China Seeking to Set Carbon Price Through its Emissions Trading System (ETS)

China is seeking to set a carbon price through its Emissions Trading System (ETS). A specific carbon tax for industry is currently not considered in order to ease the burden on smaller businesses and avoid jeopardizing China’s economic development. An “Environmental Protection Tax” was officially introduced on January 1, 2018, however, the tax is levied as punitive measure for companies exceeding permitted volumes of solid waste, air, noise and water pollution.

Currently emissions are traded in eight pilot cities and provinces. Price averages for 2018/19 in those pilots are stated in the 2019 China Carbon Pricing Survey (the “Survey”):

Bejijng	Above CNY 60/ton CO₂
Shanghai	Around CNY 30 -40/ton CO₂
Hubei	Steady around CNY 30 – 40/ton CO₂
Shenzhen	Around CNY 20/ton CO₂with a dip and ensuing re-appreciation
Guangdong	Stable around CNY 20/ton CO₂
Fujian	Around CN 20/ton CO₂with a dip and ensuing re-appreciation
Chongqing	Sharp price decrease since 2018, June 2019 CNY 5 – 10/ton CO₂
Tianjin	Low trading volume, CNY 10 – 15/ton CO₂

Among the most advanced ETS pilot systems is Shanghai’s ETS which was launched November 2013. Operated by the Shanghai Environment and Energy Exchange, thresholds are divided into industrial (chemical, iron, steel, etc.) and non-industrial (hotel, aviation, ports, shipping, etc.) sectors. Thresholds differentiate into: Over 10.000t CO₂/year for most sectors, 100.000t for shipping and 20.000t for new entrants in power and industry sectors. Caps were set considering the predicted economic growth during the 12^th 5-Year-Plan, the reduction target of carbon intensity per unit of GDP, and contributions from pilot enterprise to carbon reduction. Free allocation of allowance is based on different methodologies for different industries. Sector-specific benchmarks are applied for e.g. power and heat; historic emissions intensity for industry, aviation or shipping while historic emissions are used for e.g. buildings. The calculation is mostly based on 2014-2016 data.

The SEEE trades Carbon Emission Allowances (SHEA) and CCER (China Certified Emission Reductions) through open bidding and negotiation transfer for single transactions over 100,000t CO₂. Prices are not fixed but negotiated through open bidding. Other regions have set up similar systems, but have adjusted details to local industries and their respective socio-economic power.

In addition, China announced in 2017 that it was to roll out a nationwide ETS, with simulation trading expected to start 2020. Allocation of allowances are expected to be based on historic emission data of companies and benchmarking for specific industry sectors. Caps are set for carbon intensity (carbon produced per unit of production), but not for absolute carbon emissions.

According to the “Survey” the majority of surveyed participants expect an average carbon price at about 30CNY/ ton of CO₂. The government is currently in the process of strengthening the legal and regulatory framework as well as building capacity for regulators. It is designed as a carbon intensity cap-and-trade system, initially targeting specific types of power generating plants. Other industries will be included over time. Main factors influencing prices are identified as ‘cap setting and free allocation’ and ‘government regulation and intervention’.

Activity Rating: *** Moving Forward

China is thoroughly preparing the roll-out of its Emissions Trading System that will govern the price on carbon, which is commendable given the difficulties that e.g. the EU has encountered with the ETS. However, there are several issues to point out. First of all, implementation is going slower than planned and will thus slow down the impact on carbon emissions. Secondly, the ETS only stipulates limits for carbon intensity, not for absolute carbon caps. That means production expansion may still result in higher carbon emissions overall, even though emission per unit produced may fall. And finally, according to a 2018 study by the National Center for Climate Change Strategy and International Cooperation a meaningful carbon price of min. CNY 150/ton CO₂ would have the biggest impact with a significant 36% reduction of emissions in the power sector. The current prices fall far short of having a real impact.

As to the “Environmental Protection Tax”, given that tax rates can be set locally based on socio-economic strength of the respective region, it may encourage pollution havens as polluting industries may move away from provinces with higher socioeconomic levels and higher taxes. In addition, it does not specifically tax for CO₂ emissions.

Take Action

Message:

We commend China on having proposed a comprehensive and far-reaching Emissions Trading System that will compel companies to pay a price on their carbon emissions. We acknowledge that given China’s size, complexity of industry structure and the need for continued economic development the task of implementation is immensely difficult. And because the ETS promises to be a crucial mechanism to bring down CO₂ emissions, it is of utmost importance that any carbon price creates real impact. Therefore, we ask that the Government of China consider a higher floor price for carbon and not leave price regulation to the exchange platforms and the market. We also ask that the government consider setting absolute carbon emission caps, not caps on carbon intensity, to reduce overall emissions. We ask that all possible resources are put onto the roll-out of the national ETS system to ensure its impact can be felt as early as possible.

Contact:

Ministry of Ecology and Environment of the People’s Republic of China

Website to leave message: http://www.mee.gov.cn/hdjl/bzxxzs_1/

Or:

National Center for Climate Change Strategy and International Cooperation

国家应对气候变化战略研究和国际合作中心

Address/ 地址：

北京市西城区后英房胡同5号环境国际公约履约大楼邮政编码：100035

Environmental Convention Compliance Building

No. 5, Houyingfang Hutong, Xicheng District, 100035 Beijing

Fax/ 传真：（+86）010-8220 0550

Sources:

http://www.mee.gov.cn/xxgk2018/xxgk/xxgk13/201911/t20191112_742030.html?keywords=碳排放交易市场

https://www.china-briefing.com/news/china-environmental-protection-tax/

http://www.chinatax.gov.cn/chinatax/n810214/n810641/n2985871/n2985888/n2985983/c3006066/content.html

https://ets-china.org/ets-in-china/

Slater, H., De Boer, D., Qian, G., Shu, W., 2019, 2019 China Carbon Pricing Survey, December 2019, China Carbon Forum, Beijing

http://www.ncsc.org.cn/yjcg/international_review/201804/P020180920511277673481.pdf

https://www.eex.com/blob/99210/22f1151f649bb90e2fb772d0640cab3a/seee-brochure-data.pdf