New carbon trading rules revealed

The recent administrative regulations adopted by the State Council, China's Cabinet, to manage the nation's carbon trading market — the world's largest — will help resolve emerging problems in the program and ensure that the market plays a significant role in helping the country realize its ambitious climate targets, experts said.

Compared with previous regulations, which were issued by departments under the State Council, the new ones include much stricter penalties for violations to help deter companies from fraudulently understating their emissions, they said.

Formulated based on pilot experiences and foreign standards, a stipulation was added to gradually introduce a mechanism to charge a fee so that companies who need emissions allowances must pay for them, which will help further raise enterprises' awareness on low-carbon development, they added.

Premier Li Qiang signed a State Council decree last month to adopt the new regulations, which will take effect on May 1.

Carbon trading is the process of buying and selling allowances to emit greenhouse gases among designated emitters.

The country initiated pilot carbon trading programs in October 2011 in seven parts of the country, including Hubei province, Beijing and Shanghai. The pilot programs in these regions started trading in 2013.

The national carbon trading market, which currently only involves the coal-fired power generation sector, started trading in July 2021. The market covers 2,257 power-generating enterprises.

Overall, these companies contribute roughly 5.1 billion metric tons of carbon dioxide emissions, representing about 40 percent of all emissions in the country, according to the ministry.

The national program imposes carbon emission limits for every unit of electricity a power plant generates. After each cycle of trading, operators can sell any carbon allowances they have left after complying with the emissions benchmark. If they exceed their limits, they will have to buy allowances.

Currently, companies get the allowances for free. But the mechanism can reward companies that cut their emissions intensity by allowing them to sell their allowances, and make it so those that do not must purchase them.

Zhu Xiao, a law school professor at the Renmin University of China, said that previously, the operation of the country's carbon trading activities was regulated by rules issued by the National Development and Reform Commission and the Ministry of Ecology and Environment.

In 2014, the commission unveiled an interim regulation on carbon trading. After the responsibility for tackling climate change and emission reductions was transferred to the ministry in a 2018 institutional reshuffle of the State Council, the ministry made public a regulation for trial implementation in 2020.

Compared with the previous rules rolled out by the two State Council departments, the administrative regulations have much greater clout, the professor said.

The national carbon market has demonstrated its role as a market-based instrument that promotes low-carbon development, according to the ministry.

By the end of last year, the national carbon market had seen over 440 million tons of carbon emission allowances change hands for almost 24.9 billion yuan ($3.5 billion).

Companies that exceed their emissions benchmarks are given a yearlong compliance period to bring their emissions down.

During the first compliance period from 2019 to 2020, the trade volume jumped by 19 percent, and the money earned from selling emission allowances increased by 89 percent in the second period from 2021 to 2022, the ministry stated, adding the price of emission allowances has climbed to 80 yuan per ton, compared with 48 yuan per ton when the market was launched.

Despite the progress, the ministry has found that its regulation for trial implementation has failed to adequately address situations that have emerged in the market's governance, the ministry said in a media release following the adoption of the administrative regulations.

The previous regulation for trial implementation, for instance, did not sufficiently ensure the quality of carbon emissions data or crack down on violations, it noted.

Furthermore, Zhang Yaobo, an official with the Ministry of Justice, said in a news conference on Feb 26 that some companies cheat when reporting their emissions data.

The administrative regulation has included much stricter sanctions for violations, including data falsification.

Technical service providers for carbon emissions data will have their illicit gains confiscated and will face fines worth five to 10 times the gains, the new regulations said. The penalties should be a minimum of 200,000 yuan and not exceed 1 million yuan.

Executives responsible for the violations and individuals directly involved will also be punished. Aside from being fined from 20,000 to 200,000 yuan, they will be banned from compiling annual carbon emissions reports and conducting emissions data auditing business for five years.

The ministry's regulation for trial implementation only stipulates penalties for companies, not individuals, that commit such violations, and fines only range from 10,000 to 30,000 yuan.

Xu Huaqing, director of the National Center for Climate Change Strategy and International Cooperation, said the new regulation will help strengthen emission data management, which is key for the market's operation.

"The quality of greenhouse gas emissions data is critical for ensuring the healthy and orderly development of the national carbon trading market," he stressed.

Currently, however, the emissions data management at some key carbon emitters in the market is poor, he said. They not only lack adequate institutions for the management of carbon data and carbon assets but also don't have dedicated posts for the work.

In addition to penalties for data fraud, the administrative regulations also lay out explicit directives on a series of other key work procedures concerning data quality management, including data verification, information disclosure and supervision, Xu said.

He said these stipulations can motivate key carbon emitters and relevant technical services providers to carry out emissions data quality management in a more standardized manner.

Xu called on the government to establish an information disclosure mechanism to further enhance its governance over emissions data.

"Related departments and key carbon emitters should make public carbon emissions data, the results of data verification and relevant administrative penalties as required to uphold the public's right to be informed about, be involved in, express views on and supervise the issue," he said.

According to the administrative regulation, companies that fail to purchase allowances to comply with their emission limits during the designated time allotted in each compliance period will also have to pay significantly higher penalties.

Under the new administrative regulation, such companies will be fined five to 10 times the average price of carbon emission allowances in the month prior to the designated time. The previous rule only stipulated a maximum fine of 30,000 yuan.

In a case in the Ningxia Hui autonomous region, for example, a company, the name of which was not disclosed, only bought 4,114,678 tons of the 4,285,582 allowances it needed to buy before Dec 7, 2021, according to Ningxia's department of ecology and environment.

The company, however, was only given a penalty of 29,000 yuan in accordance with the ministry's regulation for trial implementation.

Lai Xiaoming, chairman of the Shanghai Environment and Energy Exchange, lauded the administrative regulation's stipulation of gradually introducing paid allowances into the national carbon trading program.

He said the introduction of the paid allowances will help further enhance companies' awareness that "emitting carbon dioxide is costly, while reducing emissions brings returns", which will help promote low-carbon development.

The administrative regulation will, he said, "provide a legal guarantee for the country's efforts to accelerate the construction of an even more effective and energized carbon market with international influence".