引言 Introduction
On March 30th 2021, China’s Ministry of Ecology and Environment (“MEE”) promulgated a draft version of Emissions Trading Scheme Regulation (“New ETS Regulation”), soliciting for public opinions. Once officially promulgated, China will have a new national market with centralized emissions trading and centralized settlement. Existing emissions trading exchanges will be combined to this new market in phases. China is committed to coping with climate change as its national strategy. To fulfill China’s obligations under the Paris Agreement and Kyoto Protocol, China announced its commitment to peak its carbon emissions by 2030 and carbon neutrality by 2060. The new national carbon emissions trading market is set to serve as an important policy tool and a long term socio-economic mechanism to achieve China’s carbon emissions goals.
从全球来看，世界各主要国家早已在碳排放权交易上先行先试，积累了丰富的经验。美国在2003年就建立了芝加哥气候交易所，欧盟在2005就实施了碳排放权交易机制中并引入了现在被各国广泛采纳的“限制加交易”（cap & trade）的原则。而中国也早在2005年就通过CDM即发达国家与发展中国家之间的清洁发展机制项目的方式参与到国际碳排放权交易市场的实践中。笔者所在团队作为银团贷款律师于2007年参与的17亿元人民币东海海上风力发电场项目融资项目就作为国内最早几批CDM项目，创新地引入了场外跨境碳排放权交易这一金融创新元素。
From a global perspective, major countries around the world have long been pioneers in carbon emissions trading and have accumulated experience. For instance, the Chicago Climate Exchange was established in 2003 in the United States. European Union commenced emissions trading and introduced the “cap and trade” principle in 2005, which is now being widely used in many countries. China participated in global emissions trading as early as 2005 through participation in clean development mechanism (“CDM”) projects, an emissions trading mechanism operating between developed countries and developing countries. As early as in 2007, King & Wood Mallesons assisted a 1.7 billion RMB syndication loan arranged by Shanghai Pudong Development Bank to fund the construction and operation of East Sea offshore wind farms. This was one of the first CDM projects in China to adopt cross-border OTC emissions trading—a financial innovation at the time.
In this article, we will reflect on the development and status quo of China’s emissions trading market, review the new market oversight framework introduced by the New ETS Regulation, and share our observations on issues, outlook of the new market and its impact on industries and enterprises.
 核心概念 Key concepts
The term “Carbon peaking” and “Carbon neutrality” went viral in the Chinese news after they appeared in the Chinese government’s working report during this year’s “Two Sessions” and these terms were written into China’s 14th Five-Year Plan. According to IPCC, the intergovernmental Panel on Climate Change, “Carbon neutrality” refers to balancing human emissions and absorption of carbon, with the goal of achieving net zero carbon emissions. In contrast, “Carbon peaking” refers to the peaking of a country’s carbon dioxide emissions and the annual decline since the peak.
In order to limit global warming to well below 2 degrees Celsius, preferably to 1.5 degrees Celsius, as compared to pre-industrialization period, the Paris Agreement proposed that the global net greenhouse gas (“GHG”) emission must reach net zero by middle of this century. A key mechanism to achieve this goal is through each country contributing its national determined contribution (“NDC”). Carbon peaking by 2030 and carbon neutrality by 2060 is China’s NDC to fulfill its commitment under the Paris Agreement.
Currently, there are two main market instruments to achieve emissions reduction around the world, one is a carbon tax and the other is an emissions trading scheme (“ETS”). The 2016 version of the World Bank’s Report on “Emissions trading in practice—a handbook on design and implementation” defines ETS as the process whereby the government sets the quantity of emissions, allocate the allowances amongst key emission entities in key emission industries and permits the allowances to be circulated and priced on the market like a commodity, thus achieving carbon emissions reduction based on such market mechanism.
It is important to point out from the outset, the response to address climate change not only requires achieving “Carbon peaking” and “Carbon neutrality”, but also requires controlling emissions of GHG in its entirety. China’s ETS covers seven (7) GHG, of which six (6) of them are listed in the Paris Agreement and one (1) additionally added by China independently.
 中国碳排放权交易的历史和现状 History and current situation of carbon emissions trading in China
It has been a decade since China commenced its pilot emissions trading scheme in 2011. This period can be divided into two phases with the establishment of the MEE in 2018 as the dividing point.
