1. Background International Background Development of the EUETS National Background Political Support...2

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2 Table of Contents 1. Background International Background Development of the EUETS National Background Political Support Political Support on the National Level Political Support on the Provincial Level Development of China s ETS pilots Comparisons between ETS pilots and the EUETS EUETS Comparison between the Guangdong Pilot ETS and the EUETS Comparison between the Hubei Pilot ETS and the EUETS Comparison between the Shanghai Pilot ETS and the EUETS Comparison between the Tianjin Pilot ETS and the EUETS Comparison between the Shenzhen Pilot ETS and the EUETS Comparison between the Beijing Pilot ETS and the EUETS Comparison between the Chongqing Pilot ETS and the EUETS Horizontal Comparison of Different ETS Pilots Basic Elements Allowance Allocation Trading Offsets Incentive and Punishment Mechanisms MRV Legislative Documents Compliance Cycle Summary of Comparisons Enterprises capability to participate in emissions trading Management capability...53

3 3.1.1 Soft Factors Hard Factors Capability on Managerial Mechanism Development Capability on Emissions trading Employee Capability Specialists Authority Management Compliance Capability MRV Development Capability Compliance Procedure Investigation on Organizations Participation in Emissions trading Investigation Introduction Investigation Method Results Analysis Capability of Organizations to Conduct Carbon Asset Assessments Expectations on Participating in Emission Trading Expectations for the Shanghai Pilot ETS Demands of Participating in Relevant Training Development of China s Emissions Trading Markets in Specialized Carbon Emissions Management Services Emergence of Integrated MRV Systems Capital Transfers of Exchanges...73 Reference...75 Annex I Survey Statistics...77

4 Preface This report is based on information and legal documents published by 30thDec2013, some of which may be out of date by the publication date. This report was conducted by Environomist Ltd.. The working group has drawn expertise from the following professionals: Team leader: Mr. Richard Mao Key experts: Mr. Lu Zhou, Mr. Nan Ma, Mr. Bo Gao and Mr. Caspar Chiquet Data controller: Mrs. Fang Dong, Ms. Junya Huang and Mr.Jiayuan Wang Editor: Mr. Baomo Chong Reviewer: Mr. Wu Lin, Mr. Xuan Yang We are grateful to have contributions from the following organizations: Shanghai Environmental and Energy Exchange Centre Testing International Corporation( Stock code: ) South Pole Carbon Asset Management Ltd. China Carbon Forum UNDP Special acknowledgement to the following individuals who have made significant contributions to the report: Editorial effort supported by Mrs. Miao Liu (China CDM Fund) Survey working carried out by Mr. Hui Bin and Ms. Jin Li (Shanghai Environmental and Energy Exchange) Report launch supported by Mr. Jackie Cheng (UNDP) Report launch supported by Mr. Hugh Kater (China Carbon Forum) Environomist Ltd. reserves all copy rights of this report We are grateful to receive feedback and comments from our valuable readers Please feel free to contact richard.mao@environomist.com

5 Environomist Ltd. Environomist Ltd. was established with the vision of facilitating low carbon economy transition and promoting carbon management capacity in public and private sector. With years of development, we have become the most reputable professional carbon consulting company with rich experience in the China carbon management area. The company has a wide range of Chinese and Western background, both familiar with international carbon market rules while deeply understanding Chinese characteristics of carbon management. Different from other consulting firms, we serve our customers with a set of carbon management solutions, which includes both planning and execution, to achieve the desired goal. Our team members include registered financial professionals, certified GHG auditors, international carbon asset managers, registered engineer, carbon management experts and other senior professionals. With many high quality service solutions successfully completed, we have developed a rich network with international organizations, government bodies and private companies. Since our establishment, we have provided large scale CDM carbon asset development and management service to regional governments, a series of training to national ministries, product carbon inventory projects to large sate owned enterprises and low-carbon development planning and carbon trading rules consulting to several local governments.

6 South Pole Carbon Asset Management Ltd. South Pole ( is a leading developer of Certified and Voluntary Emission Reductions projects (CERs and VERs) and a provider of specialised consultancy and carbon IT services. South Pole's carbon project portfolio focuses on high-quality carbon emission reduction credits for a wide range of sectors. The advisory and consulting services span from GHG accounting and carbon foot-printing to project- and sector level MRV, carbon credit issuance and transaction services, capacity development for project partners and policy advisory to governments and international institutions, including the CDM reform and the design and piloting of New Market Mechanisms (NMMs): bilateral sectoral crediting, domestic emission trading schemes, Nationally Appropriate Mitigation Actions (NAMAs), and its integration into Low Carbon / Low Emission Development Strategies (LCDS/LEDS). South Pole is consistently rated among the most successful carbon companies1. The company s current portfolio includes more than 300 emission reduction projects (CERs, VERs and PoAs) in over 25 countries, totalling more than 100 million tco2e expected to be issued until 2020, and more than 14 million tco2e already issued and delivered in less than 6 years, making South Pole one of the leading market players worldwide. In particular, the company is World leading project developer and seller of Gold Standard CDM and voluntary emissions reduction credits. Since its inception in 2006, South Pole has grown very rapidly and now has twelve offices in 5 continents, covering all regions of the world. It is headquartered in Zurich and has offices in Bangkok, Beijing, Hanoi, Jakarta, Johannesburg, Kampala, Medellin, Mexico City, New Delhi, and Taipei, as well as a representative office in the US. The company is privately owned and employs 80 carbon market experts from over 20 countries, covering the full spectrum of carbon market services and areas of expertise. 1 Rated Best Project Developer in ENDS Guide to Carbon Offsets 2008 ( and in Environmental Finance s Voluntary Carbon Markets Survey in 2011 and again in 2012 (

