On February 4, 2024, the State Council promulgated the Interim Regulations on the Administration of Carbon Emission Trading (hereinafter referred to as the "Regulations"), which will come into effect on May 1, 2024. For the first time, the "Regulations" clarify the basic systems of the carbon emission trading market in the form of administrative regulations, and make clear provisions on the coverage, inclusion objects, quota allocation, data supervision, quota settlement and trading operation of the carbon trading market, providing a policy basis for strengthening data quality supervision, improving the supervision and management system, and increasing the punishment for violations of laws and regulations, which is a milestone for the development of the mainland carbon market. As the basic legal basis for the operation and management of the carbon market, all relevant entities of carbon trading need to strengthen the analysis and judgment of the Regulations, improve compliance and carbon asset management capabilities, accelerate the cultivation of green new quality productivity, build a green and low-carbon supply chain, continuously reduce the carbon footprint of products, and comprehensively respond to international carbon barriers and carbon risks.
The Regulations provide strong legal support for the construction of the carbon market
Constitute a "1+1+3" regulatory policy system for carbon trading. From departmental rules to administrative regulations, the promulgation of the "Regulations" provides stronger legal protection for carbon emission trading. Before the promulgation of the Regulations, the management of carbon emission trading was mainly based on departmental regulations, and the overall level was low, resulting in insufficient authority, stability and transparency of carbon emission trading norms. In December 2014, the National Development and Reform Commission (NDRC) promulgated the Interim Measures for the Administration of Carbon Emission Trading to standardize the construction of a national carbon emissions trading market. In December 2020, the Ministry of Ecology and Environment (MEE) promulgated the Administrative Measures for Carbon Emission Trading (Trial) to regulate carbon emission trading and related activities across the country. Compared with departmental regulations, the Regulations are administrative regulations, with a higher level and a significant increase in administrative penalties, which will help strengthen the restraint on violations of laws and regulations and effectively ensure the healthy operation of the carbon market. As the superior regulations in the field of carbon trading in the mainland, the Regulations, together with the Administrative Measures for Carbon Emission Trading (Trial), the Administrative Rules for the Registration of Carbon Emission Rights (Trial), the Administrative Rules for Carbon Emission Trading (Trial), the Administrative Rules for Carbon Emission Trading (Trial) and the Administrative Rules for Carbon Emission Settlement (Trial) issued by the Ministry of Ecology and Environment, together constitute the "1+1+3" regulatory policy system in the field of carbon trading in the mainland.
Comprehensively prevent the risk of carbon market operation. The promulgation of the "Regulations" is in line with the law of the development of carbon trading itself, which is conducive to better preventing carbon market risks. Different from the traditional market trading method, carbon emission trading is synchronized with the legislation and improvement of carbon emission trading, from the allocation and registration of carbon emission allowances, to the establishment, optimization and dynamic adjustment of relevant supporting mechanisms such as trading varieties, trading methods, management norms, trading promotion, supervision and punishment, etc. Carbon emission trading has the characteristics of strong policy, and market risks, policy risks, and legal risks interact and are closely linked, which will further amplify the trading risks. The "dual carbon" goal promotes the accelerated development of carbon trading, and policy incentives and the expansion of market trading scale pose new challenges to risk management, especially market differentiation and strengthened policy expectations may increase the overall risk. The profit-seeking impulse of market players will increase the risk of market transactions, and the interaction of different markets will form new risks of complex changes, and avoiding market risks and strengthening risk management have become practical problems that need to be solved urgently. The Regulations adhere to the whole process management, covering all major aspects of carbon emission trading, and clearly define the relevant responsibilities of the three major entities of national and local government authorities, key emitting enterprises and third-party technical service institutions in data reporting, verification and verification, and quota trading. Strengthening the supervision of the whole process of carbon trading activities and sharing information with relevant departments is conducive to comprehensively preventing the risks of carbon market operation.
