Beijing’s environmental watchdog prompted speculation in late September when it named several non-power companies as “reporting entities” set to participate in China’s national emissions trading scheme (ETS) for 2022.

However, experts have told China Dialogue that the announcement does not mean the five implicated sectors — petrochemicals, chemicals, building materials, steel and civil aviation — have been absorbed into the national ETS.

Rather, it shows that the city’s authorities are preparing some businesses for a future expansion of the ETS, they added.

China’s national carbon market began trading in July 2021, and so far only covers the power sector, accounting for around 40% of national carbon dioxide (CO2) emissions. During its first year, more than 2,000 power companies were obliged to account for their CO2 emissions from the previous two years.

The official plan is to incorporate “two to three” new sectors into the national ETS this year and for the scheme to include all eight sectors deemed as high emitters by 2025. However, no concrete steps have been announced to achieve these goals. Reports have instead suggested that the expansion would “slow down” or “be delayed” due to a mix of factors.

The announcement

In its September 27 notice, the Beijing Municipal Ecology and Environment Bureau published two indices of “emitting entities” to be “incorporated into the management of the national carbon market” for 2022.

The first index contained the names of 14 “key emitting entities” from the power sector, while the other listed eight “reporting entities” from five other sectors.

Beijing’s statement came amid a flurry of similar documents published by the environmental watchdogs of other provinces, including Fujian, Zhejiang, Jilin, Tianjin and Guangdong. But most of the other lists only included power companies.

Therefore, some reports have said that Beijing’s announcement marked “the first time non-power-generating sectors had been incorporated into the national carbon market” — a move that, if true, would represent a breakthrough for China’s national ETS.

Various experts, however, point out that these five sectors have not been integrated into the national carbon market and that Beijing’s notice had been misread.

Tan Luyue, a carbon markets analyst based in Beijing, tells China Dialogue that the Beijing bureau was simply instructing these eight companies to report their emissions data for 2022.

Tan, a senior carbon analyst at Refinitiv, a global provider of financial markets data and infrastructure, says the move suggests that Beijing — one of China’s eight pilot carbon markets — has “higher requirements” for those sectors which are expected to be covered by the national carbon market in the coming years.

In 2011, China launched pilot ETS projects in seven cities and regions — Beijing, Tianjin, Shanghai, Chongqing, Hubei, Guangdong and Shenzhen — to try out emission trading as the first step of its long journey in establishing a national ETS. At the end of 2016, the eighth regional pilot ETS was launched in Fujian province. All eight pilots have continued since the launch of the national ETS.

Stian Reklev, director and co-founder of Carbon Pulse, a news and intelligence website focused on carbon pricing initiatives, tells China Dialogue that the eight companies “will not have any compliance obligations” until China’s central government includes them in the national ETS.

Unlike power companies deemed “compliance entities,” these “reporting entities” will not be allocated “allowances” or “permits,” which give them the right to emit a certain amount of CO2 and are calculated based on emissions intensity. Nor will they need to trade emissions permits on the national carbon market in any way.

“It just means they have to report their annual CO2 emissions, which is a good idea,” Reklev notes, adding: “In addition to Beijing, Guangdong and Fujian are also doing this, as far as I know.”

The significance

Although the national ETS currently only includes the power sector, the central government said in a document back in 2016 that it planned to bring in eight “key” high-emitting sectors in the “first phase” of the countrywide trading program. These eight sectors were petrochemicals, chemicals, building materials, iron and steel, non-ferrous metals, paper-making, power, and aviation.

Since then, companies in these eight sectors have been reporting their carbon emissions and undergoing annual verification; therefore, the statement from Beijing was “a very normal” work procedure, according to Chen Zhibin, senior manager of adelphi, a Berlin-based think tank for climate, environment and development.

Chen says the difference between power companies and the other companies is that the former have operated within the emission allowance system since last year when the central government issued their emissions permits, whereas the latter are only being asked to report their emissions.

