Emissions trading refers to a mechanism for trading legal emissions rights as commodities with the aim of controlling the overall emission of pollutants into the environment and optimizing the allocation of emissions quotas. As a concept, emissions rights trading dates back over thirty years. However, it was not until the advent of the Kyoto Protocol which became effective in 2005, that the international community established the “Clean Development Mechanism” (“CDM”), a global emissions reduction regime. Under this mechanism, every developed country is required to commit to a certain amount of emissions reduction by a specified deadline. Those countries which generate more emissions than their certified emission reduction (“CER”) may purchase CER credits from the countries which have unused CER credits or which are not subject to emissions reduction commitments. In other words, enterprises in different countries may buy and sell rights to emit carbon dioxide by means of climate exchanges in a similar manner as they would trade stocks in stock exchanges.
As a developing country, China is not subject to any obligations to reduce its greenhouse gas (“GHG”) emissions under the Kyoto Protocol until 2012. Therefore, many enterprises in Europe, the United States and other developed countries have launched CDM projects in cooperation with Chinese enterprises. As China’s environmental problems worsen, the creation of energy efficiency and emissions reduction solutions has risen to the top of the agenda for China both now and in the long term. For this reason, China has promulgated a series of laws and regulations in order to promote energy efficiency and emissions reductions. The Outline of the Eleventh Five-year Plan for National Economic and Social Development explicitly establishes resource conservation as a fundamental national policy.
At the same time, Chinese enterprises led by CNPC Assets Management Co., Ltd (“CNPCAM”) began preparations to establish China’s first climate exchange, which has been hailed as a move towards opening a new epoch of environmental protection in China.
A. History of TCX
In the initial stage of the project, CNPCAM proposed possible solutions and identified potential legal risks involved in the project following extensive feasibility analysis to ensure the success of the project.
Although uncertainties existed in both the legal and commercial aspects of the project, CNPCAM was confident that the establishment of TCX would amplify China’s environmental protection efforts and help China prepare for its future emissions reduction obligations under the Kyoto Protocol. After several rounds of consultation and negotiation, CNPCAM, the Chicago Climate Exchange (“CCX”) and TCX signed a memorandum and furthered their discussions on the cooperation framework and details. Based on the memo, the parties executed a cooperative agreement in which they agreed to establish TCX. TCX integrated the resources of CNPCAM, borrowed the model and technologies of CCX’s emission trading platform, and benefited from the experience of the Tianjin Property Rights Exchange. In addition, TCX received tremendous support from the Tianjin municipal government and relevant departments of the central government.
On September 25, 2008, TCX was officially launched in Tianjin Binhai New Area, which is a State-Council-approved testing ground for ancillary reforms to China’s economic reform. TCX is expected to become an effective platform for China’s emissions trading regime.
B. Business Scope and Operation of TCX
During the present initial phase of its operation, TCX focuses on the trading and auxiliary services of emissions of primary pollutants including sulphur dioxide and chemical oxygen demand (“COD”) and pilot auctions of the CER of GHG, including carbon dioxide. In the future, TCX will engage in the trading of derivatives related to emissions trading in accordance with Chinese laws and regulations.
TCX adopts a membership system. The membership is classified into emitters, credits providers and bidders. “Emitters” are those entities which emit sulphur dioxide, COD and other pollutants subject to mandatory obligations of energy efficiency and emissions reduction. “Credits providers” refer to those entities do not physically cause emissions or do not bear energy-saving or emission reduction obligations and are thereby in a position to provide liquidity to the market. “Bidders” refer to those entities or individuals which bid for emissions rights with the electronic trading system of TCX.
As of the end of September 2008, several entities have become members of TCX, including CNPCAM, Tianjin Economic-Technological Development Zone, Industrial and Commercial Bank of China, Construction Bank of China, Bohai Bank, Taida Group, Bureau of Comprehensive Development of the Ministry of Water Resources of the PRC, China National United Oil Corporation, Northern International Trust Investment Corporation, Tianjin Zhongxin Eco-City Investment Development Corporation, Arreon Carbon Corporation, First Capital Futures Co. Ltd., Binhai Capital Co. Ltd. and Tianjin Equity Investment Co. Ltd.