Penalties for violations of laws and regulations have been unprecedentedly increased. The Regulations have increased the penalties for violations of laws and regulations to an unprecedented extent, which will help ensure the sustainable and healthy development of the carbon market. Penalties have been strengthened, and a series of punishment systems have been formulated for key emitting entities and technical service institutions to strictly prevent and punish the falsification of carbon emission data. It mainly makes clear provisions in terms of strengthening the main responsibility of key emitting enterprises, strengthening the management of technical service institutions, strengthening supervision and inspection, and increasing penalties. Previously, the Administrative Measures for Carbon Emission Trading (Trial) had insufficient penalties for violations due to the low level of law. In the first compliance cycle of the national carbon market, problems such as enterprise data falsification and verification agencies went through the motions were prominent, and due to the low cost of violating the law, some participants took risks in the face of huge interests.
Before the promulgation of the Regulations, the relevant parties manipulated market transactions, technical service institutions to do both carbon asset management and third-party verification and other chaos exposed the carbon market supervision is not in place, the "Regulations" for violations of zero tolerance, Articles 19 to 28, respectively, for the competent authorities, key emitting enterprises, technical service institutions and other participants in the illegal acts of the formulation of severe punishment. Key emitting enterprises will face fines of up to 2 million yuan if they fail to count their emissions, falsify the content and data of their annual emission reports, or fail to produce and submit samples for testing in accordance with regulations, and if they refuse to make corrections, their carbon emission quotas for the next year will be reduced according to the proportion of 50% to 100%, and they will be ordered to stop production for rectification. For example, if the annual emission report or technical audit opinion of the technical service organization is falsified, the illegal income shall be confiscated, and a fine of not less than 5 times but not more than 10 times the illegal income shall be imposed, and if the circumstances are serious, it shall be prohibited from engaging in the preparation of annual emission reports and technical audit business, and the responsible personnel involved will also face a lifetime ban from engaging in related business. In terms of penalties, strict penalties such as fines, orders to suspend production for rectification, cancellation of relevant qualifications, and prohibition of engaging in corresponding businesses are stipulated for those who commit fraud in greenhouse gas emissions-related inspection and testing, annual emission report preparation and technical audit, and a credit record system is established.
The carbon market is driven by compliance
Activity and maturity need to be improved
The development of the carbon market in mainland China presents six major characteristics. In July 2021, the mainland carbon market was officially launched, and two compliance cycles have been completed. The national market covers about 5.1 billion tons of carbon dioxide emissions per year, and 2,257 key emitting enterprises are included, making it the world's largest carbon market covering greenhouse gas emissions.
First, the institutional system has been continuously improved. The State Council issued and implemented the Interim Regulations on the Administration of Carbon Emission Trading, and the Ministry of Ecology and Environment issued management measures and three management rules for carbon emission rights registration, trading and settlement, which made clear requirements for all aspects of carbon emission trading such as registration, emission accounting, reporting, verification and quota allocation, and initially formed a legal system and working mechanism for the national carbon emission trading market composed of administrative regulations, departmental rules, standards and specifications, as well as business rules for registration institutions and trading institutions.
Second, the trading infrastructure is basically sound. The support system of "one network, two institutions, and three platforms" has been basically completed, and the "National Carbon Market Information Network" has been built to publish authoritative information on the national carbon market in a centralized manner. A national carbon emission allowance registration agency and trading agency have been established to manage the registration, issuance, clearance, trading and other related activities of allowances. The three major infrastructures of the national carbon emission allowance registration system, trading system and management platform have been built, the whole process of online management has been realized, and the infrastructure support system of the national carbon emission trading market has been basically formed.
Third, the ability of carbon emission accounting and management has been significantly improved. Establish a normalized and long-term supervision mechanism for the quality of carbon emission data, implement a three-level joint review of "national-provincial-municipal", use big data, blockchain and other information technologies for intelligent early warning, innovate and establish a dynamic supervision mechanism for performance risks, and urge enterprises to complete the settlement on time and in full. The carbon emission management and accounting capabilities of enterprises participating in the carbon market have been significantly improved.
