The Road of Carbon Emissions Trading from Pilots to a Nationwide Scheme in China Dr. Xianbing Liu Senior Policy Researcher/Task Manager Kansai Research Centre, IGES, Japan Market Mechanism Seminar, 31 May 2015

 Background  A brief overview of global carbon pricing progress  GHG ETS pilots in China  The progress to a nationwide scheme  Perspective of Chinese businesses to ETS  Summary of the presentation Structure of the presentation 2 Market Mechanism Seminar, 31 May 2015

Alternative tools to control emissions 3 A: Command-and-control approaches:  For limited number of participants  Easy to control but little space for innovation  Tools that China usually adopts Market Mechanism Seminar, 31 May 2015 B: Market-based instruments:  E.g., carbon taxes and GHG ETS  Large number of participants  Possible technology innovation  Control of the emissions objective  Largely used in developed economies  Chinese ETS pilots in the 12 th FYP C: Voluntary agreements:  For limited number of participants  No security to achieve the objective  Desire to not impose obligatory regulation  Already in place in many countries but not sufficient to achieve strong reduction effort Integrative Policy Frame for Enhancing Business Environmental Performance

4 Global existing and emerging carbon pricing Market Mechanism Seminar, 31 May 2015  About 40 national and over 20 sub-national jurisdictions are putting a price on carbon. Together these carbon pricing instruments cover almost 6 Gt-CO 2 or about 12% of the annual global GHG emissions.  The world’s two largest emitters are now home to carbon pricing instruments. Source: (WB, 2014)

Prices in existing carbon pricing schemes 5 Market Mechanism Seminar, 31 May 2015  168 US$/t-CO 2 in the Swedish carbon tax  Price signal at 95 US$/t-CO 2 for Tokyo Cap- and-Trade Program  Prices in the EU ETS remained in the depressed range of about 5-9 US$/t-CO 2 Source: (WB, 2014)

Coverage of existing ETS in the world 6 Market Mechanism Seminar, 31 May 2015 Emissions trading schemeThe threshold for firms/installations to be covered EU-ETS  Installations undertaking fuel combustion with a capacity of 20 MW  Specific production thresholds for other industries  Small facilities with emissions less than 25,000 t-CO 2 per year excluded in phase 3. New South Wales GHG Reduction Scheme, Australia  Electricity sector only Regional GHG Initiative  Electricity sector only  Generation capacity > 25 MW Albert, Canada  Facilities emitting more than 100,000 t-CO 2 per year New Zealand ETS  Forestry, waste and agriculture included in succession from 2008  Some industries have thresholds for participation, e.g., liquid fuel supply > 50,000 litres per year Tokyo Cap-and-Trade Scheme, Japan  Threshold for inclusion: Energy use > 1,500 kilolitres of crude oil equivalents per year Carbon Pollution Reduction Scheme, Australia  Threshold: Emissions > 25,000 t-CO 2 per year Western Climate Initiative  Threshold: Emissions > 25,000 t-CO 2 per year Source: Fan et al. (2014)

7 China on the way to set up an ETS Singapore-China Energy Forum, 2 October 2014 National commitment to reduce emissions intensity by 40-45% in 2020 compared to 2005 level at COP15 NDRC designated low-carbon development in 5 provinces and 8 cities and encourages carbon trading as part of the strategy State Council mentions plans to establish an ETS for the first time The 12 th FYP was announced and lists the ETS as a central part of the country’s energy and climate policy NDRC officially approved carbon trading Pilots in 7 provinces and cities State Council further clarified tasks to establish the ETS during the 12 th FYP NDRC set interim measures to support voluntary GHG reduction transactions and Indicates that CCERs can be used as offsets in the pilots Design of ETS pilots, incl. review and approval of NDRC on emissions limits, allocation methods and detailed implementation plan for each pilot Operation of pilot ETS with ongoing efforts to establish a national ETS after 2016 Dec., 2009 Aug., Jun., 2012 Dec., 2011 Oct., 2010 Nov., 2010 Nov., 2011

8 Locations of 7 Chinese ETS pilots Market Mechanism Seminar, 31 May 2015

Background of the pilot regions 9 IndicatorPopulationGDP * CO 2 emissions GDP per capita CO 2 per capita CO 2 intensity CO 2 intensity target for 2015 from 2010 UnitMillionBillion $Mt1,000 $tt/1,000 $% China Beijing Tianjin Shanghai Chongqing Hubei Guangdong Shenzhen EU Note: * Exchange rate in 2010: 1 $ = 6.77 Yuan = 0.75 € Sourced from: (Zhang et al. 2014)  The pilot regions cover an area of 480,000 km 2 with a total population of 199 millions.  The pilot regions have different industrial structure and economic development level, produce 30% of China GDP and release more than 20% of the country’s CO 2 emissions. Market Mechanism Seminar, 31 May 2015

