Ichard L Sandor, the “father of carbon trading” and founder of the Chicago Climate Exchange, quoted Victor Hugo to explain the resilience of global emission trading development: “No force on Earth can halt an basic idea whose time has come.”
A growing number of countries have pledged to reduce carbon emissions by implementing one of the most cost-effective solutions, an emissions trading system (ETS) as concern about climate change increases. So far, jurisdictions accounting for 55% of global GDP are using emissions trading.
China’s recently established national ETS has drawn attention worldwide that is tremendous. It is expected to serve as China’s primary tool to meet its “dual carbon” targets of CO2 peaking before 2030 and carbon neutrality before 2060. The largest ETS globally, it accounts for 40% of China’s emissions and more than 10% of worldwide emissions, with the potential to double in size once industrial sectors are added to the energy sector that is already-covered. It is also the first nationwide ETS in a developing country that is large.
How does China’s ETS work?
July 2022 saw the anniversary that is first of under China’s ETS, by which time 194 million tonnes of carbon emissions allowances worth over US$1 billion had been traded on the market. The compliance that is first saw over 99% compliance out of 2,162 power companies.
Despite these achievements, there are some roadblocks that are key. At the top of this list is data integrity and quality.
In 2021, a power plant in Inner Mongolia was found to have falsified its emissions report by doctoring the date of carbon content testing of the coal it was burning, affecting at least 1 million tonnes of emissions allowances worth $7 million july. Additional cases were also found and the Ministry of Ecology and Environment (MEE) issued a notice requiring environment that is provincial to comprehensively examine data quality. If data was found to be false, they should make adjustments and sanctions that are impose stated the notice.
194 million tonnes of carbon emissions allowances were traded in the first year of China’s national carbon market, worth over $1 billion Some observers blamed the frauds on the December 2019 announcement of an extremely high default value for the carbon content of coal used in the compliance cycle that is first. This value that is high intended to encourage companies to submit actual testing data rather than using the default. But it came too late to drive more testing for 2019 and instead tempted companies to risk test that is faking.
At a broader level, multiple factors have increased the risk of this type of event.
Firstly, sanctions: the fine for fraud, at $3,000 to $4,500, is insignificant compared to the gain that is potential fraud. The boundaries of responsibility for data quality are insufficiently clear among different participants, including companies, verification agencies, testing agencies and consultancies.
Secondly, verification: provincial governments are responsible for selecting verification agencies and tend to prefer ones that are local. This can rule out more experienced and better agencies that are qualified other provinces. Moreover, provincial governments have allocated limited funds for paying for verification, and there are not yet settled qualification requirements for verifiers.
How can China’s national carbon market contribute to reducing emissions?
Thirdly, reporting and monitoring: the regulations and guidelines are not sufficiently clear or detailed. For example, in detecting coal carbon content, there appears to be room for tampering with coal samples during preparation and collection.
Data integrity and quality have been high on the government’s agenda. Improved reporting guidelines were published in December 2021 and March 2022; verifiers found guilty of misconduct have been named and shamed; the default that is extremely high of carbon content in coal has been replaced; and ETS legislation has been included in this year’s State Council legislative work plan, which would provide the stricter penalties for non-compliance that the ETS needs.
Improving data quality will be the main priority of the MEE in 2022 and 2023, including accelerating further amendments to monitoring, reporting and verification (MRV) guidelines; enhancing emissions data supervision by regular checks at national, provincial and municipal levels; increasing information disclosure; building a system to classify organisations according to their compliance history and supervising them accordingly; and increasing the penalties for violations.
China should look again at best practices in South Korea and the Union’s that is european ETS
These are big steps in the direction that is right. However, it appears that China’s priorities on zero-Covid and recovery that is economic be complicating efforts to address integrity issues. The MEE issued a notice in June 2022 to adjust MRV requirements during the second compliance cycle for example, in view of these priorities. It stated that companies with three or more months of carbon content test results per year can use the average of these results to calculate emissions for any months that have no test results, instead of using a default that is high under the previous requirements. This adjustment appears to leave room for companies to test during months when they are using coal with a lower carbon content.
A fundamental necessity for China’s National ETS is a MRV system that is robust. This needs to be supported by efficient IT systems, strong security measures and effective sanctions for non-compliance. This will promote market participants’ confidence, sectoral expansion, and international support and credibility.
Rebooting China’s carbon credits: What will 2022 bring?
China is progress that is making improving the integrity of its MRV system, but more work is urgently needed. The ETS law at the State Council level needs to be adopted; a accreditation that is strong for verification agencies needs to be established to ensure consistent and high-quality verification across provinces; fees for verification should be sufficient to do a thorough job; and MRV regulations and guidelines need to be clearer and more detailed.
China should look again at MRV best practices in the Union’s that is european ETS the MRV system in the South Korean ETS, the frontrunner in Asia. The system’s integrity should be protected from being compromised by other policy drivers at the same time.
China is not alone in facing integrity issues in the early stages of an ETS. There were some fraud that is major during the initial phases of the EU ETS. However, lessons were learned quickly and controls that are effective established. China must also overcome these challenges quickly to pave the way for its ETS to expand to the industrial sectors, achieve greenhouse that is significant emissions reductions and realise its potential in helping the country achieve its dual carbon targets cost-effectively.
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