the road of carbon emissions trading from pilots to a nationwide scheme in china dr. xianbing liu...

The Road of Carbon Emissions Trading from Pilots to a

Nationwide Scheme in China

Dr. Xianbing LiuSenior Policy Researcher/Task Manager

Kansai Research Centre, IGES, JapanE-mail: [email protected]

Market Mechanism Seminar, 31 May 2015

Background A brief overview of global carbon pricing progress GHG ETS pilots in China The progress to a nationwide scheme Perspective of Chinese businesses to ETS Summary of the presentation

Structure of the presentation2


Alternative tools to control emissions3

A: Command-and-control approaches:For limited number of participantsEasy to control but little space for innovationTools that China usually adopts


B: Market-based instruments:E.g., carbon taxes and GHG ETSLarge number of participantsPossible technology innovationControl of the emissions objectiveLargely used in developed economiesChinese ETS pilots in the 12th FYP

C: Voluntary agreements:For limited number of participantsNo security to achieve the objectiveDesire to not impose obligatory regulationAlready in place in many countries but not sufficient to achieve strong reduction effort Integrative Policy Frame for Enhancing Business

Environmental Performance

4 Global existing and emerging carbon pricing


About 40 national and over 20 sub-nationaljurisdictions are putting a price on carbon.Together these carbon pricing instruments coveralmost 6 Gt-CO2 or about 12% of the annualglobal GHG emissions.

The world’s two largestemitters are now home tocarbon pricing instruments.

Source: (WB, 2014)

Prices in existing carbon pricing schemes5


168 US$/t-CO2 in the Swedish carbon tax

Price signal at 95 US$/t-CO2 for Tokyo Cap-and-Trade Program

Prices in the EU ETS remained in the depressed range of about 5-9 US$/t-CO2

Source: (WB, 2014)

Coverage of existing ETS in the world6


Emissions trading scheme The threshold for firms/installations to be covered

EU-ETS

Installations undertaking fuel combustion with a capacity of 20 MW Specific production thresholds for other industries Small facilities with emissions less than 25,000 t-CO2 per year

excluded in phase 3.

New South Wales GHG Reduction Scheme, Australia

Electricity sector only

Regional GHG Initiative Electricity sector only Generation capacity > 25 MW

Albert, Canada Facilities emitting more than 100,000 t-CO2 per year

New Zealand ETS Forestry, waste and agriculture included in succession from 2008 Some industries have thresholds for participation, e.g., liquid fuel

supply > 50,000 litres per year

Tokyo Cap-and-Trade Scheme, Japan

Threshold for inclusion: Energy use > 1,500 kilolitres of crude oil equivalents per year

Carbon Pollution Reduction Scheme, Australia

Threshold: Emissions > 25,000 t-CO2 per year

Western Climate Initiative Threshold: Emissions > 25,000 t-CO2 per year

Source: Fan et al. (2014)

7 China on the way to set up an ETS

Singapore-China Energy Forum, 2 October 2014

National commitment to reduce emissionsintensity by 40-45% in 2020 compared

to 2005 level at COP15

NDRC designated low-carbon developmentin 5 provinces and 8 cities and encourages

carbon trading as part of the strategy

State Council mentions plans to establishan ETS for the first time

The 12th FYP was announced and lists theETS as a central part of the country’s

energy and climate policy

NDRC officially approved carbon tradingPilots in 7 provinces and cities

State Council further clarified tasks toestablish the ETS during the 12th FYP

NDRC set interim measures to supportvoluntary GHG reduction transactions and

Indicates that CCERs can be used as offsets in the pilots

Design of ETS pilots, incl. review andapproval of NDRC on emissions limits,

allocation methods and detailed implementation plan for each pilot

Operation of pilot ETS with ongoing efforts to establish a national ETS after 2016

8 Locations of 7 Chinese ETS pilots

Beijing (北京)

Tianjin (天津)

Shanghai (上海)

Hubei (湖北)

Chongqing (重慶)

Guangdong (広東)

Shenzhen (深セン)


Background of the pilot regions9

Indicator Population GDP* CO2 emissions

GDP per capita

CO2 per capita

CO2 intensity

CO2 intensity target for 2015 from 2010

Unit Million Billion $ Mt 1,000 $ t t/1,000 $ %

China 1337 5930.5 8900 4.4 6.7 1.5 -17

Beijing 19.6 208 110 10.6 5.6 0.5 -18

Tianjin 13.0 136 156 10.6 12.1 1.2 -19

Shanghai 23.0 254 239 11.0 10.4 0.9 -19

Chongqing 28.9 117 176 4.1 6.1 1.5 -17

Hubei 57.2 236 377 4.1 6.6 1.6 -17

Guangdong 104.3 680 549 6.5 5.3 0.8 -19.5

Shenzhen 10.4 140 84 13.5 8.1 0.6 -21

EU-27 502 16176.2 3910 32.2 7.8 0.2 --

Note: * Exchange rate in 2010: 1 $ = 6.77 Yuan = 0.75 €Sourced from: (Zhang et al. 2014)