Fourth, the overall performance of the carbon market is stable and improving. By the end of 2023, the cumulative trading volume of the national carbon emission trading market reached 440 million tons, with a turnover of about 24.9 billion yuan. The overall carbon price showed a steady upward trend, and the enthusiasm of enterprises to participate in the transaction increased significantly, and the average transaction price of allowances rose from 42.85 yuan/ton in the first compliance cycle to 68.15 yuan/ton.
Fifth, the effective operation of the national carbon market has played an important role in promoting the green transformation of key emitting industries. The national carbon market has improved the allocation of allowances and strengthened penalties for violations, and the incentive and restraint mechanism for carbon emission reduction has begun to emerge. Power generation enterprises included in the national carbon market shall reduce the carbon emission intensity of power generation through the implementation of quota management。 In 2022, the standard coal consumption for power supply of thermal power plants of 6,000 kW and above in China will be 300.7 g/kWh, a decrease of 1 g/kWh compared with 2020. The carbon dioxide emission per unit of power generation in China was 541 g/kWh, a decrease of 36.9% compared with 2005, and remarkable results were achieved in reducing carbon emissions from electricity.
Sixth, the ability of the whole society to participate in green and low-carbon development has been significantly enhanced, laying the foundation for achieving the "dual carbon" goal. In 2023, more than 6,000 key emitting enterprises across the country will organize the preparation of corporate greenhouse gas emission reports. Enterprises pay more attention to carbon asset management, strengthen the construction of talent team, and actively develop related carbon finance business. The national carbon market introduced certified voluntary emission reductions to offset the payment of allowances, and brought 980 million yuan of revenue to the owners or relevant market entities of 189 CCER projects through the allowance settlement offset mechanism, which greatly encouraged social capital to invest in voluntary emission reduction projects such as hydropower, wind power, methane utilization, and photovoltaic power generation.
The national carbon market is driven by the implementation of the contract, and the market activity and maturity need to be improved. The turnover rate of the national carbon emission trading market is about 3%, and block agreement trading is currently the main trading method, accounting for about 83%. The EU carbon market is the most actively traded carbon market in the world, with a turnover rate of 417%, and compared with the EU, China's carbon market activity still has a lot of room for improvement.
In the future, the carbon market will further expand the coverage of industries and strengthen data quality management. The expansion of the national carbon market industry and the strengthening of data quality management will become the focus of the next stage. In October 2023, the Ministry of Ecology and Environment (MEE) issued the Notice on Reporting and Verification of Greenhouse Gas Emissions from Enterprises in Some Key Industries from 2023 to 2025, improving emission accounting and reporting instructions for the cement, aluminum smelting, and steel industries. It is expected that during the "14th Five-Year Plan" period, the national carbon market will further expand the coverage of industries, or will include industries such as cement, electrolytic aluminum and civil aviation, and the scale of the national carbon market quota will be expanded to 7 billion ~ 8 billion tons. Industries such as steel, paper, glass, petrochemicals and chemicals will also be gradually included. After the initial period of carbon market operation, the allocation of allowances will gradually tighten, and the proportion of paid allocation will increase, driving the steady rise of carbon prices. In the future, the carbon market can introduce diversified investors, carbon trading varieties and trading methods will be diversified, and carbon financial products derived from carbon emission rights will tend to be diversified. In the future, carbon asset companies and financial institutions will be allowed to enter the market to further improve market activity and carbon asset liquidity.
