China announces national ETS

3 January 2018

China on Tuesday 19 December formally announced the launch of its national emissions trading scheme, which will start with the power sector, but it left out major details such as when the market would actually begin operating and how exactly it would work.
The general opinion among analysts seems to be that the scheme has been announced prematurely in order to meet president Xi Jinping’s 2017 deadline, set as long ago as 2015.
The ETS has a long history in China. A national carbon trading scheme was first announced in November 2008 by the national government, to enforce a compulsory carbon trading scheme across the country's provinces as part of its strategy to create a "low carbon civilisation".
Then in 2015 it was announced by president Xi Jinping during a state visit to the United States that China would launch a national emission cap-and-trade scheme by 2017. It would cover key industry sectors such as iron and steel, power generation, chemicals, building materials, paper-making, and nonferrous metals. But the announcement was derided by American commentators as a propaganda coup – it was introducing the same kind of scheme that had recently failed to get through US Congress.

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The news has to date been met with a certain scepticism in the West. Observers in Washington, where the 2017 start date for the scheme was announced amid much publicity in September during a State visit, noted that it only referred then to a preliminary regulatory rollout, and has not advanced significantly.
Actual allowance trading between power generators in China’s national emissions trading scheme is unlikely to start before 2019 or 2020, while other sectors could be brought into the market even later than that, according to the government’s own plan.
The Carbon team at Thomson Reuters expects a slow start to the scheme. “The NDRC (National Development and Reform Commission) has reiterated that the carbon market is created with the aim to curb emissions. But to what extent the ETS could contribute depends on the design," says Tianyu Meng, a Thomson Reuters analyst.
“President Xi's mandate of market set-up by 2017 has been officially achieved by the NDRC. Now is the implementation time. Apart from that many details of the market design are yet to be finalized and disclosed to the market,” commented Hongliang Chai, a senior analyst at Thomson Reuters.
Some of the outline details are known. First, that initially only the power sector will be covered. Thomson Reuters expect the market to cover some 1700 power companies with over 10 000 tonnes of coal equivalent, of a total emission of 3.5 gigatonnes CO2 at the beginning. Aluminium, cement and other sectors will join at later stage. Start dates, such as the start of carbon unit trading, are not specified but it is known that carbon offset will not be accepted in the national market for at least the first three years..
Second, that the ETS will go through three phases: a setting up phase, a simulation phase and a deepening phase; the first two phases will each take around one year.
During the first two phases, only power companies will be covered in the national market, and Thompson Reuters expect national ETS-covered companies to continue their compliance in respective regional pilots. Hubei will host the registry and Shanghai the trading platform, although allowance trading is not expected to come in the first few months of 2018. The existing eight regional pilot markets will continue their operation, covering entities that are not included in the national market. It is expected that in due course those pilots will merge with the national market.



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