7 Shanghai Environment Energy Exchange Co., Ltd. (SEEE) Shanghai Environment Energy Exchange Co., Ltd. (SEEE), approved Shanghai Municipal Government, and was founded on 5th of August, SEEE is a market platform for the transactions in the fields of environment and energy. Focusing on environment and energy, SEEE is a specialized equity-capital market platform for the transactions of asset rights, creditor s rights, stock rights, IPR and etc. SEEE has been deeply involved in Shanghai emission trading scheme design and achieved a series of outputs including policy design and technical documents. SEEE has set up comprehensive trading rules and safe trading system. Since November 26th, SEEE has been working hard on efficient, transparent and high-quality platform.

8 CTI Centre Testing International Corporation (CTI, is China s leading product testing, inspection, certification, and consulting firm. Providing comprehensive services for virtually all consumer products, CTI ensures quality and enables companies to sell their products to markets worldwide. CTI, set in 2003 and a publicly traded company on the Chinese Shenzhen Stock Exchange (Stock code: ) since October 2009, performs product testing on industries. Headquartered in Shenzhen of China, possesses over 30 branches in mainland China alone. CTI Certification Shenzhen CTI International Certification Co., Ltd (CTI Certification, a member of Centre Testing International Corporation, is a 3rd party certification body licensed by CNCA (Certification and Accreditation Administration of the People s Republic of China) and accredited by CNAS (China National Accreditation Service for Conformity Assessment). Up to date, CTI Certification has issued ISO9001, ISO14001, OHSAS18001, HACCP and ISO22000 certificates for more than 10,000 businesses and organizations in China and abroad. GHG Validation/Verification and Sustainable Development CTI Certification has accredited by JAS-ANZ to conduct ISO verification and becomes its only local third party in mainland China, and got approval on the business development under ISO verification from CNCA. CTI Certification has signed cooperative agreement with Carbon Trust and become its only International Affiliate of Carbon Trust in mainland China, Hong Kong and Taiwan. As the major GHG inventory third party in Shenzhen Carbon Trade Pilot of China, CTI Certification involved in the preparation of standardized and technical documentation Specification with guidance for quantification and reporting of the organization s greenhouse gas emissions and Specification with guidance for verification of the organization s greenhouse gas emissions in Shenzhen, and was responsible to more than 100 enterprises GHG inventory verifications.cti Certification was successfully accredited as DOE by UNFCCC in Nov. 2012, and became the first listed operational entity as local DOE in China.

9 Glossaryy CCER: China Certified Emission Reduction CDM: Clean Development Mechanism CER: Certified Emission Reduction EUETS: European Union Emission Trading Scheme ERU: Emission Reduction Unit EUTL: European Union Transaction Log JI: Joint Implementation NAP: National Allocation Plan MRV: Measurement, Reporting and Verification

10 1. Background 1.1 International Background Development of the EUETSTS Table 1-1 Timeline of the EU ETS Time Content 1992 United Nations Framework Convention on Climate Change 1997 Kyoto Protocol 2000 Green Paper on GHG Emissions Trading 2001 Proposal for a framework Directive for GHG emissions trading within the EU 2003 Directive 2003/87/EC 2009 Directive 2009/29/EC At the United Nations Conference on Environment and Development in 1992, the Agenda 21 and the United Nations Framework Convention on Climate Change (hereafter the UNFCCC) was passed, which requires developed nations to take on more responsibilities in the fight against climate change, while developing nations are exempted from legally binding commitments. The UNFCCC is the fundamental framework for international collaboration on mitigating climate change and aims at the stabilization of GHG concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system (UNFCCC, 1992). It came into force on March 1st1994, and governs international efforts to mitigate climate change through its Conferences of the Parties (COPs), which are held regularly. After the United Nations Conference on Environment and Development, various nations initiated an international dialogue, but did not reach a consensus on the mitigation obligations for each member at first. The Kyoto Protocol, signed at the Conference of the Parties in 1997, which also served as the meeting of the Parties to the Kyoto Protocol, is the first legislation that limits greenhouse gas (hereafter GHG) emissions. The Kyoto Protocol involves 6 GHGs and requires developed countries to commit to legally binding GHG emission reductions. Requirements for a few key developed countries are as follows: up to 2012, the U.S.A. committed to a reduction of7%, the European Union to a reduction of 8%, while Japan committed to 6%, all compared to their emission levels in The Kyoto Protocol includes three flexible mechanisms to assist member states to achieve their emission reduction commitment: International Emission Trading (ET), Joint Implementation (JI), and the Clean Development Mechanism (CDM). JI is defined in Article 6 of the Kyoto Protocol, which states that any Party included in Annex I (i.e. developed countries) can collaborate on a project level to reduce emissions and produce Emissions Reduction Units (ERUs), which can then be transferred to other Annex I parties. The core of the CDM is to allow Annex I parties to collaborate with non-annex I parties (i.e. developing countries) on the project level to reduce emissions and produce Certified Emission Reductions(CERs) which can then be used as offsets for their emissions. With the intention to assist its member states to achieve their emission reduction commitments, the EU started planning the introduction of a market-based mechanism for mitigating GHG emission, a so-called cap-and-trade mechanism, following successful market-based solutions for battling acid rain in America. The EU published the Green Paper on GHG Emissions Trading in 2000, which officially announced that an Emissions Trading Scheme would form an important part of the EU s 1