第一阶段 2011年- 2017年，国家发展改革委是应对气候变化的主管机构，在这一阶段以国家发改委为主导颁布了以下主要的政策性文件：
Phase 1, from 2011 to 2017, the National Development & Reform Commission (“NDRC”) was the competent regulatory authority responsible for addressing climate change, and it has promulgated the following major policy documents in relation to emissions trading:
- In 2011, the NDRC promulgated “Notice on Introduction of Emissions Trading Pilot Program,” and since then seven provinces and provisional cities, including Beijing, Tianjing, Shanghai, Chongqing, Hubei, Guangdong and Shenzhen commenced emissions trading pilot operations.
- In 2012, the NDRC promulgated the “Interim Measures for the Administration of Voluntary Greenhouse Gas Emission Reduction Trading” to encourage domestic and foreign institutions, enterprises, groups and individuals to participate in voluntary greenhouse gas emission reduction trading by means of record management.
- In 2014, the NDRC promulgated the “Interim Measures for the Management of Carbon Emission Trading,” with an aim of establishing a carbon emissions trading market to provide trading of emissions allowance in accordance with the “cap and trading” principle and CCER.
- In 2017, the NDRC promulgated the “National Carbon Emissions Trading Market Construction Plan (Power Generation Industry),” which marked the completion of the overall design of China’s carbon emissions trading system and the official launch of the national carbon emissions trading system for the power generation industry.
Phase II, from 2018 until present, the competent authority in charge of addressing climate change was changed from NDRC to MEE, and during this Phase II, the MEE has promulgated the following major policy documents in relation to emissions trading:
- In 2020, MEE promulgated the draft “Management Measures for the Settlement of National Carbon Emission Rights Registration and Trading (Trial Implementation);”
- In 2020, MEE promulgated the draft “National Management Measures for Carbon Emission Trading (Trial Implementation);”
The 2016 version of the World Bank’s Report on “Emissions Trading in Practice—a Handbook on Design and Implementation” points out emissions trading market is a market driven by public policies. These rules and regulations issued by the NDRC and MEE has designed, constructed and led the creation and development of China’s emissions trading market. As of the date of this article, the pilot programs has had seven (7) meaningful performance periods, whereby it has achieved significant carbon emissions reduction. However, China’s emissions trading market is generally segregated with both national power industry market and local exchanges under pilot programs co-existing. The segregation clearly limits the overall trading volume. In addition, China’s emissions trading market is a spot market without financial derivatives which results in low liquidity.
 《新碳排放权交易条例》的主要机制和内容 Main mechanisms of the New ETS Regulation
The new ETS Regulation constitutes top-level design of China’s future nationwide emissions trading market, which defines the boundary of the market, the market participants, types of products and GHG to be traded on the market, the principles to set total national allowance and allowance allocation mechanism, what registration system and which trading rules applies to the market, and the reporting, reviewing and punishment mechanism, etc. Unfortunately, one major drawback is that this New ETS Regulation provides for a sound framework but it lacks details. Some analysts point out this is lack of specificity is intentional to facilitate passing the regulation as quickly as possible while leaving sufficient room for future flexibility.
市场运作减排的逻辑 The underlying logic for market based emissions reduction
ETS is a well-tested emissions reduction mechanism. The underlying logic for such a mechanism to achieve emissions reduction is that the overall allocation of allowance is matched with a country’s overall carbon emission target. Accordingly the allowances allocated to each country takes into account the overall reduction target, and each allowance is much lower than each country’s current carbon emission level. By limiting the allowance, this encourages each country to promote technological innovation and facilitate the use of alternative energy sources in order to keep its emissions level capped below the allowance. If there are unused allowance, a country can then sell their allowance on the market. If a country cannot maintain its emissions within the its prescribed allowances, the country can either buy from the emissions trading market or pay a penalty. Each year the overall distributable allowances will decrease, and the ideal is that all countries—globally—will jointly achieve carbon peaking and carbon neutrality gradually.
