The institutional framework for national ETS is coming - the Administrative Measures for Trading of Carbon Emission Rights (for Trial Implementation) promulgated

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After extensive public consultation, the Administrative Measures for Trading of Carbon Emission Rights (for Trial Implementation) (《碳排放权交易管理办法(试行)》in Chinese) (Administrative Measures) were officially promulgated by the Ministry of Ecology and Environment (MEE) on January 5, 2021. Serving as a part of Beijing’s agenda to establish the national ETS for the trading of carbon emission rights (national ETS), the Administrative Measures are an institutional framework and milestone for the launch and improvement of a unified national market.

As early as 2014, the National Development and Reform Commission (NDRC) issued the Interim Administrative Measures for Trading of Carbon Emission Rights (《碳排放权交易管理暂行办法》in Chinese) (Interim Measures) to regulate the establishment of the national ETS. MEE also issued the Interim Administrative Regulations for Trading of Carbon Emission Rights (Draft) (《碳排放权交易管理暂行条例(征求意见稿)》in Chinese) on March 29, 2019, for public comments, in an attempt to introduce a regulation with higher legislative level to replace the existing regulations.

Although the time for such a regulation with higher level is yet to come, after six years of exploration in regional carbon markets, as well as the gradual establishment of the national ETS over the past two years, we are delighted to see that MEE has finally promulgated the long-awaited Administrative Measures, which aims to provide an institutional framework and to accelerate the launch of the national ETS as soon as possible.

Since the Administrative Measures were promulgated after its draft version (Draft Administrative Measures) published by MEE on October 28, 2020, to better understand the new regulation and the regulatory trends it implies, we produce a summary report on the main provisions of the Administrative Measures as follows based on the comparison between the Interim Measures and the Draft Administrative Measures.

1. The list of key emission entities is still to be determined by the provincial competent authorities.

Under the Interim Measures, the regulation of the national ETS adopts a "top-down" pattern, requiring the provincial competent authorities to determine the list of key emission entities within their jurisdictions based on the relevant criteria. In comparison, the Draft Administrative Measures require that all emission entities meeting the criteria shall take the initiative to report themselves to the competent authorities so as to generate a list of key emission entities.

In this regard, the Draft Administrative Measures put forward a new "bottom-up" regulatory pattern, which shifts the reporting duty from the government to the emission entities. Such policy was expected to motivate the emission entities to proactively comply with the law and form a two-way dynamic regulation system between the competent authorities and the emission entities. However, the Administrative Measures do not adopt the proposed pattern. Article 9 stipulates that, "the competent departments of ecology and environment at the provincial level shall, pursuant to the relevant provisions of the Ministry of Ecology and Environment, determine the lists of key emission entities within their respective jurisdictions.”

Accordingly, the Administrative Measures inherit the "top-down" pattern as specified in the Interim Measures, under which the competent authorities are still responsible for determining the list of key emission entities. It is noteworthy that, according to Article 12, after an emission entity that meets the criteria for key emission entities reports itself, the competent authorities shall include it in the list after verification.

This indicates that the legislators believe the implementation of a full scope “bottom-up” pattern is still immature, but it still can serve as a supplementary mechanism. In the future, it is still possible that the competent authorities will step back from the front when the barriers for the “bottom-up” pattern are removed, such as the vast variety of the measurement methodology for gas emission is unified and the ability to identify the emission entities who fail to report themselves is improved.

In addition, Article 11 of the Administrative Measures also prescribes a removal mechanism: If an emission entity’s emission is below the threshold of the key emission entities for two consecutive years, or if its emission ends because it no longer engages in production or business operation, it will be removed from the list. This mechanism further improves the list management by solving the previous “only-in-no-out” issue.

2. Cross-ministry regulation enforcement is introduced.

MEE is the prime competent authority for national carbon trading. Article 6 of the Administrative Measures requires MEE to jointly enforce regulation with other relevant departments of the State Council.

Undoubtedly, the joint approach facilitates the sensitivity and the enforcement of the carbon trading market regulation. However, the Administrative Measures do not adopt the joint penalty mechanism proposed in Article 46 of the Draft Administrative Measures, which requires the provincial competent authorities to inform their penalty decisions to their counterparts of market regulation, tax and finance.

In the case of false statements in its emission report filed by an emission entity, the Draft Administrative Measures stipulate that the competent authorities have the discretion to decide if its emission quota for the next year shall be decreased by an amount equal to the falsely-stated amount. In the Administrative Measures, the reduction penalty is no longer discretionary but compulsory. This exemplifies the legislative intention for stricter regulation, eliminating the room for manipulation.

In addition, the Administrative Measures require that the emission entities shall keep their emission data for at least five years, which assists the competent authorities to conduct retrospective supervision.

3. The carbon emission right is recognized as “quota.”

The Interim Measures and the Draft Administrative Measures both define the carbon emission right as the "legally obtained right to emit greenhouse gases into the atmosphere" and the carbon emission quota as “the carbon emission volume for a certain period allocated by the government to the key emission entities.” The Administrative Measures combine these two concepts and define the carbon emission right as “carbon emission quota for a certain period allocated by the government to the key emission entities.” Here, the carbon emission right is recognized as a kind of administrative quota, instead of a statutory right. At present, there is still controversy over the legal nature of the carbon emission right, and we hope that it will find its place in the hierarchy of statutory rights soon.

To sum up, we see that the Administrative Measures inherit the regulatory logic of the Interim Measures. Moreover, these new measures further refine the institutional framework for the national ETS and enhance the regulation. Overall, the Administrative Measures still maintain a prudent attitude toward the regulatory policy, the legal status of carbon emission right and the financial risk of carbon trading. For example, while strengthening the regulation, the Administrative Measures emphasize that this emerging market is a part of the "carbon emission reduction" agenda rather than a financial policy; in addition, it expressly cautions against excessive speculation during the promotion of the market.

Along with the Implementing Plan for Setting and Allocating the Total Quotas for National Carbon Emission Rights Trading for the Period 2019-2020 (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)》in Chinese) and the List of Key Emission Entities Included in the Management of National Carbon Emission Right Quotas Trading for the Power Generation Industry (《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》 in Chinese), both promulgated in December 2020, the Administrative Measures are an institutional document and milestone for the establishment of the national ETS. We are looking forward to witnessing the further development and breakthrough in the carbon trading market in 2021, such as extending the market from power generation industry to others, covering more trading products other than quotas, and introducing an offset mechanism such as CCER when appropriate.

We will keep track with the development of China’s carbon market and update our observation duly. Please stay tuned.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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