28 April 2015 International Share on: China: An Update on the Development of a National ETS As discussed in an earlier post, China has seven regional pilot emissions trading schemes (“ETS”). Between June 2013 and June 2014, China implemented pilot programs in five cities—Beijing, Shanghai, Chongqing, Shenzhen, and Tianjin—and two provinces—Guangdong and Hubei. A stated objective of the pilot programs is to guide the eventual design and implementation of a nationwide carbon trading scheme in 2016.The pilot programs vary considerably. Each of the seven pilot schemes has developed unique systems and rules for establishing emissions caps for covered sectors, allocating emissions allowances, monitoring and reporting emissions, offsetting allowances with carbon credits, and registering and trading allowances and offsets. The various pilot programs have also consistently varied in terms of volume traded and average price. Such variation across the existing pilot programs may provide important insight to the National Development and Reform Commission (“NDRC”) in developing a nationwide ETS. NDRC can look to the experience of the various programs and replicate those elements that have worked well, while avoiding problematic aspects of the pilot programs. Despite the benefits, the considerable differences in the pilot ETSs could pose challenges in transitioning from seven regional schemes to a unified program and raise questions regarding the ultimate design of a nationwide ETS.Regarding the final design of the nationwide ETS, it is not yet clear to what degree local or regional distinctions will remain under the nationwide program. Several of the pilot programs have expressed some interest or willingness to pursue linkages or partnerships with other of the pilot programs. For example, the Guangdong ETS is reportedly exploring the possibility of linking with the Shenzhen ETS. The two markets have significant variations that would complicate such cooperation. For example, the Shenzhen pilot establishes targets based on emissions intensity, while the Guangdong pilot sets an absolute emissions target. Moreover, the two programs cover different sectors and have different coverage and reporting thresholds. Efforts to link the two programs could provide important lessons in designing a nationwide ETS, and a fruitful linkage, despite the many differences, could support the notion that provincial authorities should be allowed some degree of flexibility to maintain distinct features of existing programs.NRDC has not yet indicated how it will handle the logistical issues that could arise with the transition from seven regional schemes to a unified national program. For example, NDRC has not yet addressed whether and how they will allow for the carry-over of unused allowances from the pilot ETSs. China’s Transition to the National ETS There have been a number of recent announcements and developments relating to the nationwide ETS. On December 10, 2014, NDRC published Provisional Measures for the Administration of Carbon Emissions Trading (“Provisional Measures”), providing basic guidelines for the nationwide ETS. These high-level guidelines focus mainly on core principles and the division of responsibilities between national and provincial authorities, but provide few specific details. According to the Provisional Measures, the NDRC will set caps at the national and provincial levels and will establish national standards for scope and coverage, allowance allocation, and monitoring, reporting and verification. The provincial Development and Reform Commissions will be responsible for the implementation of the ETS in their region. In February 2015, a senior official with the NDRC’s climate change department announced that China plans to initially cap emissions from six sectors (power generation, metallurgical, nonferrous metal, building materials, chemicals, and aviation). Also in February 2015, NDRC published an article detailing a basic roadmap for the development of the nationwide ETS. In the remainder of 2015, the State Council will finalize regulations for the national system, while the NDRC issues supporting details and technical standards. For example, the NDRC plans to establish the total emissions levels, as well as allocation methods for national carbon emissions. A trial operations period will begin in 2016 and continue through 2020. The NDRC views this second phase as an operational improvement phase, during which it will gradually incorporate provinces into the scope of the ETS and make all necessary adjustments and improvements. A stabilization and maturation phase will begin in 2020, during which NDRC will work to diversify the types of products traded on the nationwide ETS and potentially explore the feasibility of linking with international carbon markets. While these recent announcements shed some light on China’s developing carbon market, significant questions regarding the ultimate design of a nationwide ETS in China remain.