市场边界和市场主体 Boundary and participants of the market
The New ETS Regulation provides that the MEE will propose which industries may participate in the emissions trading market, subject to approval by the State council. It is anticipated that high emission industries will be included initially, such as power generation industry (which accounting to more than 50% of China’s Carbon emission), steel and ore, chemistry, architecture, cement, non-ferrous etc. According to the New ETS Regulation, participants to the emissions trading scheme shall include those that are identified as key emissions enterprises as well as other qualifying entities and individuals. Without doubt, key emission enterprises will be those entities in major identified industries whose carbon emission account for high percentage of overall carbon emission in China. Detailed criteria of participating key emissions enterprises will be proposed by the MEE subject to the State Council’s approval. The New ETS Regulation does not elaborate who are the qualifying entities and individuals eligible for emissions trading, which leaves room for flexible policies in the future. Taking the example of European Union, emissions trading has become the fastest growing investment banking business, attracting many investment banks, hedge funds, private equity funds, securities funds and individual investors to participate in emissions trading. There has also been practices of individual persons participating in emissions trading on the Chinese market.
总量限制下的额度分配 Cap and distribution of allowances
《新碳排放权交易条例》规定，生态环境部根据国家温室气体排放总量控制和阶段性目标要求， 提出碳排放配额总量和分配方案， 报国务院批准后公布，然后省级生态环境主管部门据此按年度向区域内重点排放单位分配。排放配额初期以免费分配为主，适时引入有偿分配，并逐步提高有偿分配的比例。这个规定非常原则性，我们期待未来将需要有一个配额管理细则，对诸如国家和地方生态环境主管部门之间的职责分配、年度额度的发放与履约后额度调整的时间差等细节问题进行补充规范。
The New ETS Regulation provides that the overall allowances and its distribution will be proposed by the MEE in accordance with China’s overall carbon emissions control objectives and phased target, subject to the approval of the State Council. Then each provincial authority will allocate to each key emission entity according to such principals. At the initial trading period, such allowances will be distributed for free and when the circumstances are appropriate, an auction will be introduced as means of allowance distribution. Over the years the percentage of distribution through bidding will increase. It is apparent, these rules are in principal in nature and we would expect that detailed allowance distribution rules will be promulgated shortly to specify the allocation of duties between the central MEE and local provincial authorities, the annual allocation of allowance on yearly basis adjusted by yearly performance and review.
碳排放权登记注册报告制度 Registration and reporting system of emission rights
Pursuant to the New ETS Regulation, a new national emission rights registration platform and emission trading platform will be established. The establishment proposal will be made by the MEE, subject to approval by the State Council. The emission rights registration and trading platform will provide centralized emissions trading, record the holding, change, oversight and cancellation of the emission rights and provide settlement for emissions trading. According to a recent newsletter published on the website of Hengseng Electronics, it will assist the construction of the national emission rights registration and trading platform, which will be a two-city model, with Shanghai United Assets and Equity Exchange responsible for supervising the national emissions rights registration platform and Hubei Emissions Trading Exchange responsible for supervising the national emission trading platform. The platform will support bidding, transfers, auctions, trading of emissions rights, certification of emission reduction (“CCER”), energy use rights, with the capacity to add more functions in the future.
碳排放权交易规则 Emissions trading rules
《新碳排放权交易条例》规定，碳排放权交易标的包括国家分配给各重点排放单位的排放配额和CCER。CCER主要是通过实施可再生能源、 林业碳汇、 甲烷利用等项目，实现温室气体排放的替代、 吸附或者减少。这些清洁能源项目可以申请生态环境主管部门组织对其项目产生的温室气体削减排放量进行核证。 经核证属实的温室气体削减排放量， 由生态环境主管部门予以登记。重点排放单位可以购买经过核证并登记的温室气体削减排放量， 用于抵销其一定比例的碳排放配额清缴。强制配额市场因为有法律制度约束力为基础，覆盖规模以上排放企业，其市场交易量占有主要份额。自愿减排市场作为强制市场的有效补充，可以提高全社会的减排责任，营造可持续性低碳社会的氛围。同时CCER也被媒体称为未来新能源企业“现象级的商品”，为企业带来可观的经济收入。
According to the New ETS Regulation, commodities to be traded on the market shall include emissions allowances and CCER. CCER refers to renewable energy projects, carbon sink projects, methane utilization projects, which substitute, neutralize or reduce GHG emissions. Sponsors to these projects may apply for the certification and registration by the MEE of GHG reduction of these projects. Such certified GHG emissions reduction can be sold to emissions entities to offset a certain percentage of exceeded allowance that they are allocated. In general, trading of allowance will constitute a majority of the trading volume on the emissions trading market as it is supported by mandatory regulatory regime whereas trading of CCER will supplement trading as it is conducted on a voluntary basis. It is anticipated the combination of these two trading will greatly improve the overall emissions reduction efforts. CCER is also being referred as “phenomenal commodity” of the future which can bring considerable income for those renewable energy projects.
