Carbon-neutral policies in China

    By Charles J Yao, Jingtian & Gongcheng






    As one of the first 10 parties to the 1992 UN Framework Convention on Climate Change, China is an active participant in global climate co-operation and has been further promoted from an important participant to a key leader. China abides by the basic framework defined by the international community under the Paris Agreement, and is committed to promoting the establishment of a fair, reasonable and equitable global governance system.

    In September 2020, at the 75th session of the UN General Assembly, President Xi Jinping announced that “China will scale up its intended nationally determined contributions by adopting more vigorous policies and measures. We aim to have carbon dioxide emissions peak before 2030, and to achieve carbon neutrality before 2060.” The goal has been written into the outline of the 14th Five-Year Plan for National Economic and Social Development, and Vision 2035 of the PRC issued in March 2021. China will accelerate the construction of its legal system related to carbon peak and carbon neutrality.

    Charles Yao Jingtian & Gongcheng
    Charles J Yao
    Partner at Jingtian & Gongcheng in Beijing
    Tel: +86 10 5809 1022

    Carbon neutrality means that the amount of carbon dioxide produced is offset by afforestation, energy conservation and emissions reduction. According to the Implementation Guideline on Carbon Neutrality for Large-scale Activities (Trial) issued by the Ministry of Ecology and Environment in 2019, carbon neutrality refers to offsetting the greenhouse gas emissions of large-scale activities by purchasing carbon allowances or carbon credits, or by generating carbon sinks through newly built forestry projects.

    With the purchase and sale of relevant carbon allowances and carbon credits, the development of China’s carbon emission rights market has gone through the process of local pilot projects (in Beijing, Shanghai, Guangzhou, Shenzhen, Hubei, Chongqing, Tianjin and Fujian), and gradual exploration of a unified opening of the national carbon emission rights market. China’s carbon market consists of the Credit Emission Allowance (CEA) and the China Certified Emission Reductions (CCER) markets.

    CEA market

    The Administrative Measures for Carbon Emission Right Trading (Trial) (Administrative Measures for Trading), issued by the Ministry of Ecology and Environment on 31 December 2020 and effective as of 1 February 2021, standardise national carbon emission rights trading and related activities, including carbon emission allowance allocation and settlement, carbon emission rights registration, trading and settlement, greenhouse gas emission reports and verification, and the supervision and management of the above-mentioned activities.

    According to the Administrative Measures for Trading, the Ministry of Ecology and Environment promulgated the Administrative Rules for Carbon Emission Rights Registration (Trial), the Administrative Rules for Carbon Emission Rights Trading (Trial), and the Administrative Rules for Carbon Emission Rights Settlement (Trial) on 14 May 2021, which further detailed the specific operations in the registration, trading and settlement of carbon emission rights.

    Combined with current laws and regulations, the trading mechanism of a CEA market is briefly introduced as follows:

    CEA is a carbon emission rights index that the state distributes free of charge (or paid distribution will be introduced, according to national requirements, later) to key greenhouse gas emission entities through provincial ecology and environment departments.

    Enterprises that meet the following conditions will be included in the list of key emission entities of the competent provincial ecology and environment departments: (1) Belong to an industry covered by the national carbon emission rights trading market; and (2) produce annual greenhouse gas emissions of up to 26,000 tonnes of carbon dioxide equivalent.

    Key emission entities included in the national carbon emission trading market will no longer participate in the local carbon emission rights trading pilot market. At present, the first batch of domestic enterprises that have the right to enter the national carbon emission rights trading market are qualified power generation enterprises.

    Key emission entities can open accounts and conduct related business operations in the national carbon emission rights registration system. Key emission entities are required to fulfil their obligations within the prescribed time limit, use their CEA to offset their actual carbon emissions and complete the settlement of CEA.

