New Regulations on Carbon Emission Rights Announced in China

From January 1^st, 2021, the first compliance cycle of the national carbon market was officially launched in China and by December 31^st, 2021, 2,225 key greenhouse gas emission companies across the country will be assigned carbon emission quotas. Additionally, the new trial regulations "Carbon Emissions Measures for the Administration of Rights Trading" (referred to as the "Measures") came into effect on February 1^st, 2021.

Carbon emissions trading is a market-based approach to managing pollution and it is used as one of the tools to tackle climate change. Authorities allocate a certain number of specific carbon emission quota to businesses and such companies that have not used up all of their allocated carbon emission quota may sell the residual amount to other companies which have to obtain more carbon emission quotas as part of their production. This arrangement essentially punishes those polluters who exceed the allocated quota and encourages those who don’t.

The "Measures" are aimed at regulating national carbon emissions trading and related activities, and stipulate the responsibilities, rights, and obligations of all levels of ecological and environmental authorities and market participants, as well as key links and work requirements for the operation of the national carbon market.

The authorities manage the list of greenhouse gas emission companies and also include companies that meet the following conditions in the list of key emission companies:

1.       A company belonging to the industry covered by the national carbon emission rights trading market;

2.       A company which has annual greenhouse gas emissions reaching the equivalent of 26,000 tons of carbon dioxide.

Issuance of Carbon Emission Quotas

Currently, the issuance of carbon emission rights is mainly based on free distribution, however paid distribution may be also introduced at an appropriate time in the future. For the allocated quota, if the key emission company has any objection, it has the right to apply to the provincial ecological environment department for review within 7 working days, and such review should generally be completed within 10 working days.

Verification and Payment of Carbon Emissions

Key emission companies should submit a report stating their greenhouse gas emissions in the previous year to the provincial eco-environmental department before March 31^st of each year. The provincial eco-environmental department will then inform such key emission companies of the results after verification.

Observations

China's national carbon market is developing rapidly as the first compliance deadline is approaching at year end, with the average daily trading volume of carbon emissions quotas already seeing an increase in November. The national carbon market had a trading volume of 23.03 million tons, with a turnover of RMB 939 million.

The national carbon market has a lot of potential and the trading system will likely cover more industries in the future. Most companies currently covered are from the power generation sector, but steel and petrochemical producers are likely to be more actively involved in the market in the near future.

Furthermore, financial institutions will soon be allowed to join in the trading system, generating sufficient liquidity and trading volumes, as well as providing services to businesses to manage carbon emission trading.

Conclusion

China's carbon emissions trading market has been successfully piloted, and nationwide development is underway. Carbon emissions will not only be used as an administrative indicator to tackle climate change, but they also aim to affect businesses’ sustainable development in China.