China s National Carbon Market Development Plan (Power Generation Sector)

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1 China s National Carbon Market Development Plan (Power Generation Sector) Building a carbon market is an important measure that uses the market mechanism to control greenhouse gas (GHG) emissions, as well as an urgent requirement for deepening reform of ecological civilization. It can help reduce society s costs of emissions reduction, and promote the green and low-carbon economic transition and upgrading. To advance the development of a national emission trading scheme (ETS) and ensure its launch in 2017, this plan is formulated based on The People s Republic of China s 13 th Five-Year Plan for Economic and Social Development and The Overall Plan on Ecological Civilization Reform. I. Overall Requirements 1) Guidelines Further implement the spirit of the 19 th Party Congress; hold high the great banner of socialism with Chinese characteristics; adhere to Xi Jinping's thoughts on a new era of socialism with Chinese characteristics; closely follow the overall plan of the "five in one" and coordinate and promote the layout of "four comprehensive strategies"; firmly establish the development concepts of innovation, coordination, greenness, opening up, and sharing; conscientiously implement the decision-making arrangements made by the Party Central Committee and the State Council on the construction of ecological civilization; fully develop the market mechanism's role in controlling GHG emissions; and steadily push forward the establishment of a unified national carbon market, in order to effectively control and gradually reduce carbon emissions, and promote green, low-carbon development for our country. 2) Basic Principles Insist on market-based guidance and service-oriented governance; acting in the spirit of the administrative reform that the government is pushing forward, make enterprises the mainstay; use a market-oriented approach; enhance government regulation and services; and let the market play a deciding role in resources allocation. Start with easy steps and adopt a multi-phase approach. Based on the national goals of ecological civilization and GHG emissions control, adopt a multi-phase approach to build the carbon market, provided that it would not impact the stability and health of economic growth. The national carbon market will begin with the power generation sector (which includes combined heat and power generation in references through this document, similarly hereinafter), and then gradually expand to other sectors and trading products to improve the carbon market. Insist on better coordination and wider stakeholder engagement. Take into consideration both domestic and international situations; balance regional, industrial sustainable development and the need for GHG emissions control; follow the overall plan for ongoing supply-side reform; and enhance coordination with relevant policies regarding power sector reform, energy consumption cap, energy and carbon intensity control, and air pollution control. The carbon market design needs to be continuously improved, involving sectors, local governments, businesses, and the public, in a collective effort to optimize it. ENERGY FOUNDATION 1

2 Use unified standards and make sure the process is fair and transparent. Standardize market entry, allowances allocation methodologies, and technical standards; establish unified national systems for emissions data reporting, registration, allowance trading, and transaction settlement. Create a market-friendly environment that promotes fair competition, promptly and accurately discloses information, and is subject to public scrutiny. 3) Objectives and Tasks Insist on using the carbon market as a policy tool to control GHG emissions, and prevent financial and other risks. The power generation sector will be used to kickstart the national ETS, cultivate market participants, and optimize market supervision, then ETS coverage will be gradually increased, diversify trading products and trading types. The goal is to establish a carbon market that will ensure clear ownership, strict protection of rights, smooth operations, effective regulation, transparent procedures, and international influence. The cap shall be appropriately tight, with a reasonable and moderate price, so as to boost the mitigation potential of enterprises, push forward industrial upgrades, and thus meet targets of GHG control. After the release of this document, the carbon market shall be set up in three phases: Phase 1: Lay the Foundation. Take approximately one year to build unified national systems for emissions data reporting, registration, and allowance trading. All participants shall be trained to build their capacity and improve their management skills. A governance system shall be developed for the carbon market. Phase 2: Have a Mock Operation. Take approximately one year to conduct the mock trading of allowances in the power generation sector. The objective is to examine the effectiveness and reliability of all key market elements, strengthen early warning and prevention mechanisms for market risks, and improve the carbon market s governance and supporting systems. Phase 3: Optimize the Market. Conduct spot trading of allowances among participants from the power generation sector. The sole purpose of trading is to fulfill compliance obligations (comply with the obligation of emissions reduction); allowances that are used for compliance obligations will be surrendered, and the remaining allowances can be transferred or traded in the next compliance period. Once the carbon market for the power generation sector is successfully established, the market shall gradually expand to cover other sectors, trading products, and trading types. The Chinese Certified Emissions Reductions (CCERs) shall also be considered for inclusion in the market as early as possible. II. Key Elements of the Carbon Market 4) Participants. At the early stage, key emission entities from the power generation sector should be market participants. Participants can then be extended to include other energy-intensive, high-polluting, and resources-intensive sectors when time is right. Other organizations and individuals who are eligible under the trading rules should also be considered in good time. ENERGY FOUNDATION 2