On the existing emissions trading exchanges, trading is conducted through bidding, bilateral agreements, listing and picking, application for matching etc. Based on these key models, there have also developed other trading models, such as open trading, auction, listing, electronic quotation, bulk transaction etc. Currently, the New ETS Regulation only included trading by bilateral agreements, trading by unilateral quotation or other methods in compliance with law.
碳排放测量监测、报告与核查机制 Monitoring emissions outcome, reporting and verifying mechanisms
There are three important pillars to an effective emissions trading market, i.e. monitoring, reporting and verifying, which serve as an important basis to guarantee accuracy, credibility of the emissions data. Monitoring is the process where emissions data and information is collected. Reporting is the process where such data and information is composed and disclosed. Verifying is the process where the reports are periodically or independently evaluated and emissions outcomes are confirmed. This requires cooperation of government agencies, emission entities and third parties each play their roles in accordance with clearly outlined rules. The New ETS Regulation requires key emissions entities to prepare reports in accordance with technical specifications, truthfully disclose emissions data, timely fulfil emissions allowance compliance and accept verification by the MEE. After receiving the emissions report submitted by the key emissions entities, the MEE will organize verification by itself or engage third parties to conduct the verification as the basis of evaluating key emission entities’ compliance of their obligations.
 《新碳排放权交易条例》实施的挑战和机遇 Opportunities and challenges
Establishing a new national emissions trading market is an important policy instrument to achieve China’s carbon neutrality objective. It is predicted that once the new market is launched, China’s emissions trading market will be the biggest emissions trading system in the world, with volume of total allowances allocated therein exceeding other regional emissions trading markets such as EU or U.S. market.
Under the new centralized trading system, those existing emissions trading exchanges that are not being selected to operate the new centralized trading system will determine a different role to participate in the new market, either as special members trading on agency or as auctioneer assisting the auction of local emissions allowances.
From an industry perspective, the establishment of a new national emissions trading market and implementation of other carbon reduction policies will have a significant impact on all industries. The boundary conditions, development logic, development mechanism of the key emissions sectors, and the green sustainable sectors will certainty lead to a paradigm shift. The technology and industrial practices will be reshaped, which will stimulate innovation and upgrading of traditional industries and foster green investment patterns, technological innovations, investment and financing practices. Carbon reduction policies is primed to revolutionize all sectors including but not limited to transportation, building, energy, power industry, and aviation etc.
From a financial institution perspective, financial institutions can play an important role in emissions trading as a key investors, through which they can provide financial supports for green transformation via green bond, green loans, green fund etc. From a micro perspective, financial institutions will need to make carbon emissions an important compliance focal point to avoid projects being funded are being called off due to violation of carbon emission or projects facing critical financial failure due to failure to accurately predict the emissions allowances, emissions trading prices or policies. In addition, we predict Chinese financial institutions will make ESG compliance an important condition precedent for financial closing, a practice that has been adopted by international financial institutions such as World Bank, Asia Development Bank, Development Finance Institution etc.
Of course, there are still many challenges ahead to build a new national emissions trading market featured with wide coverage, sufficient liquidity, openness and effectiveness, e.g. determining annual distributable allowances, ensuring the fairness and openness of allowances allocation, formulating a market price mechanism, connecting China’s emissions trading market with international market, introducing financial derivatives such as carbon futures, carbon swap and connecting the emissions trading market with financial market, exploring emissions trading mortgage, and diversifying products and investors on the market etc. The New ETS Regulation signifies a green revolution is on the horizon, but there is a long way to go.