The pilot regions cover an area of 480,000 km2 with a total population of 199 millions. The pilot regions have different industrial structure and economic development level, produce

30% of China GDP and release more than 20% of the country’s CO2 emissions.


10 Chinese ETS pilot designs

RegionCO2 emissions covered (Mt)

Share of total emissions (%)

Type of emissions

No. of covered entities

Emissions threshold (t-CO2/a)

Historical period

Beijing 58 50 Direct + indirect 490 > 10,000 2009-2011

Tianjin 112 45 Direct + indirect 114> 20,000 (Ind.)

> 10,000 (Others)2010-2011

Shanghai 90 60 Direct + indirect 191 > 20,000 2009-2012

Chongqing NA NA Direct + indirect 242> 20,000

(or > 10,000 tce)2008-2010

Hubei 117 33 Direct + indirect 138> 120,000

(or > 60,000 tce)2010-2011

Guangdong 209 42 Direct + indirect 242> 20,000

(or > 10,000 tce)2010-2012

Shenzhen 32 40 Direct + indirectInd.: 636

Build.: 197> 20,000 2009-2011

All pilots > 620 7 (National total) Direct + indirect 2,249 -- --

EU-ETS (Phase I)

2014 47 Direct 11,500 > 10,000 1996-2004

Cap – Difficult to calculate; GHGs coverage – Direct and indirect CO2 emissions Company coverage – Heavy polluters (SOEs, private) Allocation method – Principally ‘Grandfathering’



RegionIndustries covered

in commonAdditional

industries coveredOther sectors covered

Beijing

Heat and electricity production

Iron & steel Nonferrous metals Petrochemical and

chemical Pulp and paper Glass Cement

17 manufacturing sectors

Commercial buildings, financial, hotel, restaurants, post, education, medical, retail, public, utilities, etc.

TianjinOil and gas exploration

Residential buildings

ShanghaiTextiles and building materials

Commercial buildings, financial, hotel, airlines, harbours, airports, railway, etc.

Chongqing -- --

Hubei Automobile --

Guangdong TextilesCommercial buildings, transportation and construction

Shenzhen26 manufacturing sectors

Commercial building and transportation (In consideration)

Large number of sectors covered Big difference in sector coverage between pilot regions Certain difficulties in future nationwide scheme




Registry infrastructure Each pilot develops its own registry Very similar with the EU-ETS registry

Compliance Surrounded allowance shall equal to verified emissions Penalty for non-compliant companies:• Fines about 3 times of carbon price

• The next year allowance shall be deducted for 2 times of the excess emissions

Offsetting Offsets – China Certified Emission Reduction (CCER) Including forestry carbon offset Limited to about 10% of total verified emissions



MRV Each pilot develops the MRV guidance Lack of reliable data and regulation Third-party entities conduct the validation and verification

→ Without accurate MRV system, ETS can not function

Market platform At beginning, financial institutions are not allowed to enter the market

→ With Hubei as an exception

→ Only spot market

MRV guidelines in the pilots14


Beijing Tianjin Shanghai Guangdong Shenzhen

General guidelines for monitoring and reporting ◎ ◎ ◎ ◎ ◎

General guideline for verification ◎

Power and heat ◎ ◎ ◎ ◎

Iron & steel ◎ ◎ ◎

Non-metal processing (Cement, ceramics, etc.) ◎ ◎ ◎

Chemical industry ◎ ◎

Petrochemical industry ◎ ◎ ◎

Non-ferrous metals ◎

Textile and paper ◎

Air transport ◎

Transport stations ◎

Service industry (Mainly for buildings) ◎ ◎ ◎

Other sectors ◎ ◎

Number of guidelines (General + Sectors) 1+6* 1+5 1+9 1+4 2+1* The guidelines for power and heat are separated. Source: Duan et al. (2014)

Process of MRV in China’s pilots15


Source: Duan et al. (2014)

Accounting and reporting (by enterprises)

Verification (by third parties)

Spot-checking (by governments)

Re-accounting (by enterprises)

Re-verification (by third parties)