11 climate policy. Following that, it published the Proposal for a Framework Directive for GHG Emissions Trading within the European Community and published the Directive 2003/87/EC after 2 years of drafts and revisions. The Directive 2003/87/EC defines the basic unit of the EU ETS, the European Union Allowance (EUA) in the form of legislation and came into effect in It has already been revised and expanded based on operational experience. 1.2 National Background Political Support Political Support on the National Level Table 1-2 Development of China s Emissions Trading Scheme Time Milestones 2007 China's National Climate Change Program China's Policies and Actions for Addressing Climate Change; Tianjin, Beijing and Shanghai started to establish ETS platforms. China pledges to reduce the intensity of carbon dioxide emissions per unit of GDP in 2020 by 40 to 45 percent compared with the level of thFiveYear Plan requires establishing ETS in China; launch of low carbon pilots The National Development and Reform Commission (NDRC) published the list of China pilot ETSs: Beijing, Shanghai, Tianjin, Chongqing, Shenzhen, Guangdong and Hubei; 12th Five-Year Plan Control Scheme for GHG Emissions Pilot ETSs started to release Working Papers on ETS The Kyoto Protocol dosn t compulsively regulate GHG emissions reduction of developing countries,therefore China faces no legally binding obligation to reduce its emissions on an international level. But its economy is rapidly growing. As a result, China is now the number one emitter of GHGs worldwide. Reducing GHG emissions is no longer only an obligation to preserve the global environment,he costs of developing an ETS to achieve GHG emission reductions might be much higher in the future. These factors jointly facilitate the development of China s ETS. Before the development of China s ETS, the concept of emission trading has been imported to China with the CDM. In 2004, the NDRC published a white paper on CDM guidelines, after which China started to actively participate in CDM projects. In 2007, China's National Climate Change Program identified China s policies and activities to deal with the issues of climate change. In 2008, with the rapid development of CDM, certain local governments established environmental and energy exchanges, in order to regulate emission trading. In 2009, the State Council announced that China is going to reduce the intensity of carbon dioxide emissions per unit of GDP in 2020 by 40 to 45 percent compared with the level of In August 2010, the NDRC launched a low carbon pilot development, which signified the inclusion of developing an ETS into the national development strategy. In November 2010, the Chinese government announced its 12thFive-Year Plan, requiring the development of an ETS in China, which now constitutes the first official legal document on establishing an ETS for reducing energy consumption and carbon intensity. In October 2011, the NDRC General Office published the Notice on Carbon Emissions Trading Pilot, in which Beijing, Tianjin, Shanghai, Chongqing, Guangdong, Hubei and Shenzhen, totally seven provinces and cities were assigned as ETS pilots in China. In December the same year, the State Council published the 12thFive-Year Plan Work Program to Control GHG emissions, following which local governments successively issued their local versions of the plan. Each pilot ETS then started to focus on the development of anets. 2

12 1.2.2Political Support on the Provincial Level Table1-3 Development of all the 7 ETS pilots in China Time Milestones Call for carbon emission trading professional services in Guangdong Guangdong Working Plan for Emissions Trading Guidelines Guangdong Work Schedule in Carbon Emission Trading Pilot Guangzhou Emissions Exchange filed in NDRC Guang dong The Training of Historical Carbon Emissions Reports for Key Enterprises Guangdong Draft Measures on Emissions Trading Pilot Guangdong Initial Allowance Allocation and Working Plan on Emissions Trading Pilot(Interim) The list of enterprises under the cap and enterprises with new projects Carbon Emissions Trading Rules of China Emissions Exchange Interim Management of Memberships of China Emissions Exchange Hubei Working Plan for GHG Emission under the12th Five-Year Plan Hubei Hubei s Working Plan for emissions trading pilot Agreement to establish the Hubei Carbon Emissions Exchange Hubei Draft Measures on Emissions Trading Pilot Shanghai Working Plan for Emissions Trading Guidelines The Initial List of Enterprises under the Shanghai Emissions Trading Pilot Notice on the Initial Report of Inventory Work in Shanghai Emissions Trading Pilot Guidance for Accounting and Reporting of the GHG Emissions in Shanghai (Interim) Notice on the 2012 Carbon Emissions Report Work in Shanghai Emissions Trading Pilot Working Plan of Energy Conservation and Climate Change in Shanghai Shanghai Interim Measures on Emissions Trading Pilot Shang hai Shanghai Carbon Emissions Allowance Allocation and Management Plan in Temporary Provisions of Carbon Emissions Allowance Registration Management in Shanghai Notice on the Standard of Transaction Fee in Shanghai Notice on the Standard of Membership fee in Shanghai Carbon Emissions Trading Rules of Shanghai Environment Energy Exchange Shanghai Management on Carbon Emissions Trading Risk Control Management on Membership of Shanghai Environment Energy Exchange Settlement of Carbon Emissions Trading Rules of Shanghai Environment Energy Exchange Shanghai Environmental Energy Exchange Emissions Trading Violations Default Processing Approach Management on Carbon Emissions Trading Information of Shanghai Environment and Energy Exchange 3

