China ETS One Step Closer to Launch with Market Rules and Draft Allocation Plan Release.pdf

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China ETS One Step Closer to Launch with Market Rules and Draft Allocation Plan Release 1 China ETS One Step Closer to Launch with Market Rules and Draft Allocation Plan Release DIGEST Follonulling Presidennull Xi Jinpingnulls annonullncemennull in Sepnullember 2020 nullhanull China aims nullo peak carbon emissions before 2030 and achieve carbon neutrality before 2060, the policnull framenullork for Chinanulls nanullional ETS has monulled further ahead with the recent publication of key policy documents for consultation, on ETS market rules and updated allocation plan. The draft market rules put out key areas of market operation and design of the national carbon market and defines details regarding allowance registry, trading and settlement. Allowing CCER offsets for up to 5 of yearly compliance will boost the offset markets following the suspension in 2017. The updated allocation plan confirmed that the first compliance period of China ETS will be two years covering 2019 and 2020. The main benchmarks is slightly stricter compared to the trial allocation plan from last year, but the usage of load factor correction factor is a potential loophole that could favor old coal plants. Nevertheless, with the rapid progress in legislanullinulle framenullork, Chinanulls nanullional ETS is monulling one snullep closer nullo lanullnch in nullhe coming monnullhs. Analysis by Yuan Lin CHINA NATIONAL ETS PREPARATION WORK ACCELERATED IN NOVEMBER The Ministry of Ecology and Environment MEE published three ministerial regulations for public consultation in November, signaling significant acceleration of the construction of the national ETS. On 2 November 2020, the MEE issued two policy documents on the national ETS establishing regulatory authority and specifying general rules in key areas of market operation and design. The two documents are entitled the National Measures for the Administration of Carbon Emission Trading Trial, hereafter the Measures, and the Administrative Measures for the Registration, Trading, and Settlement of the National Carbon Emission Allowances Trial. The deadlines for ting comments were 1 December 2020 and 11 November 2020, respectively. Then on 20 November 2020, the MEE released the Implementation Plan for Cap Setting and Allocation of National Carbon Emission Allowances 2019-2020 power sector Draft for Comments, hereafter the Allocation Plan. It is the third version following the trial allocation plan in September 2019, and the internal version for stakeholders in August 2020. Read our previous analysis China’s Long-awaited and Much-halted ETS will Speed up with Backing from Leasers for details of the stakeholdersnull version in August. Below is our take on the draft ETS rules and allocation plan THE ETS RULES ARE COMPREHENSIVE, BUT ITS LEVEL OF MINISTERIAL REGULATIONS IS LOWER IN THE LEGAL HIERARCHY The Measures sets out key aspects of China national ETS. It defines the threshold of covered emitters to be yearly greenhouse gas emissions above 26,000 ton CO2eq or 10,000 ton standard coal. It clarifies on the transition of pilot ETS that emitters covered in national ETS will opt out from pilots when the ETS regulations enter into force. The national carbon market will begin with free allocation of allowances, followed by gradual introduction of auctioning. The MEE could reserve some allowances for market regulation and major projects. Financial investors and individuals could be allowed in allowance trading at a later stage. As mentioned by the Measures, covered entities, other institutions and individuals can voluntarily purchase and cancel emission allowances. However, banking and borrowing of allowances are not mentioned. MEE has confirmed that the three policies are to be released in the of departmental regulations which is lower than state council level regulations, therefore many issues are not covered. We expect that to secure an ordered market, the state council level regulation, the Regulations on the Management of Carbon Emission Trading, will be released in the 2021 to cover the matters that cannot be stipulated by the departmental regulation. Downloaded from Refinitiv Eikon by Yuan.Lin on 12/04/2020 082140 Due to the lower legal hierarchy, failures in reporting will only subject to an administrative fine of CNY 10,000 to 30,000, while failures in compliance obligations are subject to a fine of CNY 20,000 to 30,000. Therefore the level of financial fines in the national ETS appears to be quite limited compared nullo nullhe null100/nullon fine in the EU ETS. Although it is required that any gap between verified emissions and allowances ted could also be deducted from the follonulling nullearnulls allocanullion, we still expect the very low ceiling in fine will be a hidden factor hampering enforcement. REINTRODUCING CCER FOR COMPLIANCE WILL BOOST THE OFFSET MARKET A major change in the new ETS market rules is the reintroduction of Chinese offset CCER in the national ETS. The Measures stated that covered entities can use offsets for up to 5 of their verified emissions from domestic emission reduction projects in renewable energy, carbon sinks, methane utilization, and others. We expect the enterprise to fully use the offset limit, therefore the demand of the CCER will be largely increased from 2021. With renewables in China largely moving to grid parity from next year, allowing CCER from renewable projects could be seen as indirect subsidies for solar and wind projects. We expect 2020 CCER trading volumes to be around 60 million tons and in 2021 market may