Final reporting (by enterprises)

16 First year experience (2013-2014)


PilotCompliance

deadlinePerformance Data announced Measure taken Punishment

Shanghai 30 June100% (191/191)

Announce the performance rate

Strength communication, training in advance, allowance auction

Non

Shenzhen 30 June99.4% (631/635)

Release the (non) compliance enterprise list

Auction

Before July 10, 4 companies submitted allowance, no punishment

Beijing

15 June (No punishment before 27 June)

NARelease the non- compliance enterprise list

On-site enforcement, media exposure

NA

Guangdong 15 July98.9% (182/184)


Postpone compliance2 enterprises were punished

Tianjin 25 July96.5% (110/114)


Postpone complianceNo punishment measure

Legal penalty to be applied is rather low and inefficient at current stage. The information is not available for the public in most time. Allowances were short in the first year according to some multinational companies.

17 Credit prices of the pilot markets


Shenzhen

Beijing

Shanghai

Guangdong

Tianjin

Chongqing

Hubei

Prices do not represent the offer and demand; The pilots are more as compliance policy for the moment rather like market

instrument.

18 The market of Beijing pilot


Very low traded volume; Active trading around the compliance date; Carbon price is stable at around 50 Yuan/t-

CO2.

19 The market of Shanghai pilot


Around 30 Yuan/t-CO2

20 The market of Shenzhen pilot



21 The market of Tianjin pilot



To a nationwide ETS in China22


To be set up by 2016 Probably the regulation framework by 2016 Implementation at provincial level might be started by 2016 for the most

advanced regions Delay for the other areas

Standardization Common allocation rule and registries National standards

Chinese heterogeneity Already large differences in design and provincial economic structure for the

7 pilots Even stronger difference between all the provinces Difficulty of linkage between provinces in the future (Is the local

government willing to do this or not?)

Interim management measures of carbon trading in China23


Issued on December 10, 2014 by NDRC Six chapters and supplementary (48 articles) General principles Allowance management Emissions trading Verification and quotas clearance Supervision management Liability

o Supplementary

Enacted since 30 days after the issuing date

Interim management measures of carbon trading in China24


Overall, general rules regulated with the details to be specified for operation

An example: emissions allowances allocation Provincial authorities propose the key entities to be covered for NDRC

approval (The thresholds?) Cap setting by NDRC in consideration of national target, provincial

emissions amount, economic growth, energy structure and entities to be covered (Detailed emissions limits?)

Mainly free allocation initially and introduce paid allocation in due time (Schedule and detailed ratios?)

Certain amount of allowances reserved by NDRC for market stabilization and key construction projects, etc. (How much and how to use?)

GHG accounting and reporting guidelines25


Two batches of guidelines (on trial) have been issued by NDRC

1st batch on October 15, 2013 10 sectors: Power generation; power grid; iron & steel; chemical;

aluminium; magnesium smelting; plate glass; cement; ceramics; and, civil aviation

2nd batch on December 3, 2014 4 sectors: Petroleum and natural gas; petro-chemical; independent coking;

and, coal production

26 Major challenges


Idea problems: Balance in low carbon development and economic growth

Legislation problems: Delayed legislation Absence of data and standard Capacity building Link of regional pilot ETS State-owned enterprises to be involved in ETS No financial institution involved in the carbon market

(on the way to change)

27 Major challenges


Setting an ETS requires a long process over years (around 7 years for EU-ETS)

1998: Thoughts 2001: Proposition 2005: Start of trial phase What will happen after 2020?

Need a transparent, coherent and flexible legislation framework

Transparent: To assure reaching targets with equity among participants Coherent: To integrate other policy interventions Flexibility: To adjust and correct structural errors in time

Question: The energy prices would be increased due to the introduction and implementation of market-based climate polices, such as imposing energy taxes or carbon taxes in the sector of energy production and transition. Accordingly, the industrial company’s energy consumption cost would be increased. We would like to understand the viewpoint of your company to the energy cost increases due to the climate policy interventions. Please circle one letter to each increase ratio to indicate the affordability degree of your company.

