Written by: Morgan Jiang, Chaojun Zhang, Wenqing Guo KWM Corporate Business Group





1. What is Emission Trading?

2. How does China’s National Carbon Emissions Trading Scheme work?

3. How does China’s Regional Pilot Carbon Emissions Trading Scheme work?

4. How do data centers correlate with Carbon Emission Trading Scheme?

5. What are the key takeaways for data center investors?

China is home to the world’s second biggest data center industry. [1] With the rising needs of digitalization, carbon emissions derived from digital infrastructure are growing fast. According to White Paper on Low-Carbon Data Centers (2021)/低碳数据中心发展白皮书 (2021 ) issued by China Academy of Information and Communication Technology, [2] China’s total carbon discharge of 2020 reached 10 billion tonnes and is expected to grow to 18.4 billion tonnes by 2030 if there’s no limitation. [3] With China’s national carbon emission trading scheme launched in June 2021, existing policy and market momentum are developing to drive energy transition towards carbon neutrality. Understanding how current regulation regime connects us with data centers would be vital for future investment in China in such sector.

1. What is Emission Trading?

Emission trading is generally regarded as a market tool to reduce or control emission of climate-damaging gases. The emission trading system (“ETS”) was first brought up by the European Union in 2005, and has gradually been sprouting around the world. [4] Under most cases, ETS works on the principle of cap and trade. [5]

China has been developing its ETS ever since 2011. It first started with regional pilot ETS and gradually turns into national ETS. Against the backdrop of carbon neutrality, as brought up by President Xi at the UN Assembly last year, China has been accelerating the development of its national ETS.

2. How does China’s National Carbon Emissions Trading Scheme work?

The year 2021 proves to be a watershed year for China’s national ETS. On July 16, 2021, China’s national ETS kicked off its first online trade. As one of the key instruments for carbon neutrality, China’s national ETS covers 2162 entities in power generation industry (发电行业)[6] and is expected to cover some other industries including petrochemical, chemical, building materials, steel, nonferrous metals, paper, and domestic aviation in the future. [7] Under China’s national ETS, each target entity will be allocated with allowances to emit carbon dioxide based on its output, with specific benchmarks for fuel and technology.

Historically, China’s national ETS was first introduced in 2017. National Development and Reform Commission (“NDRC”) sets out milestones for China’s national ETS based on Work Plan for Construction of the National Emissions Trading System (Power Generation Industry)/全国碳排放权交易市场建设方案(发电行业). However, the function of environment protection in this regard was switched from NDRC to Ministry of Ecology and Environment (“MEE”) in 2018 due to China’s government reorganization and it is only until this January that MEE has started to release concrete implementation documents outlining the working mechanism of China’s national ETS. The governing law for the national ETS, Administrative Measures for Carbon Emission Trading (Trial)/碳排放权交易管理办法 (试行) (“Trial Measures”), provides general guidance to trade carbon emission nationwide. Following the Trial Measures, a bunch of ancillary documents were issued.[8] In late June 2021, Shanghai Environment and Energy Exchange, the operator of the national ETS, also released three detailed trading rules to facilitate daily running of ETS.

3. How does China’s Regional Pilot Carbon Emissions Trading Scheme work?

In 2011, Chinese government announced to establish regional pilot ETS in 7 locations, namely Beijing, Shanghai, Tianjin, Chongqing, Shenzhen, Guangdong and Hubei. In 2016, Fujian was chosen to be the 8th regional pilot ETS. Regional pilot ETS vary in terms of scope, allocation methods, price levels and etc., with an intention to test different design options and figure out the best practice.

For now, regional pilot ETS continue to operate in parallel with the national ETS. According to the Trial Measures, regional pilot ETS will only cover entities that are not included in the national ETS. It is expected that existing regional pilot ETS will gradually transit into the national ETS in the long run.

4. How do data centers correlate with Carbon Emission Trading Scheme?

Certain companies that operate data centers in Beijing are listed in the List of Key Carbon Dioxide Emission Entities of Beijing (2020)/2020年度北京市重点碳排放单位名单 (“Beijing List”). Beijing adopts a quota scheme for key carbon dioxide emission entities. Any entity listed in the Beijing List will be allocated with allowance every year and should comply with the Administrative Measures of Beijing Carbon Emission Trading (Trial)/北京市碳排放权交易管理办法(试行) and its ancillary documents.