13 Time Milestones Tianjin s Working Plan for emissions trading guidelines Tianjin Interim Measures on Emissions Trading Pilot Tian jin Tianjin Development and Reform Commission Notice on Carbon Emissions Trading Work in Beijing Notice on the Standard of Transaction Fee in Tianjin Carbon Emissions Trading Rules of Tianjin Climate Exchange (Interim) Settlement of Carbon Emissions Trading Rules of Tianjin Climate Exchange (Interim) Management on Carbon Emissions Trading Risk Control in Tianjin Climate Exchange (Interim) Shenzhen Draft Decision on Strengthening the Management of Carbon Emissions The initial verification on carbon emissions in Shenzhen authorized by Shenzhen Market Administration Client Operation Manual of Emissions Trading System Provisions of Carbon Emissions Management of the Shenzhen Special Economic Zone Specification with Guidance for Quantification and Reporting of the Organization s GHG Emissions Specification with Guidance for Verification of the Organization s GHG Emission The Limits of Pubic Building Energy Consumption in Shenzhen Shen zhen Specification with Guideline for Quantification and Reporting of Building GHG Emission Specification with Guidance for Verification of Building GHG Emission Shenzhen Standard of Transaction Fee on Emissions Trading Pilot Involved Companies Operational Manual of Shenzhen Emissions Trading Registry Management Rules on Membership of Shenzhen Emissions Exchange Membership Structure of Shenzhen Emissions Exchange Spot Transaction Rules for Shenzhen Carbon Trading(Interim) Trading Guidelines of Shenzhen Emissions Exchange(Interim) Shenzhen Draft Measures on Emissions Trading Pilot 4

14 Time Milestones Beijing 12th Five-Year Plan on Saving Energy and Climate Change Bei jing Notice on Carbon Emissions Trading Work in Beijing Beijing Carbon Emissions Accounting and Reporting Guidelines(2013) Beijing s Carbon Emissions Trading Verification Institutions Management Approach (Trial) Beijing s Carbon Emissions Trading Verification Approach (Trial) Beijing s Carbon Emissions Trading Registration System Operational Guidelines Beijing s Procedures of Reporting GHG Emissions Beijing s Information on Opening Carbon Emissions Trading Account OTC Rules for Beijing Carbon Trading Carbon Emissions Trading Rules of Beijing Environment Exchange Notice on the Standard of Transaction Fee in Beijing Chongqing's Carbon ETS Establishment Work Plan and Division of Tasks Chongqing ETS pilot based on Chongqing Draft Rules for Emissions Trading Guidelines Chong qing Chongqing's Emissions Trading Platform and Registry Construction Project Launch to Establish pilot ETS 5

15 2. Development of China s ETS pilots 2.1 Comparisons between ETS pilots and the EUETS This chapter mainly discusses the EU ETS in comparison with the implementation plan and characteristics of each pilot ETS in China. Such a comparison will provide an overview over the development of China s ETS pilots, describe the differences among them and between the EU ETS, and indicate the potential impacts on a future national ETS in China. Table 2-1 Comparison between the EU ETS and China s ETS pilots EU ETS Guangdong Hubei Shanghai Tianjin Shenzhen Beijing Chongqing Emission Reduction Target Phase I: 6%; Phase II: 8%; Phase III: 20% (Compared to 1990) 19.5% (Compared to 2010) 17% (Compared to 2010) 19% (Compared to 2010) 15% (Compared to 2010) 15% (Compared to 2010) 18% (Compared to 2010) 17% (Compared to 2010) Monitored GHGs Phase I: CO2; Phase II: CO2, N2O; Phase III: Six GHGs CO2 CO2 CO2 CO2 CO2 CO2 CO2 Reporting Obligations Only Industrial companies emitting more than 10,000 tons of CO2 Companies consuming more than 8,000 tons of standard coal per year Companies emitting more than 10,000 tons of CO2per year Carbon-intensiv e industries such as iron and steel, chemical, power, heating, petrochemical and exploitation and those of civil buildings, which emit more than 10,000 tons of CO2annually Companies emitting more than 3,000 but less than 5,000 tons of CO2annually, and other enterprises and buildings in specific area Companies consuming more than 2,000 tons of standard coal per year in the provincial area 6

16 Compliance Coverage 30 member states; 29 emission activities Companies emitting more than 20,000 tons of CO2 in industries of power, cement, iron and steel, ceramic, petrochemical, textile, non-ferrous metals, plastics, and paper Industrial companies consuming more than 60,000 tons of standard coal annually Carbon-intensiv e industries such as iron and steel, petrochemical, chemical,non-fe rrous metals, power,materials, textile,papermak ing, rubber, chemical fibber, which emitmore than 20,000 tons ofco2annually, and those of non-industrial enterprises such as aviation, ports, airports, railway,commer ce, hotels and financial enterprises, which emit more than 10,000 tons of CO2 annually Carbon-intensiv e industries such as iron and steel, chemical, power, heating, petrochemical and exploitation and those of civil buildings, which emit more than 20,000 tons of CO2annually Enterprises and institutional organizations which emit over 5000 tons of CO2per year, large public buildings over 20,000 square meters, office buildings for governmental agencies over 10,000 square meters Companies emitting more than 10,000 tons of CO2annually, both direct and indirect Allowance Reserve and Banking Allowances issued in Phase I may not be used in Phase II; Allowances issued in Phase II may be banked for Phase III Allowance reserve for 2013 is 38,000,000 Reserves5% of the total provincial emissions for market interventions, another 15% for new entrants A certain amount of reserves for market interventions Only regulated enterprises will be entitled to receive reserved allowances, which will be sold at a fixed price Starting th December December th November th December th June th November Guangdong Province Time Table for Key Milestones of the First Phase ( ) ETS Pilot under the 12 th 5-Year Plan 7