10 Chinese ETS pilot designs Region CO 2 emissions covered (Mt) Share of total emissions (%) Type of emissions No. of covered entities Emissions threshold (t- CO 2 /a) Historical period Beijing5850Direct + indirect490> 10, Tianjin11245Direct + indirect114 > 20,000 (Ind.) > 10,000 (Others) Shanghai9060Direct + indirect191> 20, ChongqingNA Direct + indirect242 > 20,000 (or > 10,000 tce) Hubei11733Direct + indirect138 > 120,000 (or > 60,000 tce) Guangdong20942Direct + indirect242 > 20,000 (or > 10,000 tce) Shenzhen3240Direct + indirect Ind.: 636 Build.: 197 > 20, All pilots> 6207 (National total)Direct + indirect2,249-- EU-ETS (Phase I) Direct11,500> 10,  Cap – Difficult to calculate;  GHGs coverage – Direct and indirect CO 2 emissions  Company coverage – Heavy polluters (SOEs, private)  Allocation method – Principally ‘Grandfathering’ Market Mechanism Seminar, 31 May 2015

11 Chinese ETS pilot designs Region Industries covered in common Additional industries covered Other sectors covered Beijing  Heat and electricity production  Iron & steel  Nonferrous metals  Petrochemical and chemical  Pulp and paper  Glass  Cement 17 manufacturing sectors Commercial buildings, financial, hotel, restaurants, post, education, medical, retail, public, utilities, etc. Tianjin Oil and gas exploration Residential buildings Shanghai Textiles and building materials Commercial buildings, financial, hotel, airlines, harbours, airports, railway, etc. Chongqing-- HubeiAutomobile-- GuangdongTextiles Commercial buildings, transportation and construction Shenzhen 26 manufacturing sectors Commercial building and transportation (In consideration)  Large number of sectors covered  Big difference in sector coverage between pilot regions  Certain difficulties in future nationwide scheme Market Mechanism Seminar, 31 May 2015

12 Chinese ETS pilot designs Market Mechanism Seminar, 31 May 2015  Registry infrastructure  Each pilot develops its own registry  Very similar with the EU-ETS registry  Compliance  Surrounded allowance shall equal to verified emissions  Penalty for non-compliant companies: Fines about 3 times of carbon price The next year allowance shall be deducted for 2 times of the excess emissions  Offsetting  Offsets – China Certified Emission Reduction (CCER)  Including forestry carbon offset  Limited to about 10% of total verified emissions

13 Chinese ETS pilot designs Market Mechanism Seminar, 31 May 2015  MRV  Each pilot develops the MRV guidance  Lack of reliable data and regulation  Third-party entities conduct the validation and verification → Without accurate MRV system, ETS can not function  Market platform  At beginning, financial institutions are not allowed to enter the market → With Hubei as an exception → Only spot market

MRV guidelines in the pilots 14 Market Mechanism Seminar, 31 May 2015 BeijingTianjinShanghaiGuangdongShenzhen General guidelines for monitoring and reporting ◎◎◎◎◎ General guideline for verification ◎ Power and heat ◎◎◎◎ Iron & steel ◎◎◎ Non-metal processing (Cement, ceramics, etc.) ◎◎◎ Chemical industry ◎◎ Petrochemical industry ◎◎◎ Non-ferrous metals ◎ Textile and paper ◎ Air transport ◎ Transport stations ◎ Service industry (Mainly for buildings) ◎◎◎ Other sectors ◎◎ Number of guidelines (General + Sectors)1+6 * * The guidelines for power and heat are separated. Source: Duan et al. (2014)

Process of MRV in China’s pilots 15 Market Mechanism Seminar, 31 May 2015 Source: Duan et al. (2014) Accounting and reporting (by enterprises) Verification (by third parties) Spot-checking (by governments) Re-accounting (by enterprises) Re-verification (by third parties) Final reporting (by enterprises)

16 First year experience ( ) Market Mechanism Seminar, 31 May 2015 Pilot Compliance deadline PerformanceData announcedMeasure takenPunishment Shanghai30 June 100% (191/191) Announce the performance rate Strength communication, training in advance, allowance auction Non Shenzhen30 June 99.4% (631/635) Release the (non) compliance enterprise list Auction Before July 10, 4 companies submitted allowance, no punishment Beijing 15 June (No punishment before 27 June) NA Release the non- compliance enterprise list On-site enforcement, media exposure NA Guangdong15 July 98.9% (182/184) Announce the performance rate Postpone compliance 2 enterprises were punished Tianjin25 July 96.5% (110/114) Announce the performance rate Postpone compliance No punishment measure  Legal penalty to be applied is rather low and inefficient at current stage.  The information is not available for the public in most time.  Allowances were short in the first year according to some multinational companies.