Your company’s choice Energy

cost

increase

ratio (%)

Very low;

Easily

acceptable

Not high;

Acceptable

Moderate;

Barely

acceptable

High;

Rejection

Very high;

Strong

rejection

0.1 ○A B C D E

0.3 ○A B C D E

0.5 A ○B C D E

0.7 A ○B C D E

1.0 A ○B C D E

3.0 A B ○C D E

5.0 A B ○C D E

7.0 A B ○C D E

10.0 A B ○C D E

15.0 A B C ○D E

20.0 A B C ○D E

30.0 A B C ○D E

50.0 A B C D ○E

70.0 A B C D ○E

100.0 A B C D ○E

15 options in Policy-orientedenergy costincreases

Fivelevels of acceptance

28 MBDC card measuring cost affordability


29

Energy Cost Increase Ratio

(%)

Strong Rejection

(%)

Rejection(%)

Barely Acceptable

(%)

Acceptable(%)

EasilyAcceptable

(%)

Total(%)

0.1 0.0 0.0 1.8 33.3 64.9 100.0

0.3 0.0 0.0 5.4 45.1 49.6 100.0

0.5 0.0 0.9 14.4 50.5 34.2 100.0

0.7 0.0 4.5 17.1 50.5 27.9 100.0

1.0 1.8 8.1 37.8 35.1 17.1 100.0

3.0 6.3 14.4 43.2 27.9 8.1 100.0

5.0 7.2 18.9 46.9 21.6 5.4 100.0

7.0 11.7 29.7 42.3 12.6 3.6 100.0

10.0 19.8 42.3 29.7 6.3 1.8 100.0

15.0 31.5 41.4 24.3 2.7 0.0 100.0

20.0 46.0 41.4 10.8 1.8 0.0 100.0

30.0 55.9 37.8 5.4 0.9 0.0 100.0

50.0 75.7 21.6 2.7 0.0 0.0 100.0

70.0 84.7 15.3 0.0 0.0 0.0 100.0

100.0 87.4 12.6 0.0 0.0 0.0 100.0

Responses of Chinese companies (N=111)


02

04

06

08

01

00

Pe

rce

nta

ge o

f th

e sa

mpl

es

0 20 40 60 80 100Energy cost increase ratio (%)

Observed data of easily acceptable & acceptable Observed data of barely acceptable and over

Regression curve of easily acceptable & acceptable Regression curve of barely acceptable and over

50% of the samples corresponds to the ratios of 2.8% and 9.3% on the two curves.

30 Simulation of Chinese samples (N=111)

Two curves were simulated:One is the sum of easily acceptable + acceptableThe other is the sum of easily acceptable + acceptable + barely acceptable

The real affordable ratio shall be between these two curves.


31 Affordable energy cost increases by sector

Variable Percentile Centile (%) 95% Conf. Interval (%)

Panel A: All the samples (N=111)

Mean of μ: 8.8%

The std. dev. of μ: 9.0%

10 0.72 0.54 1.94

30 3.95 2.57 5.08

50 6.59 5.20 6.97

70 10.23 7.08 12.86

90 18.50 13.83 28.91

Panel B: Samples from iron & steel sector (N=34)

Mean of μ: 8.8%


10 0.61 0.32 1.73*

30 3.37 0.99 6.72

50 6.74 4.36 10.35

70 11.20 6.75 16.03

90 17.94 13.14 52.6*

Panel C: Samples from cement sector (N=17)

Mean of μ: 7.7%


10 2.19 1.94 5.08*

30 5.17 2.25 6.81

50 6.75 5.08 10.15

70 9.79 6.47 13.12

90 14.31 10.15 19.05*

Panel D: Samples from chemical sector (N=27)

Mean of μ: 9.9%


10 0.84 0.50 3.19*

30 3.65 1.58 5.20

50 5.20 3.61 9.13

70 8.31 5.20 25.71

90 29.58 11.13 44.08*

*: Lower (upper) confidence limit held at minimum (maximum) of sample.

Significantly and negatively associated with competition level;

The large companies have higher affordability.


32 Carbon prices affordable for companies of China

Energy typeEnergy use ratios (%)

Current energy price a Emission factor b

Iron & steel Cement Chemical

Electricity 27.85 31.19 18.62 0.618 Yuan/KWh 0.8592 t-CO2/MWh

Coal 61.82 61.67 32.10 746 Yuan/t 1.9383 t-CO2/t

Fuel oil 0.64 2.35 34.86 4450 Yuan/t 3.0358 t-CO2/t

Natural gas 1.03 0.00 2.04 2.78 Yuan/m3 2.1731 t-CO2/1,000 m3

Steam 0.66 0.00 6.51 230 Yuan/t 0.3231 t-CO2/t

MEANAFFORD 8.8% 7.7% 9.9%Data source: a www.askci.com;

www.cngold.org;b (Su et al., 2009); (NDRC, 2010).