17 Time Allowance Allocation Allocation based on historical emissions with partially baseline-based allocation. Phase I:95% allowances for free; Phase II:90% for free; Phase III: no more than 50% for free Based historical emissions per industry, allowance allocation for free; 3% of the total allowances are for new entrants in ; 10% of the total allowances are for new entrants in 2015 Based on historical emissions per industry, freely issued by 30th June Allocation approach based on historical emissions, allocation approach based on baselines, allocation for free or against a charge based on industrial emissions, mainly issued for free with partial allowance allocation against a charge Based on historical emissions per industry, allocation for free or against a charge. Free allowances cannot be lower than 90%. Charging for allowances includes mechanisms such as fixed price sales and auctioning Manufacturing, other industrial and service industries receive allowances based on historical emissions; power and electricity industries based on historical carbon intensity Authorized Transaction Platform Mostly ICE(but not specified) China Emissions Exchange (Guangzhou) Hubei Carbon Emissions Exchange Shanghai Environmental and Energy Exchange Tianjin Climate Exchange Shenzhen Emissions Exchange China Beijing Environment Exchange Chongqing Carbon Emissions Exchange Trading Products EUA,CER/ERU Allowance, CCER Allowance, CCER Allowance, CCER Allowance, CCER Allowance, CCER Allowance, CCER Trading Modes Spot and future market; exchange and OTC Trading modes have to be in compliance with national laws and relevant regulations Electronic bidding; online matching Auctions, OTC and others Online spot; negotiated transfers and auctions Spot: electronic auctions, fixed price, block trades, and negotiated transfers Public trading; negotiated transfers; other trading modes; OTC Trading Participants Energy and industrial enterprises under the cap, financial institutions and Companies under the cap; Introducing new participants at an appropriate Companies under the cap, corporations or other organizations Companies under the cap, other organizations and individuals Companies under the cap and other institutions, enterprises, organizations, Companies under the cap, other organizations, individuals and investment Companies under the cap, reporting companies voluntarily participating, 8

18 individuals time holding CCERs and individuals institutions and other institutions Offset Mechanisms CDM, JI CCER, no more than10% of the total emissions CCER, no more than10% of the total emissions CCER, certain percentage of total emissions CCER, no more than10% of the total emissions CCER, no more than10% of the total emissions CCER, no more than10% of the total emissions, local CCERs should account for at least 50% of used offsets Fines between 10,000 and 30,000 CNY for failing to report emissions; Fines between 10,000 and 50,000 CNY for failing to report emissions; Incentives and Noncompliance Fines 40 Euro/t fine for non-compliance in Phase I; 100 Euro/t in Phase II Fines three times of the average market price for non-compliance Fines three times of the average market price; the amount of non-surrendered allowances will be deducted twice in the following year Fines between 10,000 and 30,000 CNY for providing false information or hiding important information; Fines between 30,000 and 50,000 CNY for unreasonably resisting verification; Fines between 50,000 and 100,000 CNY for failing to surrender allowances; Fines between 50,000 and 100,000 CNY for serious issues; For failing to surrender: compulsive deduction, the insufficient amount will be deducted from the following years allowance allocation; a fine of three times the former six months average market price will be due. 9

19 Specification with Guidance for Quantification and Reporting of the Organization s Greenhouse Gas Emissions MRV Differentiated MRV guidelines for 29 emitting activities Guidance for Accounting and Reporting of the Greenhouse Gas Emissions in Shanghai (Interim) Guidance for Reporting of the Greenhouse Gas Emissions in Tianjin (Interim) Guidance for Verification of the Greenhouse Gas Emissions in 5 Industries Specification with Guideline for Quantification and Reporting of Building Greenhouse Gas Emission (Interim) Specification with Guidance for Verification of the Organization s Greenhouse Gas Emission Beijing Carbon Emissions Accounting and Reporting Guidelines (2013) Specification with Guidance for Verification of Building Greenhouse Gas Emission (Interim) Reporting Date 31st December Last working day in February 15th April 30th April 31st March 15th April Surrender Date 30th April Last working day in May 1st June to 30th June 31st May 30th June 15th June 10

20 2.1.1 EUETS Table 2-2 Characteristics of each phase of the EU ETS Phase I: (Experimental) Phase II: (Kyoto Protocol) Phase III: Goal Preparation for the upcoming operation To achieve the emission reduction target of 8% under the Kyoto Protocol To reduce emissions by20% by 2020, compared to emissions in 2005 Member States 25 member states 25 member states, plus Iceland, Norway and Liechtenstein Cap 45% of the commitment under the KP Reduction of6.5% on the basis of 2005 Annual reduction of1.74; No more National Allocation Plans (NAP) Allowance Allocation Monitored GHGs 5% at most to be auctioned 10% at most to be auctioned CO2 CO2, N2O 6 GHGs Gradually moving to 100% auctioned allocation Scope Combusting installations Around 11,000 installations, which cover almost half of the total emissions in the EU Extending coverage to Aviation, petrochemical industry, aluminium, covering more than 60% of the EU s GHG emissions Trading Mechanism Allowance trading, CDM Allowance trading, CDM, JI Allowance trading, CDM, JI Banking Allowances cannot be used in Phase II Allowances can be used in Phase III Fines 40Euro/ton 100Euro/ton 100Euro/ton Source: Prior to the commencement of theeu ETS, the EU has prepared for 2 years before its official operation in The EU ETS was established based on the Directive 2003/87/EC in Phase I from 2005 to 2007 was planned as an experimental phase testing the scheme design and operation, and therefore facilitating the EU ETS of Phase II to achieve its emissions reduction commitment under the Kyoto Protocol. Phase III startedin2013 and will end in In the beginning, the EU ETS involved25 participating states and had only CO2 as its monitored GHG gas in Phase I. Each member state assigned emission permits in a National Allocation Plan (NAP) in accordance with its commitment under the Kyoto Protocol, most of which were freely distributed to involved emitting installations. The EU ETS in Phase II involved additional GHG gases besides CO2 and expanded the number of participating states to 27. The amount of allowances was adjusted based on outcomes of Phase I, and auctioning was introduced as an additional 11

