emissions amount, economic growth, energy structure and entities to be covered (Detailed emissions limits?) • Mainly free allocation initially and introduce paid allocation in due time (Schedule and detailed ratios?) • Certain amount of allowances reserved by NDRC for market stabilization and key construction projects, etc. (How much and how to use?)

25. GHG accounting and reporting guidelines • Two batches of guidelines (on trial) have been issued by NDRC • 1st batch on October 15, 2013 • 10 sectors: Power generation; power grid; iron & steel; chemical; aluminium; magnesium smelting; plate glass; cement; ceramics; and, civil aviation • 2nd batch on December 3, 2014 • 4 sectors: Petroleum and natural gas; petro-chemical; independent coking; and, coal production

26. Major challenges • Idea problems: Balance in low carbon development and economic growth • Legislation problems: Delayed legislation • Absence of data and standard • Capacity building • Link of regional pilot ETS • State-owned enterprises to be involved in ETS • No financial institution involved in the carbon market (on the way to change)

27. Major challenges • Setting an ETS requires a long process over years (around 7 years for EU-ETS) • 1998: Thoughts • 2001: Proposition • 2005: Start of trial phase • What will happen after 2020? • Need a transparent, coherent and flexible legislation framework • Transparent: To assure reaching targets with equity among participants • Coherent: To integrate other policy interventions • Flexibility: To adjust and correct structural errors in time

28. MBDC card measuring cost affordability Five levels of acceptance 15 options in Policy-oriented energy cost increases

29. Responses of Chinese companies (N=111)

30. Simulation of Chinese samples (N=111) • Two curves were simulated: • One is the sum of easily acceptable + acceptable • The other is the sum of easily acceptable + acceptable + barely acceptable • The real affordable ratio shall be between these two curves. 50% of the samples corresponds to the ratios of 2.8% and 9.3% on the two curves.

31. Affordable energy cost increases by sector • Significantly and negatively associated with competition level; • The large companies have higher affordability.

32. Carbon prices affordable for companies of China

33. Attributes and levels of ETS for choice experiment • Design Expert 8.0 was used; • D-optimal design applied; • 12 Choice sets constructed; • Two versions, 6 sets for each; • An example set of GHG ETS in China.

34. Company GHG-ETS choice preference a) The companies prefer a hybrid method in cap setting (CAP-C); b) High penalty (5 times) is needed for changing the company’s policy choice; c) Auction ratio for allocating the allowances is insignificant in this analysis; d) Compliance period is insignificant in determining the choices.

35. Business laggard practices in carbon management Survey to cement companies in FY2014

36. Preparation and barriers for ETS (Cement sector) Annual emissions Preparations for ETS Barriers for ETS

37. Summary of the presentation • This presentation overviews the practices of China in ETS pilots and efforts for the establishment of a nationwide scheme; • Certain experience has been accumulated through the pilots and overall direction was clarified for an ETS at country level; • Many details to be specified for supporting the practical operation of the national ETS; • The business perspective was shared using the results from questionnaire surveys to Chinese companies; • The practices of Chinese businesses in carbon management are much laggard than the actions for energy saving; • Capacity building in MRV of carbon emissions at business level is highly necessary for smooth operation of ETS in China; • Nevertheless, giving modest carbon prices could be accepted by Chinese companies, even for those from energy-intensive sectors.

38. Thank you for your attention!