Affordable carbonprice (Yuan/t-CO2)

42.7 38.6 83.7

iii

iii

iii

iii

ratioEnergypriceEnergy

pricecarbonAffordableratioEnergyfactorEmission

amountUsepriceEnergy

pricecarbonAffordableamountUsefactorEmissionMEANAFFORD


33

B: GHG ETS

Attributes Levels

Cap setting

1) Based on the company’s historical emissions;

2) Based on the sector’s advanced emission levels;

3) Differentiated measures for the existing and new established companies

Allowance allocation

1) All for free;2) 5% auction, the rest for free;3) 10% auction, the rest for free;4) 30% auction, the rest for free

Penalty 1) A fine the same of market price of carbon emissions; 2) 3 times of market price; 3) 5 times of market price

Compliance period

1) 1 year;2) 3 years

Attributes and levels of ETS for choice experiment

Policy attribute

Option A01 Option B01

Cap settingBased on the company’s

historical emissions

Based on the historical emissions for the existing companies, and the sector

advanced emission levels for the new entrants

Allowance allocation

5% auction, the rest for free All for free

PenaltyA fine of 5 times of the

market priceA fine of 3 times of the

market price

Compliance period

1 Year 1 Year

Please tick the one you prefer

□ □

Design Expert 8.0 was used; D-optimal design applied; 12 Choice sets constructed; Two versions, 6 sets for each; An example set of GHG ETS in China.


34 Company GHG-ETS choice preference

a) The companies prefer a hybrid method in cap setting (CAP-C); b) High penalty (5 times) is needed for changing the company’s policy choice;c) Auction ratio for allocating the allowances is insignificant in this analysis;d) Compliance period is insignificant in determining the choices.

Attribute MNL RPL LC

Class 1 Class 2

CAP-B 0.093 0.085 -0.197 0.782

CAP-C 0.845*** 0.850*** 0.863*** 1.350***

ALLOCATION 0.058 0.017 -0.276 2.689

PENALTY-B -0.136 -0.141 -0.390 0.792

PENALTY-C -0.840*** -0.856*** -1.339*** 0.634

COMPLIANCE -0.229 -0.235* 0.075 -0.774

Class probability 0.731 0.269

Log-likelihood -626.46 -625.69 -387.17

Pseudo R squared 0.125 0.126 0.459

Obs. 1033 1033 1033

Notes: 1) The standard errors are not reported to save space.

2) * and *** denote that the parameter is significant at 10% and 1% level, respectively.


35 Business laggard practices in carbon management


No. Descriptions Count %

Panel A: The status of energy saving target setting of companies (N=78)

1 Not set the quantitative target yet 1 1.3

2 Have 5 to 10 years medium and long term target 16 20.6

3 Have 3 to 5 years short term target 42 53.8

4 Have annual target 50 64.1

5 Have internally decomposed targets by division and production process 58 74.4

Panel B: Internal energy monitoring and statistics of companies (N=78)

1 Not set up internal energy use monitoring and statistics system 0 0.0

2 Have comprehensive energy use statistics system at company level 49 62.8

3Have a relatively complete energy statistics system, with key energy-using

equipment and process monitored59 75.6

4Have complete energy statistics system and specific division and staffs for

energy management62 79.5

GHG mitigation target (N=78)

No. Descriptions Count %

1 Not yet and no plan 15 19.2

2 Not yet but have plan 36 46.2

3 Have the target in carbon emissions intensity 23 29.5

4 Have the target in mitigating absolute carbon emissions 18 23.1

Survey to cement companies in FY2014

36 Preparation and barriers for ETS (Cement sector)


Possibility as GHG ETS target (N=78)

Categories No. %

Very high 25 32.1

High 26 33.3

Moderate 18 23.1

Less 3 3.8

Not at all 6 7.7

An

nu

al e

mis

sion

sP

rep

arat

ion

s fo

r E

TS

Bar

rier

s fo

r E

TS

This presentation overviews the practices of China in ETS pilots and efforts

for the establishment of a nationwide scheme;

Certain experience has been accumulated through the pilots and overall

direction was clarified for an ETS at country level;

Many details to be specified for supporting the practical operation of the

national ETS;

The business perspective was shared using the results from questionnaire

surveys to Chinese companies;

The practices of Chinese businesses in carbon management are much laggard

than the actions for energy saving;

Capacity building in MRV of carbon emissions at business level is highly

necessary for smooth operation of ETS in China;

Nevertheless, giving modest carbon prices could be accepted by Chinese

companies, even for those from energy-intensive sectors.

37 Summary of the presentation


38

Thank you for your attention!


the road of carbon emissions trading from pilots to a nationwide scheme in china dr. xianbing liu...

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