17 Credit prices of the pilot markets Market Mechanism Seminar, 31 May 2015 Shenzhen Beijing Shanghai Guangdong Tianjin Chongqing Hubei  Prices do not represent the offer and demand;  The pilots are more as compliance policy for the moment rather like market instrument.

18 The market of Beijing pilot Market Mechanism Seminar, 31 May 2015  Very low traded volume;  Active trading around the compliance date;  Carbon price is stable at around 50 Yuan/t-CO 2.

19 The market of Shanghai pilot Market Mechanism Seminar, 31 May 2015 Around 30 Yuan/t-CO 2

20 The market of Shenzhen pilot Singapore-China Energy Forum, 2 October 2014 Around 40 Yuan/t-CO 2

21 The market of Tianjin pilot Singapore-China Energy Forum, 2 October 2014 Around 25 Yuan/t-CO 2

To a nationwide ETS in China 22 Market Mechanism Seminar, 31 May 2015  To be set up by 2016  Probably the regulation framework by 2016  Implementation at provincial level might be started by 2016 for the most advanced regions  Delay for the other areas  Standardization  Common allocation rule and registries  National standards  Chinese heterogeneity  Already large differences in design and provincial economic structure for the 7 pilots  Even stronger difference between all the provinces  Difficulty of linkage between provinces in the future (Is the local government willing to do this or not?)

Interim management measures of carbon trading in China 23 Market Mechanism Seminar, 31 May 2015  Issued on December 10, 2014 by NDRC  Six chapters and supplementary (48 articles)  General principles  Allowance management  Emissions trading  Verification and quotas clearance  Supervision management  Liability o Supplementary  Enacted since 30 days after the issuing date

Interim management measures of carbon trading in China 24 Market Mechanism Seminar, 31 May 2015  Overall, general rules regulated with the details to be specified for operation  An example: emissions allowances allocation  Provincial authorities propose the key entities to be covered for NDRC approval (The thresholds?)  Cap setting by NDRC in consideration of national target, provincial emissions amount, economic growth, energy structure and entities to be covered (Detailed emissions limits?)  Mainly free allocation initially and introduce paid allocation in due time (Schedule and detailed ratios?)  Certain amount of allowances reserved by NDRC for market stabilization and key construction projects, etc. (How much and how to use?)

GHG accounting and reporting guidelines 25 Market Mechanism Seminar, 31 May 2015  Two batches of guidelines (on trial) have been issued by NDRC  1 st batch on October 15, 2013  10 sectors: Power generation; power grid; iron & steel; chemical; aluminium; magnesium smelting; plate glass; cement; ceramics; and, civil aviation  2 nd batch on December 3, 2014  4 sectors: Petroleum and natural gas; petro-chemical; independent coking; and, coal production

26 Major challenges Market Mechanism Seminar, 31 May 2015  Idea problems: Balance in low carbon development and economic growth  Legislation problems: Delayed legislation  Absence of data and standard  Capacity building  Link of regional pilot ETS  State-owned enterprises to be involved in ETS  No financial institution involved in the carbon market (on the way to change)

27 Major challenges Market Mechanism Seminar, 31 May 2015  Setting an ETS requires a long process over years (around 7 years for EU-ETS)  1998: Thoughts  2001: Proposition  2005: Start of trial phase  What will happen after 2020?  Need a transparent, coherent and flexible legislation framework  Transparent: To assure reaching targets with equity among participants  Coherent: To integrate other policy interventions  Flexibility: To adjust and correct structural errors in time

15 options in Policy-oriented energy cost increases Five levels of acceptance 28 MBDC card measuring cost affordability Market Mechanism Seminar, 31 May 2015

29 Energy Cost Increase Ratio (%) Strong Rejection (%) Rejection (%) Barely Acceptable (%) Acceptable (%) Easily Acceptable (%) Total (%) Responses of Chinese companies (N=111) Market Mechanism Seminar, 31 May 2015

50% of the samples corresponds to the ratios of 2.8% and 9.3% on the two curves. 30 Simulation of Chinese samples (N=111) Two curves were simulated:  One is the sum of easily acceptable + acceptable  The other is the sum of easily acceptable + acceptable + barely acceptable The real affordable ratio shall be between these two curves. Market Mechanism Seminar, 31 May 2015

