Key Highlights:
- China's State Council launches its first administrative regulations to define legal framework for carbon emission trading market operations, nearly three years after the initiation of the national emission trading scheme (ETS). The new regulations took effect starting from May 1, 2024.
- Distinctions: The new policy, which has higher legal hierarchy as compared with the previous policy, enhances requirements for data quality management and increases legal liabilities. If key emitting entities (KEEs) and technical service providers are involved in illegal data activities, fines will be escalated from no more than 30,000 yuan up to one million yuan, with penalties linked to the profits gained illegally.
- Outlook: The new policy only covers spot trading and does not include innovative financial products like carbon futures. China plans to transition from a fully free allocation system for carbon emission allowances (CEA) to a hybrid system that combines free allocation with purchasable quotas. However, specific details on when this new allocation method will come into effect and the proportion of paid quotas have not been determined yet.
- The national ETS in China currently applies only to the power generation sector. In the upcoming third compliance period starting in 2024, the electrolytic aluminum and cement industries will be included. The focus will then shift to adding the steel and civil aviation industries to the ETS.
Source: Compiled by GL Consulting based on government policies
Data fabrication fines to exceed 1m yuan
The new policy enforces stricter measures to against fabricating and misreporting carbon emissions data. For key emitting entities (KEEs) caught fabricating data, fines can be up to ten times the illegal gains if these exceed 500,000 yuan. Failure to rectify violations can lead to reduced CEAs for the following year or even a production halt.
For instance, a company emitting 10 million tonnes of carbon annually could save 100 million yuan by falsifying data to show a 10% reduction in emissions, based on current carbon prices of 100 yuan/tonne. However, if caught, the fine could amount to as much as 1 billion yuan.
Schedule for CEA paid system still pending
The national ETS has yet to introduce carbon futures or forward trading due to limited participants, oversight issues, and small local pilot markets.
A new CEA allocation approach combines free quotas with purchase options will gradually replace the current fully free system. However, the policy lacks clarity on the timing and the proportion of paid quotas. A policy research institution predicts China's ETS will introduce a bidding system for power generation sector allowances in 2024, covering 5-8% of allowances initially.
In the EU carbon market, the transition from a primarily free allocation to a predominantly paid system takes around eight years.
Source: Compiled by GL Consulting based on government policies
Link:
The Interim Legislation on the Carbon Emission Trading Management:
https://www.gov.cn/gongbao/2024/issue_11186/202402/content_6934549.html
To get detailed full text, send an email to glconsulting@mysteel.com
Edited by Navy Liu: liuchuanjun@mysteel.com