In Tan’s opinion, Beijing’s action demonstrates the city’s initiative in helping certain companies prepare for the future.
Tan notes that provincial governments typically start to act, such as by enlisting compliance companies, after the central government releases an allocation scheme for a particular industry. However, “the statement from Beijing reversed the process this time, showing that (the city) took the initiative and wanted to give companies some preparation time”.

Tan points out that any company will need a learning process to meet its compliance duties in a carbon market if it has not reported its emissions data before.

But she adds that because China’s national carbon market follows a top-down workflow and the central government has a “clear timeline,” it is “hard to say” if Beijing’s move would have any impact on the national market or what that impact might be.

The wider picture

China’s national ETS started operating in January 2021, and its trading system officially went online seven months later.

Although it only includes power companies, the national ETS is already the largest in the world, covering 12% of global CO2 emissions.

By 15 July, the first anniversary of the national ETS, 194 million tons of carbon emissions allowances had been traded through the system, with the cumulative turnover reaching nearly 8.5 billion yuan ($1.18 billion), according to data from the Chinese government.

As it stands: all participating power companies have met their reporting and compliance obligations for 2019 and 2020; data reporting for 2021 has been completed; and provincial-level governments are in the process of directing local companies to start collecting and reporting their emissions data for 2022.

Expanding the national ETS to include other high-emitting sectors could promote more trading activity in the market and incentivize companies to identify and realize more cost-effective emission abatement opportunities, as an article on China Dialogue has explained.

Tan describes the carbon market as “an important climate policy tool” for China, adding that it will play a key role in the country’s carbon peaking and net zero goals.

China reaffirmed its climate pledges at the 20th National Congress of the Communist Party of China in October. In particular, President Xi Jinping instructed the Party to “refine the statistics and accounting system for emissions trading” and “improve the emissions trading system.” These orders not only underscored the importance of China’s carbon market, but also called for a higher operational standard for it, Tan says.

According to Refinitiv’s carbon market survey from 2022, the biggest challenge for China’s national and pilot ETS programs has been identified as “opaque fundamental market data.” The finding is echoed by Chinese financial outlet Caijing, which wrote in a report in May that the “problems with the quality of emissions data” could cause the inclusion of other high-emitting sectors into the national ETS to be postponed by “one to two years.”

The other challenge is the lack of clear market policies, including the overarching legislation for the market, according to experts.

Adelphi’s Chen adds that the national ETS has limitations in guiding companies to reduce their emissions due to its backdating mechanism.

Chen explains that, even though 2022 is drawing to a close, the central government has yet to announce how it will allocate emissions permits among power companies for 2021 and 2022 or whether other sectors might be introduced into the national ETS. Since China Dialogue’s interview with Chen, China’s Ministry of Ecology and Environment has started to gather public opinion on its plan for setting the overall trading volume and allocating emissions for 2021 and 2022 for the power sector.

“In the European Union carbon market, we already know what the allocation plan is for 2030, so it can direct companies to reduce their emissions in a very forward-thinking way. However, China’s carbon markets cannot achieve this right now. Therefore, it would be very hard for it to lead companies’ efforts in emissions-cutting and investment,” Chen notes.

He adds: “As the trading takes place after the emissions have happened, (the Chinese system) has limited capacity in guiding the markets.”

However, Chen highlights the planning difficulties China is facing.

“China’s carbon emissions have yet to peak, so the country will face strong headwinds if it issues restrictive, quantitative, and strict targets for sectors, which may curb their development. How to design a quantitative and tightening carbon market before peaking emissions is a tough problem for the whole world,” Chen explains.

Asked about the achievements of the national carbon market so far, Chen points to the establishment of the trading system from technological standards to software and hardware, the carbon pricing mechanism, and companies’ awareness of paying for emissions.

“Many power groups in China are owned by the state and these state-owned groups have set up specific departments or companies to manage their carbon assets. This is a big step forward,” Chen says.

Reported by You Xiaoying.

This is an original article from China Dialogue, and has been republished here with permission.

(Header image: Workers check power lines in Beijing, 2021. Hao Yi/Beijing Youth Daily/VCG)