Beijing pilot ETS was first launched in November 2013, covering approximately 45% of the city’s total emissions and a wide range of industries, including heat, cement, petrochemicals and etc[9]. In 2016, Beijing further lowered the inclusion thresholds from the original 10,000 to 5,000 tCO2/year.

Beijing pilot ETS proves to be the pioneer for the national ETS. Some recent news also reveals that some other regional pilot ETS, such as Guangdong[10], is planning to include data centers to its local entities list.

If investors intend to invest in data centers located in Beijing, it is suggested to check whether the target is on the Beijing List and thus will have to comply with local emission restrictions.

 5. What are the key takeaways for data center investors?

(1) Certain data centers are subject to regional pilot ETS and such data centers should comply with emission trading requirements. Monitoring what regional pilot ETS rules require is vital for investment in built-up data centers.

(2) Emission quota/allowance may also pose obstacles to data centers in terms of construction. For example, allowance for power generation industry in the national ETS will be revoked if construction before approval (未批先建) exists. [11]Though data centers are not subject to the national ETS at this moment and risks incurred are relatively remote, it is still advisable to keep an eye on its further development.

As pressure mounts on government to carbon neutrality and carbon peak, policymakers of all levels have been working towards a low-carbon transition actively. King & Wood Mallesons will continue to monitor new come-ups in this area and keep you posted of this green drive in acceleration to full speed. A series of data Center and carbon neutrality articles will follow in the near future:

(i) Energy saving: key to data center investments in China

(ii) Foreign investment in China’s data centers

(iii) Guide to permits and certificates required for China’s data centers

(iv) Construction approvals required for data centers

(v) Major operation agreements for data centers


[1] Greenpeace. China 5G and Data Center Carbon Emissions Outlook 2035. Retrieved from https://www.greenpeace.org/static/planet4-eastasia-stateless/2021/05/a5886d59-china-5g-and-data-center-carbon-emissions-outlook-2035-english.pdf

[2] China Academy of Information and Communication Technology/中国信息通信研究院 is a scientific research institute directly under the Ministry of Industry and Information Technology of China.

[3] China Academy of Information and Communication Technology. White Paper on Low-Carbon Data Centers (2021)/低碳数据中心发展白皮书 (2021年). Retrieved from https://www.dctech.org.cn/dctech/achievements.html.

[4] ETS in China. Emission Trading Schemes in China. Retrieved from https://ets-china.org/ets-in-china/

[5]European Commission. EU ETS Handbook. Retrieved from https://ec.europa.eu/clima/sites/clima/files/docs/ets_handbook_en.pdf

[6] According to list of key emission units for the national carbon emission trading quota management from 2019 to 2020/纳入2019-2020年全国碳排放权交易配额管理的重点排放单位名单 (国环规气候〔2020〕3号)

[7] According to Article 1 of Notice on Strengthening the Management of Enterprise Greenhouse Gas Emissions Reporting/关于加强企业温室气体排放报告管理相关工作的通知 (环办气候〔20219)

[8] On May 14, 2021, MEE released three management rules regarding ETS as below:

Carbon Emission Right Registration Management Rules (for trial implementation)/碳排放权登记管理规则(试行)

Carbon Emissions Trading Management Rules (for Trial Implementation)/碳排放权交易管理规则(试行)

Carbon Emission Right Settlement Management Rules (for trial implementation)/碳排放权结算管理规则(试行)

[9] International Carbon Action Partnership. China – Beijing pilot ETS. Retrieved from https://icapcarbonaction.com/en/?option=com_etsmap&task=export&format=pdf&layout=list&systems%5B%5D=53

[10] 21 Finance/21财经. Guangdong may achieve carbon peaks ahead of schedule; data centers and other industries may be included in Guangdong carbon market/广东或提前实现碳达峰,数据中心等行业或纳入广东碳市场.  Retrieved from https://m.21jingji.com/article/20210209/herald/6709b020e6604c5997467856609598a1.html

[11] According to 2019-2020 National Carbon Emissions Trading Quota Setting and Distribution Implementation Plan (Power Generation Industry)/2019-2020年全国碳排放权交易配额总量设定与分配实施方案(发电行业)