The resumption of the offset mechanism of the carbon market is conducive to improving the liquidity of the carbon market. The carbon market offset mechanism is an important part of the carbon market, which provides low-cost compliance for emission control entities, and also helps to expand the coverage of carbon trading, and individuals, companies, institutions and organizations can participate in it. At the same time, to promote the diversification of carbon financial products, the current national carbon market allowance trading (CEA) is all spot trading, the national certified voluntary emission reduction (CCER) has strong financial attributes, which can be used for the performance of key emitting units in the national carbon market, and can also be used for the performance of key emitting units in the pilot carbon market, and can also be used for corporate carbon neutrality and carbon neutrality of large-scale activities. On October 19, 2023, the Ministry of Ecology and Environment (MEE) and the State Administration for Market Regulation (SAMR) jointly issued the Administrative Measures for Voluntary Greenhouse Gas Emission Reduction Trading (Trial), and on October 24, the Ministry of Ecology and Environment (MEE) issued the first batch of four CCER project methodologies, including afforestation carbon sinks, grid-connected solar thermal power generation, grid-connected offshore wind power generation, and mangrove planting, marking the resumption of CCER trading, which had been suspended for six years. It is expected that the overall demand for CCER in the carbon market will further increase, and more methodologies will be revised and published in the future, and related projects such as biomass energy, methane utilization, and methane emission reduction are expected to benefit. However, international experience shows that emission reduction trading may have a negative impact on environmental integrity and is not conducive to promoting enterprises to increase green and low-carbon investment, so double standards of quality and quantity are usually used internationally to prevent potential risks. In the future, the national carbon market needs to further improve the CCER trading mechanism and pricing standards, and at the same time develop more project types, give full play to the potential of emission reduction, clarify market access conditions, improve the offset process, and strengthen risk prevention.
Linking to the international carbon market
Strengthen carbon footprint management and carbon barrier response
Accelerate the linkage between the national carbon market and the international carbon market。 When presiding over the 11th collective study of the Political Bureau of the 20th CPC Central Committee, General Secretary Xi Jinping pointed out: "Green development is the background color of high-quality development, and new quality productivity itself is green productivity. "The carbon market is an important tool to help achieve the "dual carbon" goal, which is conducive to stimulating the rapid development of green and low-carbon new quality productivity. From the perspective of the external environment, driven by carbon tariffs, the links between national carbon trading market systems will accelerate, and carbon tariffs will promote the convergence of global carbon prices. The world's major carbon emission trading systems are becoming more and more perfect, and the links between national carbon trading markets are accelerating. In 2023, the EU Carbon Border Adjustment Mechanism (CBAM) will come into effect, and carbon tariffs will be levied according to the difference between the EU carbon price and the carbon price of the importing country. It is expected that China will accelerate the linkage between the national carbon market and the international carbon market, improve the international influence of China's carbon market, and effectively respond to the EU carbon tariff. In terms of the carbon credit market, CCER, as a qualified emitting unit used in the implementation of the International Aviation Carbon Offset and Reduction Scheme (CORSIA), is expected to go abroad to form a link with the international carbon credit market.
Carbon barriers and carbon risks in the mainland's export industry have intensified. In 2023, the EU officially launched the implementation of carbon tariffs, which is currently in a transitional phase. The European Union will officially start taxing the carbon content of imported goods in 2026. In December 2023, the UK announced that it would implement carbon tariffs from 2027 to protect businesses from cheap imports from countries with lax climate policies, and the tax targets were carbon emissions from imported goods from aluminum, cement, ceramics, fertilizers, glass, hydrogen, and steel industries, and the UK will negotiate the synergy between the carbon tariff list and the carbon market in 2024. In addition, Australia, Japan, and the United States are also pushing for similar mechanisms to prevent the risk of carbon leakage, and a carbon customs union is already taking shape. The United States, Japan and other countries have successively proposed plans to reshore manufacturing, the United States "Inflation Reduction Act" to promote the development of the clean energy industry by providing subsidies, reduce dependence on foreign clean energy industry chain and supply chain, and the European Union's "Carbon Border Adjustment Mechanism Act" will reshape the global trade and industrial pattern. For China, it is foreseeable that the number of new green trade barriers to the export of products from related industries will increase, and the risk of market access will increase. Global trade is accelerating in the development trend of greening and "decarbonization", due to the different levels of green and low-carbon development in various countries, there is no uniformity in the standards of carbon emission measurement standards, low-carbon technology and green industry identification, carbon market trading system, environmental information disclosure, green financial market rules, etc. The compatibility of the carbon border adjustment mechanism with WTO rules, the comparability of national carbon emission costs, and the attribution of carbon emissions in international trade will become more intense, and the emission reduction measures taken to achieve climate goals may form new trade protectionist barriers, and some countries will set higher standards for trade and investment in imported products and services by imposing carbon tariffs, requiring the purchase of carbon quotas, and setting green technology standards, which will affect mainland trade and exports and exacerbate international economic and trade frictions.