21 allowance allocation approach, through which a maximum of 10% of total allowances could be allocated. The EU ETS is currently in its Phase III, with a target of 20% emission reductions by 2020, compared to Before 2013, the NAPs in each member state identified the amount of allowances in a particular state and then allocated them to installations. After 2013, allowances are directly allocated by the Commission, instead of NAPs. The total amount of allowances in the EU was reduced by 1.74% annually from 2008 to Freely allocated allowances should decrease by 20% annually; therefore freely allocated allowances will be 30% by 2020 and none by On the basis of this approach, the allocated allowances for power and combustion installations in 2013 have been set at 2.04 bln units. The EU ETS regulates that 5% of the total amount of allowances should be reserved for new entrants. Simultaneously, allowances allocation should be open to pilot CCS projects in places where it is currently impossible to commercially develop innovative new energy pilot projects. Such projects will be allocated no more than 15% of the total amount of allowances. Those installations in industries or sub-industries that are facing serious emission leakage risks will receive all allowances for free. Operators must hold GHG emission permits; otherwise their emitting installations are not allowed to emit GHGs. Only if installation operators are competent to monitor and report GHG emissions will they be allowed to emit GHGs. An operator s GHG emission permit can involve one installation or several installations in the same place. In addition, installations can be excluded by member states from the EU ETS if for three continual years emissions are lower than a specific amount. Issued allowances should be registered in a registry, in order to maintain a record of holding, allocation, abandonment, and surrendering for accounts registered in member states. The Commission formulates regulations which improve standardization and system safety, conserve normal data in a standardized database, and disclose the information on issuing, holding, transferring, and surrendering allowances. It also protects confidential information and ensures that all transfers are in accordance with the Kyoto Protocol. EU regulations also limit the use and identification of CERs and ERUs in the EU, as well as monitor their level of use. Allowances can be transferred between individuals in the EU and between them and individuals from a third nation. The Commission established the European Union Transaction Log (EUTL) for maintaining independent transaction logs, which record the issuance, transfer, and cancellation of allowances. The Commission automatically examines the transfers of allowances in the registry to protect from illegal issuance, transfer, and surrender of allowances. The Commission will inform the member states if it has identified abnormal situations and prohibit the abnormal situation from developing further. One of the most important cornerstones for a transparent ETS is a guideline for measuring, reporting and verifying (MRV) GHGs. Therefore, the EU published the GHG Emissions Monitoring and Reporting Guidelines, which regulate GHG emissions monitoring and reporting. Emission reports have to be verified by third parties and disclosed to the public. The verification needs to be in accordance with the guideline and ISO standardizations. Members are responsible for formulating measures to ensure compliance. They need to inform the EU about these regulations, adjustments thereto, and disclose operators and aviation operators who violate such regulations. Operators and aviation operators failing to surrender enough allowances by 30th April every year will face fines. Operators pay a fine of 40 Euros for each allowance they fail to surrender in the Phase I EU ETS. In Phase II, they have to pay 100 Euros per allowance. All missing allowances have to be surrendered in the following year in addition to allowances for that year s 12

22 emissions. The fines will increase in accordance with the European Consumption Index Comparison between the Guangdong Pilot ETS and the EU ETS Table 2-3 Comparison between the Guangdong pilot ETS and the EU ETS Source of Emission Reduction Target Scope Allowance Allocation Trading Platform Trading Participants Trading Mode Reserve Offsets Guangdong National 12th Five-Year Plan Companies emitting more than 20,000 tons of CO2 in industries of power, cement, iron and steel, ceramic, petrochemical, textile, non-ferrous metals, plastics, and paper Based on historical emissions per industry, allowance allocation for free; 3% of the total allowances are for new entrants in ; 10% of the total allowances are for new entrants in 2015 China Emissions Exchange (Guangzhou) exclusively Companies under the cap; new participants will be introduced at an appropriate time Legal Trading Mode Allowance reserve for 2013 is 38,000,000 CCER, no more than10% of total emissions EU ETS Commission 6 GHGs, 29 activities Allocation based on historical emissions, partially baseline based allocation; 95% allowances allocated for free in Phase I;90% in Phase II; less than 50% in Phase III Mostly ICE (not mandatory) Companies under the cap, financial institutions and individuals Spot and future contracts either on an exchange or OTC Allowances from Phase I cannot be used in Phase II; allowances from Phase II can be used in Phase III CDM, JI Fines Three times of average market price 40 Euro/ton; 100 Euro/ton MRV MRV Qualification Verification Institution Qualification Monitoring and Reporting Guideline; Verification Guideline Monitoring and Reporting Guideline; Verification Guideline Monitoring and Reporting Guideline; Verification Guideline The Carbon Emissions Trading Pilot Work Plan, published in September 2012, is based on relevant requirements of the Five-year Control Scheme for GHG Emissions and Guangdong Province 13

