Actual allowance trading between power generators in China’s national emissions trading scheme is unlikely to start before 2020, while other sectors could be brought into the market even later than that, according to the government’s scheme design plan published Wednesday.

The nine-page document contained little new beyond what was revealed at Tuesday’s press conference formally launching the scheme, but it gave more in-depth, albeit ambiguous, information on some essential issues.

In the plan, the National Development and Reform Commission (NDRC) estimated they would spend approximately 12 months building the system (MRV, trading platform, data reporting) and another year testing the system through a simulated market before actual trading for the 1,700 power companies can begin.

That suggests that the market simulation, which is not expected to feature any compliance obligations or real allowances changing hands, would not start until 2019, and that the real market would most likely start in 2020, though each of those “approximate” one-year building and testing phases could end up being shorter or longer than anticipated.

The plan said that once trading among power companies is “stable”, officials would bring in key emitters from other industries, implying that they may not be formally covered by the market until 2021 at the earliest, though again there is a chance the government would seek to do it sooner.

Legislation and policy plans in China are often written ambiguously so as to allow for abrupt or last-minute changes if circumstances demand.

The document also confirmed comments made by officials during Tuesday’s press conference that in addition to bringing in new sectors, the NDRC would look to eventually lower the entrance threshold from the initial 26,000 tonnes of CO2/year in order to increase participation.

Below is an overview of what is known – and unknown – about the Chinese ETS after the announcements the past couple of days:

  • Coverage– Around 1,700 power generators emitting some 3 billion tonnes of CO2 per year will be included initially, with other sectors joining at a later stage. There is no clear information available on which criteria will serve as the basis for decisions on when to expand the scheme.
  • Cap– There is no information about the emissions trajectory that will serve as the basis for cap-setting in the ETS, although China’s Paris obligation to peak emissions by 2030 and cut carbon intensity 60-65% below 2005 levels over that period is likely to play a guiding role. The market plan said the emissions cap will be set in a “tight and proper range” to inspire companies to dig deeper to achieve emission cuts, but among the government’s objectives is to not increase cost pressure on China’s power sector as a whole.
  • Allocation– Allocation for the power sector will be based on benchmarking. The market plan said that while the NDRC will have an influence on allocation methodologies, it will be up to provincial governments to carry out allocation to local companies – presumably within the limits of an overall cap set for the province.
  • Trading– When real trading starts, likely in 2020, market access will only be available to power companies (and not intermediaries) and they will only be able to trade spot permits. Other compliance buyers will join as more sectors are added, but financials and other trading firms that could unduly affect prices are expected to be excluded until the market is considered sufficiently mature. Other tradable products such as allowance futures and offsets will also be disallowed until the market develops and rules are finalised. It remains unclear whether brokerages will be allowed to offer OTC services.
  • Pricing– The market plan aims for a “reasonably modest” allowance price, and says that market behaviour will be supervised in order to “set the price on a right track to reflect mitigation cost and supply and demand fundamentals.” A price containment mechanism will also be put in place to prevent irregular fluctuations and market manipulation.
  • Compliance regulations– It will be up to provincial governments to impose penalties on companies failing to surrender sufficient permits, and that will be done according to legislation, the market plan said. However, ETS legislation has yet to be passed and it is uncertain when that might happen, so the plan did not specify penalty levels. Violators will be recorded in national credit rating systems, making it more difficult for them to obtain loans from financial institutions.
  • Regional pilot markets– Beijing said power companies (and later, emitters from other sectors) covered by any of China’s regional pilot markets will no longer have to comply with them once they are brought into the national ETS. However, there is currently no definition for what constitutes being promoted to the national scheme, so for now it is unclear whether generators will need to comply with their respective regional schemes during the national design and simulation phases.

By Stian Reklev and Kathy Chen

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