Product carbon footprints will become a new trade barrier. Product carbon footprint will become a key risk that needs to be paid attention to in mainland trade exports, especially the export of new energy vehicles, lithium batteries and photovoltaic products that have advantages in the international market. In October 2023, the European Commission launched a countervailing investigation into imports of new battery electric vehicles originating in China. There are more and more "green" clauses in international trade rules and regional trade agreements, and the issuance of carbon footprint statements, carbon verification, and certification of carbon labels have become international practices, and carbon labels have increasingly become the "green passes" in international trade. Carbon footprint management covers the entire industrial chain, covering a wider range and causing greater impact, which is more stringent than the carbon market for enterprise-level control, which is directly related to market access. However, the benefit is that it is conducive to driving the emission reduction of the entire industrial chain, and by tapping the emission reduction potential of the whole life cycle of the product, the transition from enterprise emission reduction to industrial chain emission reduction can be realized, and the specific effect depends on the structure of the industrial chain and the degree of control of the upstream and downstream of the chain owner. The EU Battery and Waste Battery Regulation, which will come into effect on July 1, 2024, mandates that electric vehicle batteries and industrial batteries with a capacity of more than 2 kWh must have a unique serial number printed in the "battery passport", declare the carbon footprint of the product, and set a carbon footprint access threshold. According to the requirements of the new version of the battery law, the battery industry chain from the mining, procurement, production and processing of raw materials, to the production of battery products, to the recycling and reuse of waste batteries, must be controlled by the carbon footprint limit standard of the whole life cycle of products. The carbon footprint management of related domestic industries is still in the exploratory stage, and China's power battery production capacity accounts for more than 70% of the world's total, and it is facing significant external pressure transmission and market access restrictions, which requires systematic planning and active response, accelerating the creation of a green and low-carbon supply chain, and promoting the green and low-carbon transformation of related industries. In November 2023, the National Development and Reform Commission and other five departments jointly issued the "Opinions on Accelerating the Establishment of a Product Carbon Footprint Management System", focusing on the shortcomings and weaknesses of the mainland's product carbon footprint management policies and proposing five key tasks. The first is to formulate product carbon footprint accounting rules and standards, the second is to strengthen the construction of product carbon footprint background database, the third is to establish a product carbon label certification system, the fourth is to enrich the application scenarios of product carbon footprint, and the fifth is to promote the international convergence and mutual recognition of carbon footprint. In December 2023, the Central Economic Work Conference proposed to accelerate the construction of a green and low-carbon supply chain. The main enterprises of the industrial chain and supply chain should play an exemplary and leading role, take the initiative to benchmark against international high-standard economic and trade rules, and drive upstream and downstream supply chain enterprises to jointly reduce carbon emissions. Through technological innovation, management optimization and international cooperation, we will accelerate the creation of a green and low-carbon supply chain and develop new quality productivity. Enhance the public's low-carbon awareness through carbon inclusion and other means, give priority to the selection of products with a low-carbon footprint, effectively play the role of demand in driving supply, and promote the comprehensive and systematic green transformation of economic and social development.
Author's Affiliation: National Center for Climate Change Strategy and International Cooperation
Contact: 010-64523406 Submission email: [email protected]
Editor: Zhang Rui
Proofreading: Jiang Yiyan
Review: Chang Fei Lu Xiangqian
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