31 Affordable energy cost increases by sector VariablePercentileCentile (%)95% Conf. Interval (%) Panel A: All the samples (N=111) Mean of μ: 8.8% The std. dev. of μ: 9.0% Panel B: Samples from iron & steel sector (N=34) Mean of μ: 8.8% The std. dev. of μ: 9.9% * * Panel C: Samples from cement sector (N=17) Mean of μ: 7.7% The std. dev. of μ: 4.4% * * Panel D: Samples from chemical sector (N=27) Mean of μ: 9.9% The std. dev. of μ: 11.2% * * * : Lower (upper) confidence limit held at minimum (maximum) of sample.  Significantly and negatively associated with competition level;  The large companies have higher affordability. Market Mechanism Seminar, 31 May 2015

32 Carbon prices affordable for companies of China Energy type Energy use ratios (%) Current energy price a Emission factor b Iron & steelCementChemical Electricity Yuan/KWh t-CO 2 /MWh Coal Yuan/t t-CO 2 /t Fuel oil Yuan/t t-CO 2 /t Natural gas Yuan/m t-CO 2 /1,000 m 3 Steam Yuan/t t-CO 2 /t MEANAFFORD8.8%7.7%9.9% Data source: a b (Su et al., 2009); (NDRC, 2010). Affordable carbon price (Yuan/t-CO 2 ) Market Mechanism Seminar, 31 May 2015

33 B: GHG ETS AttributesLevels Cap setting 1) Based on the company’s historical emissions; 2) Based on the sector’s advanced emission levels; 3) Differentiated measures for the existing and new established companies Allowance allocation 1)All for free; 2) 5% auction, the rest for free; 3) 10% auction, the rest for free; 4) 30% auction, the rest for free Penalty 1) A fine the same of market price of carbon emissions; 2) 3 times of market price; 3) 5 times of market price Compliance period 1) 1 year; 2) 3 years Attributes and levels of ETS for choice experiment Policy attribute Option A01Option B01 Cap setting Based on the company’s historical emissions Based on the historical emissions for the existing companies, and the sector advanced emission levels for the new entrants Allowance allocation 5% auction, the rest for freeAll for free Penalty A fine of 5 times of the market price A fine of 3 times of the market price Compliance period 1 Year Please tick the one you prefer □□  Design Expert 8.0 was used;  D-optimal design applied;  12 Choice sets constructed;  Two versions, 6 sets for each;  An example set of GHG ETS in China. Market Mechanism Seminar, 31 May 2015

34 Company GHG-ETS choice preference a) The companies prefer a hybrid method in cap setting (CAP-C); b) High penalty (5 times) is needed for changing the company’s policy choice; c) Auction ratio for allocating the allowances is insignificant in this analysis; d) Compliance period is insignificant in determining the choices. Market Mechanism Seminar, 31 May 2015

35 Business laggard practices in carbon management Market Mechanism Seminar, 31 May 2015 No.DescriptionsCount% Panel A: The status of energy saving target setting of companies (N=78) 1Not set the quantitative target yet11.3 2Have 5 to 10 years medium and long term target Have 3 to 5 years short term target Have annual target Have internally decomposed targets by division and production process Panel B: Internal energy monitoring and statistics of companies (N=78) 1Not set up internal energy use monitoring and statistics system00.0 2Have comprehensive energy use statistics system at company level Have a relatively complete energy statistics system, with key energy-using equipment and process monitored Have complete energy statistics system and specific division and staffs for energy management GHG mitigation target (N=78) No. DescriptionsCount% 1 Not yet and no plan Not yet but have plan Have the target in carbon emissions intensity Have the target in mitigating absolute carbon emissions Survey to cement companies in FY2014

36 Preparation and barriers for ETS (Cement sector) Singapore-China Energy Forum, 2 October 2014 Possibility as GHG ETS target (N=78) CategoriesNo.% Very high High Moderate Less33.8 Not at all67.7 Annual emissions Preparations for ETSBarriers for ETS

This presentation overviews the practices of China in ETS pilots and efforts for the establishment of a nationwide scheme; Certain experience has been accumulated through the pilots and overall direction was clarified for an ETS at country level; Many details to be specified for supporting the practical operation of the national ETS; The business perspective was shared using the results from questionnaire surveys to Chinese companies; The practices of Chinese businesses in carbon management are much laggard than the actions for energy saving; Capacity building in MRV of carbon emissions at business level is highly necessary for smooth operation of ETS in China; Nevertheless, giving modest carbon prices could be accepted by Chinese companies, even for those from energy-intensive sectors. 37 Summary of the presentation Market Mechanism Seminar, 31 May 2015

38 Thank you for your attention! Market Mechanism Seminar, 31 May 2015