3 5) Trading Products. At the beginning stage, it shall be a spot market for emissions allowances in that they can be traded and delivered immediately. CCERs and other varieties that fit the trading rules can also be added when the time is right. 6) Trading Platform. Build a unified national carbon emissions trading system with interconnection and strict supervision; it will come under the management of the national public resources trading platform. III. Market Participants 7) Key Emission Entities. The key emission entities are defined as enterprises or other economic organizations from the power generation sector that emit more than 26,000 tons of carbon equivalent a year (or total annual energy consumption is above 10,000 tons of coal equivalent). Captive power plants in other sectors that pass the same emissions threshold are also recognized as key emission entities. Building on this, more entities will gradually be included. 8) Regulators. The National Development and Reform Commission (NDRC) and relevant government agencies shall regulate the carbon market together in a classification supervision manner. The NDRC shall work with sectorial regulators to develop plans for allowances allocation, establish verification standards, and ensure supervision and enforcement. According to assigned responsibilities, other government agencies shall supervise third-party verifiers or trading institutions. Climate change departments at the provincial level, and cities specifically designated in the state plan, shall oversee data verification, allowances allocation, and key emission entities within their administrative areas. All agencies and areas shall perform their duties and cooperate with each other to ensure the carbon market will be operated in a smooth and orderly manner. 9) Verification Bodies. Qualified verification bodies shall be entrusted with the task of verifying emissions data complying with regulations and technical rules, and then producing independent verification reports. In the process, they shall ensure the verification reports are genuine and credible. IV. System Development 10) The system of measurement, reporting, and verification of carbon emissions. The NDRC shall work with other relevant government agencies to formulate administrative measures for corporate emissions reporting, and further improve guidelines and technical standards for corporate GHG accounting. Climate change departments at the provincial level, and in cities specifically designated in the state plan, will undertake data validation and reporting. Key emission entities must follow related rules and report their emissions data in a timely fashion. Key emission entities and the verification bodies should take responsibility for data reliability, accuracy, and integrity. 11) Allowance management system for key emission entities. The NDRC is in charge of setting standards and methodologies for allowance allocation. Climate change departments at the provincial level, and cities specifically designated in the state plan, will allocate allowances within their jurisdictions based on these standards and methodologies. Key emission entities must take effective actions to control their carbon emissions and surrender enough allowances to match their emissions ( surrender allowances refers to the process for an entity to submit enough ENERGY FOUNDATION 3

4 allowances to cover all its emissions). Climate change departments at the provincial level, and cities specifically designated in the state plan, are responsible for the surrendering of allowances. They will impose penalties on key emission entities that fail to surrender enough allowances or fail to surrender allowances by the deadline; they also will provide information about these key emission entities on the national platform for credit records-sharing as additional penalty. 12) ETS trading system. The NDRC shall work with relevant government agencies to formulate management regulations for the ETS trading system; establish rules to regulate trading participants, trading mechanisms, trading behaviors, and market supervision and regulation; develop a pricing mechanism that effectively reflects the conditions of supply and demand and the cost of carbon mitigation; and build monitoring rules, creating an effective adjustment mechanism to reduce price fluctuation, and a risk prevention-and-control mechanism to prevent market manipulation, so as to ensure all market elements are operating in an integrated, transparent, and fair manner. V. Allowance Management in Power Generation Sector 13) Allowance allocation. The power generation sector will distribute allowances based on standards and rules for allowance allocation set by the NDRC and relevant government agencies. These standards and rules will be formulated separately. 14) Allowance surrendering. To comply with the requirements for emissions reduction, key emission entities in the power generation sector must surrender allowances equivalent to their emissions to their provincial or municipal climate change department. Entities with spare allowances can sell them on the market, and entities that are short of allowances can buy allowances from the market. VI. Supporting System 15) Carbon emissions data reporting system for key emission entities. Develop a unified national carbon emissions data reporting system with multi-level management, to explore the possibility of linking to the national online monitoring system of energy consumption. 16) ETS registry system. Develop a unified national ETS registry system and disaster recovery system, providing legal-status clarification, registration of emission allowances, and a Chinese certified emission reduction (CCER) for market entities, and ensure allowances surrendering and compliance management. The NDRC is responsible for establishing management measures and technical standards for the ETS registry system, and for supervising the ETS registry system. 17) ETS trading system. Develop a unified national ETS trading system and disaster recovery system, providing trading services and information. The NDRC shall work with relevant government agencies to establish management measures and technical standards, and to supervise the ETS transaction system. 18) ETS transaction settlement system. Build an ETS transaction settlement system, provide inquiry and consulting services for allowance settlement and related activities, and ensure the credibility of transaction results. ENERGY FOUNDATION 4

5 VII. Transition of ETS Pilots 19) Promote the transition of ETS pilots to the national ETS. Regions that have established ETS pilots since 2011 will move eligible key emission entities to the national ETS, placing them under the management of the national ETS. Regional ETS pilots will continue to operate, and will gradually transition to the national ETS when they are ready. VIII. Complementary Measures 20) Strengthen leadership. The NDRC will work with relevant government agencies to adjust the plan in a timely manner, based on the progress of the ETS, and promptly report significant situations to the State Council. Each agency must assess the situation, and strengthen their supervision of the carbon market based on the division of responsibilities. 21) Emphasize fulfillment of responsibility. The NDRC shall work with relevant government agencies to build the national ETS. Climate change departments at the provincial level, and cities specifically designated in the state plan, are responsible for developing the ETS within their jurisdictions. Eligible provinces and cities consigned by the NDRC can build and operate relevant support systems for the national ETS, which can link to a unified national platform for the exchange of information. 22) Promote capacity building. Organize capacity-building trainings for market participants, and promote related international cooperation. Encourage related industry associations and state-owned enterprises to conduct research into sectorial carbon emissions data, related statistical analyses, and other factors, so as to provide technical support for the scientific formulation of allowance allocation standards. 23) Develop good publicity and guidance. Increase the publicity of green circular low-carbon development and relevant ETS policies and measures; share ETS knowledge through multiple channels; promote the application of best practices; raise corporate and public awareness of the importance of reducing carbon emissions and increase understanding of the carbon market so as to create a favorable atmosphere for carbon market implementation. ENERGY FOUNDATION 5