23 12th Five-Year Plan for National Economic and Social Development Program, as well as the working plan of the NDRC for ETS pilots. It aims at achieving the tasks of energy conservation and emission reduction tasks formulated in the 12thFive-Year Plan with a market-based mechanism. Carbon intensity and total emissions under the Guangdong pilot ETS are designed to be reduced annually, in accordance with relevant obligatory targets and economic development in practice. The difference between the EU ETS and the Guangdong pilot ETS is that the emission reduction target of the EU ETS is an absolute amount of emissions, while that of the Guangdong pilot ETS is an emissions reduction in relation to a unit of GDP, in other words, a carbon intensity reduction. With regards to the scope of emission reductions and emission trading, the Work Plan requires that companies in the power sector, cement, iron and steel, ceramic, petrochemical, textile, non-ferrous metals, plastics, and paper, located in the area of Guangdong Province, with more than 20,000 tons of CO2 emissions (or an overall energy consumption of 10,000 tons of standard coal) in any one year of the years are to be put under the cap. The implementation scheme regulates that the participating entities are companies, which is obviously different from installations under the EU ETS. Participating entities under the EU ETS are individual installations involved in29 emitting activities as regulated by 2003/87/EC. Besides the companies under the cap, the Guangdong pilot ETS also additionally regulates that certain companies have to report their emissions annually. It requires that industrial companies that emitted more than 10,000 tons of CO2 (or have a comprehensive energy consumption of 5,000 tons of standard coal) in any one year from 2011 to 2014 must report their emissions every year. These companies will possibly be involved as new entrants in a future national ETS in China. The Guangdong pilot ETS allocates allowances with comprehensive considerations to social development tendency and monitorable emissions amounts, entirely to those involved companies of their total emissions from 2013 to New entrants with a certain regulated amount of annual emissions (or annual energy consumption) will also be allocated allowances. A certain rate of allowances will be allocated for free, while the rest will be allocated against a charge. The allowances free of charge for companies under the cap and new entrants account for 97%, while 3% are sold. Those rates will be adjusted to 90% and 10%, respectively, in The total amount of capped emissions consists of allowances for companies and an allowance reserve. Allowances for companies under the cap in 2013 reached 350,000,000, while the reserved allowances are38,000,000. The EU ETS allocates allowances in a way that combines for free and with charge. It also takes new entrants into consideration and reserves 5% of the total emissions amount for them. Prior to the EU ETS Phase III, member states actually allocated allowances themselves with their NAPs, but starting with Phase III, allowances will be issued directly by the Commission, which is more simple and transparent. The total allowance amount will be reduced by 1.74% annually, while allowances allocated for free should also be reduced by 20% annually. By 2020, there will be only 30% of allowances allocated for free and that amount will be reduced to zero by The management of allowances in the Guangdong pilot ETS will be implemented through electronic systems, which are used to register allowance accounts and allowances, and to record the issuance, transfer, and cancellation of allowances in detail. The EU ETS moved from previously independent transaction logs in each member state to the EU transaction log system managed by the registry, which has the same function as the Guangdong information systems. The traded products in the Guangdong pilot ETS are mainly the allowances themselves, with some CCERs, which are recognized by the NDRC as offsets. CCERs used by companies under the cap 3 广 东 省 碳 排 放 权 交 易 试 点 工 作 实 施 方 案 14

24 cannot exceed 10% of the total emissions of the company. The trading participants are companies under the cap for now, but will involve investment institutions and other corporations and individuals at an appropriate time. The prices of trading products are determined by demand and supply, and monitored and adjusted by the Guangdong Development and Reform Commission (Guangdong DRC). Trading participants can use the electronic system, which provides a complete hardware and software environment, to process online biddings, register trading accounts, and log trading information. In order to guarantee the fairness and safety of trading, both the Guangdong pilot ETS as well as the EU ETS establish trading supervision mechanisms to oversee the trading activities and exchange operations, while the exchanges monitor the actual process of trading. In order to enhance the reliability and validity of the ETS, Guangdong establishes an information verification system, and promotes and authorizes third-party institutions with relevant qualifications to verify the emissions reported by companies under the cap. It also develops relevant electronic systems that support verifications by the third-party institutions. The Guangdong pilot ETS also refers the scope of energy intensive companies to determine the involved companies and then expand gradually. All involved companies should report their emissions. The government allocates allowances to companies under the cap and regulates the emissions from those companies. Regulated companies have to surrender enough allowances to the Guangdong DRC every year to offset their actual emissions in the previous year, which will then be cancelled by the DRC later. The regulations do not allow companies under the cap to borrow, use and sell their future allowances in advance, but remaining surplus allowances can be carried over for use in the coming year, or be sold for profit. All trading activity will be carried out on the Guangzhou Emission Exchange as the exchange platform Comparison between the Hubei Pilot ETS and the EU ETS Table 2-4 Comparisons between the Hubei pilot ETS and the EU ETS Hubei EU ETS Source of Emission Reduction Target Scope Allowance Allocation Trading Platform Trading Participants National 12th Five-Year Plan Industrial companies consuming more than 60,000 tons of standard coal annually Based on historical industrial emissions, issued for free by 30th June Hubei Carbon Emissions Exchange exclusively Companies under the cap, corporations or other organizations holding CCERs Commission 6 GHGs, 29 activities Allocation based on historical emissions, partially baseline based allocation; 95% allowances allocated for free in Phase I;90% in Phase II; less than 50% in Phase III Mostly ICE (not mandatory) Energy and industrial companies under the cap, financial institutions and individuals Trading Mode Electronic bidding; online matching Spot, future, on an exchange, or OTC 15