    If the carbon emissions of key emission entities with allowances is less than the CEA allocated by the state, the excess can be sold as products. If their carbon emissions exceed the CEA allocated by the state, the insufficient part shall be purchased from the carbon trading market. Trading entities can trade CEA through the national carbon emission rights trading system by transfer agreement, one-way bidding or other compliant ways.

    Key emission entities shall, according to the technical specification for greenhouse gas emission accounting and reporting formulated by the Ministry of Ecology and Environment, prepare a greenhouse gas emission report of their own for the previous year, specify the emissions, and report to the provincial-level ecology and environment department where the production and business premises are located. Key emission entities shall settle the CEA of the previous year within the time limit.

    CCER market

    CCER refers to the voluntary greenhouse gas emission reductions recorded on the national trading registration system after the effects of renewable energy, forestry carbon sinks, methane utilisation and other projects in China are quantified and certified. According to the Interim Measures for the Administration of Voluntary Greenhouse Gas Emission Reduction Trading, promulgated in 2012, the state requires the filing of voluntary greenhouse gas emission reduction trading.

    The projects participating in voluntary emission reduction trading are filed and registered with the competent national authorities, and the emission reductions generated in the projects are filed and registered with the competent national authorities and traded in trading agencies filed with these authorities.

    Enterprises registered in China may apply for voluntary greenhouse gas emissions reduction projects and the filing of emissions reduction. Agencies, enterprises, organisations and individuals at home and abroad may participate, as CCER does not have many restrictions on trading entities.

    CCER can offset CEA to a certain extent. According to article 29 of the Administrative Measures for Trading, key emission entities can offset the settlement of CEA with CCER every year, and the offset ratio shall not exceed 5% of the CEA to be settled. The CCER used for offset shall not come from emission reduction projects included in the allowance management of the national carbon emission trading market. Up until now, CCER has not been included in the national CEA trading market as a tradable product.

    Other voluntary markets

    Some enterprises are also actively participating in the international voluntary emission reduction markets. The systems with high recognition include the voluntary carbon standard, the climate action reserve standard, the offset project standard of Chicago Climate Exchange and the gold standard.

    The increase in the number of categories traded in the voluntary carbon markets indicates that the domestic and international mandatory compliance sectors are gradually expanding the acceptance of the voluntary emission reduction market, which will contribute to its development, instead of squeezing it.

    Future prospects

    The national carbon trading market started well in the first year, but it is in the process of development and improvement. The following three aspects in the future are worthy of further observation.

    Continue to improve the relevant legislation. The policy documents on China’s carbon market from local pilot to national market are all guidance opinions, notices, etc. It is necessary to improve relevant regulations to provide a normative basis and guarantee for the carbon trading market at the legal level.

    Expand the coverage, participants and asset types. At present, the national carbon market only includes the power generation industry, only emission control enterprises are allowed to open accounts, and tradable carbon assets only cover the carbon allowance and CCER with few market stocks.

    A solid foundation of the data accounting work of petrochemical, chemical, building materials, steel, nonferrous metals, paper making, aviation and other high-emission industries has been established. After the industry standards and technical specifications are improved, they should be included in the carbon market as soon as possible to expand the scale of participants.

    The market may gradually be opened to non-emission control enterprises, individuals, financial institutions and carbon service providers to promote diversified development and improve market vitality. The competent authorities are actively preparing for the restart of CCER, and the trading of derivative products such as futures, options and swaps other than spot goods can be explored.

    Improve the liquidity. The price of emission rights in China’s carbon market is relatively low, and the cost of emission reduction is relatively high. For regional and national carbon trading in the first year, their activities are mainly concentrated in the performance period, and the trading volume in other periods is insufficient, leading to the low activity of enterprises. With the expansion of the national market and diversification of participants and products, activity is expected to increase.

    Jingtian & Gongcheng
    34/F, Tower 3, China Central Place
    77 Jianguo Road, Chaoyang District
    Beijing – 100025, China
    Tel: +86 10 5809 1000