25 Reserve Offsets Fines MRV MRV Qualification Verification Institution Qualification Reserves of 5% of the total provincial emissions for market interventions, another 15% for new entrants CCER, no more than10% of total emissions Three times the average market price; The amount of non-surrendered allowances will be deducted twice in the following year Allowances from Phase I cannot be used in Phase II; allowances from Phase II can be used in Phase III CDM, JI 40 Euro/ton; 100 Euro/ton Monitoring and Reporting Guideline; Verification guideline Monitoring and Reporting Guideline; Verification guideline Monitoring and Reporting Guideline; Verification guideline Hubei s Working Plan for Emissions Trading Pilot was published in February 2013, requiringco2 emissions per unit of GDP to be reduced by 17% and energy consumption by 16% within Hubei Province in accordance with the emission reduction targets proclaimed in the 12thFive-YearPlan. The Working Plan determines the total emission amount in 2015 and 2020 and that of each industry sector in Hubei Province, by scientifically accounting for historical emissions and forecasting. Similar to the EU ETS, the Hubei pilot ETS also allocates allowances based on the cap. The caps of the EU ETS from Phase I to Phase III are decreasing gradually, resulting from reduction targets of 4.5% in Phase I and 20% in Phase III, all based on the emission level in The allowance allocation strategy of the Hubei pilot ETS takes into consideration historical emissions, industrial emission benchmarks, energy conservation, and eliminating outdated capacity. During the pilot period, the allowances will be freely allocated to companies under the cap by 30th June every year. The provincial authority reserves 5% of the total emissions amount for market interventions, while a 15% reservation is for new entrants to the ETS. If an entrant undergoes capacity changes or is the result of a business merger, division, or recombination, it should apply for a re-verification with the Hubei DRC 30 days after such change. The EU ETS allocated allowances with a historical allocation method in its early stage, in which more than 95% allowances were freely allocated to installations. One of the differences is that the EU ETS allocates allowances to installations while the Hubei pilot ETS allocates allowances to companies. In addition, the Hubei Working Plan requires establishing an information system integrating registration, allowance allocation, allowance management, allowance tracking, and data exchange. The Hubei pilot ETS involves CO2 only. The traded products are mainly allowances, as well as CCERs produced in Hubei Province. Following the development of the Hubei pilot ETS, it will gradually involve all six UNFCCC GHGs. The EU ETS also graduated from an initial stage which involved only CO2 and then subsequently included other GHGs. Trading participants are industrial companies whose energy consumption is more than 60,000 tons of standard coal, corporations and other institutions holding CCERs, the Hubei allowance reserve institution, and other voluntarily participating institutions. The difference between the Hubei pilot ETS and the EU ETS is that the Hubei pilot ETS regulates entities based on their energy consumption, while the EU ETS addresses 16

26 their direct emissions. During the pilot period, the Hubei pilot ETS adopts electronic bidding and online matchmaking for trading activities. The EU ETS adopts more abundant forms of trading, which includes spot markets and future markets, both through exchange platforms and over the counter. In addition, the Hubei pilot ETS also encourages companies to develop projects that produce CCERs, which can also be used to achieve the company s emission reduction targets. At the same time, it allows capped companies to purchase CCERs generated in Hubei province, but such offsets cannot exceed 10% of the company s total emissions in a particular year. The EU ETS has CDM and JI as its offset mechanisms, also with specific limitations on the use of offsets. The Hubei Working Plan requires establishing an integrated emission reporting system, including reporting, verification, and data exchange, which supports regulated companies to report their emissions and third-party institutions to verify the reports. Industrial companies consuming more than 8,000 tons of standard coal annually must access the emission reduction monitoring system in accordance with the requirements, which asks for the companies to submit the emission report for the previous year by 28th February. The submitted reports will be verified by third-party institutions, and results should be passed to the regulator by 30thApril. The EU ETS also formulates regulations for excluding small scale installations, stating that installation that emit less than 25,000 tons of CO2 for three continual years can be excluded from the EU ETS. However, those installations should also submit emission reports to the Commission every year. In order to improve the liquidity of the emission trading market, the Hubei Draft Measures on Emissions Trading Pilot regulate that capped companies must surrender allowances of the same amount as their actual emissions, as well as a certain amount of CCERs, for the previous year by the last working day in May. The regulator will then cancel all submitted allowances, including those that have not been traded, and the reserve. The Hubei Draft Measures also identify fines for non-compliance for different trading entities. For capped companies failing to surrender enough allowances in time, the regulator can punish them with a fine of three times the average market price, and on top of that deduct the missing allowances twice during the next allowance allocation. Non-complying companies will also be announced to the public. For involved companies not or only partially reporting their emissions and interfering with verification, the allowance allocation for the next year will be cut in half. For trading entities hiding actual emissions and providing false information, the regulator should order them to amend, or issue a warning, and fine these entities, or suspend and cancel their trading qualifications, and finally disclose their names to the public. For those trading institutions violating the management rules, the regulator will warn and fine the institutions and disclose them to the public. For third-party institutions violating the management rules during verification, the regulator will order them to amend, or warn, fine, and cancel their qualification, and disclose to the public. From these fines and punishment measures, it can be seen that Hubei s draft legislation emphasizes transparency as one of its core elements. With regards to fines, illegal gains will be punished for three times the amount and up to 150,000 CNY; violations without illegal gains will be fined with no more than 50,000 CNY. For administrative entities and their work force with misconducts, misfeasance, and favouritism, the regulator will punish them with disciplinary sanctions, and for criminal activities, the regulator will seek prosecution of criminal responsibility Comparison between the Shanghai Pilot ETS and the EU ETS Table 2-5 Comparisons between the Shanghai pilot ETS and the EU ETS 17