reach 500 million tons a year. 2,267 POWER ENTERPRISES WILL BE COVERED IN THE FIRST COMPLIANCE PERIOD 2019-2020 The updated allocation plan sets the first compliance period of Chinanulls national ETS to be two years, 2019 and 2020. In addition, the MEE published a full list of the first batched of entities covered, 2267 enterprises and mostly coal-fired power plants. In addition to public power plants, self-consumption power plants on site of industrial facilities are also included, mostly in Shandong, Henan and Xinjiang. This is the reason why the total number of power enterprises increased to 2,267 compared to 1,700 in the 2017 national ETS plan. Figure below shows the number of covered enterprises by province. Shandong province tops the list with 346 covered enterprises, which is also the largest in terms of coal generation among provinces. Figure 1 The number of covered enterprises by province The confirmation of the covered entities builds on an extensive historical data collection process that started in 2013 and continued until this year. The allocation plan stated that entities in the pilot ETS that are already in the process of 2019 and 2020 allocation will be excluded from the national ETS for those two years. So far, eight pilots have all completed 2019 compliance and started 2020 allocation, whether the covered entities will be covered under the national ETS in 2020 compliance depend on when the final version of the Measurement will be officially released. BENCHMARKS HAVE BEEN TIGHTENED SLIGHTLY BUT LOAD CORRECTION FACTORS WILL FAVOR OLD PLANTS Compared to the previous versions distributed in September 2019 and August 2020, the draft continues to use benchmarking as the main allocation , with four benchmarks for conventional coal plants below and above an installed capacity threshold of 399 MW, unconventional coal plants including coal gangue, coal slime, and coal water slurry, etc., and natural gas plants, Downloaded from Refinitiv Eikon by Yuan.Lin on 12/04/2020 082140 respectively. The table below provides the changes in benchmark values as compared to the previous version in August 2020. Overall, benchmarks have been tightened slightly for all categories. Figure 2 Benchmark values comparison between the 3 rd version and 2 nd version Compared with the previous version, benchmark value of conventional coal-fired units has decreased by about 10, while that of unconventional coal-fired units and gas-fired units has risen by about 2, the heating reference value of coal-fired units decreased by about 7, while that of gas-fired units remained unchanged. We expect the updating of the benchmark values may be due to power plants increasingly adopting real monitoring of emissions rather than using the default values of emission factors. Similar to the last version, gas-fired plants will not face compliance obligations. Coal power generation facilities and combined heat and power plants will need to surrender their free allocation and allowances for up to 20 of verified emissions above the benchmark. These arrangements aim at promoting gas-fired units and reducing the overall compliance burden. One of the main changes to the allocation ology is the new regional correction factor. This provincial correction factor is an improvement meaning, which will give the chance for regional governments to further align allocation to regional climate targets but only by tightening rather than loosening allocation. This could be related to the proposals of provincial emissions peaking plan as required by the pledge of emissions peaking before 2030. Figure 3 The less hours operated, the more allowances a coal plant can get Another main change is the load factor adjustment factor, which provide units with less operation hours more allowances. This means the coal plant running less hours in a year will get more allowances than 0.877, the less hours operated, the more allowances it will get. This policy is a compensation for those plants that are mainly used for peaking generation, which usually run less hours in a year and mostly in renewable-rich provinces. Therefore, even though the new benchmarks are largely decreased from last version, the actual adjusted benchmarks will be almost 20 higher given most of Chinanulls coal plants running at half load. Hiking the benchmark for plants with very low load will partly offset the tightening of the benchmark. Benchmark for power generation tCO2 per MWh Benchmark for heat generation tCO2 per GJ 3rd version November 2020 2nd version August 2020 3rd version November 2020 2nd version August 2020 Conventional coal plant 399 MW 0.877 1.003 0.126 0.135 Conventional coal plant 399 MW 0.979 1.089 0.126 0.135 Unconventional coal 1.146 1.256 0.126 0.135 Natural gas 0.392 0.404 0.059 0.059 Downloaded from Refinitiv Eikon by Yuan.Lin on 12/04/2020 082140 Overall, the new benchmark will indicate slightly lower total allocation, which could be in the order of 200-300 Mt per year than we have previously estimated. The allocation for 2019-2020 will be 8-8.5 Gt. CHINAnullnull NAnullInullNAL Enullnull ONE STEP CLOSER TO LAUNCH Following the new 2060 climate pledge announcement in September, the work on the preparation of the national ETS has accelerated too. The released draft ETS market rules and updated allocation plan are now under discussion. At the 30 November press conference, MEE spokesman stressed that the China national carbon emissions trading rules trial version will be released soon following the public consultation process. Other specific rules on other key ETS design elements will be released as additional technical rules and guidelines. The construction of Registry and Trading plats are also under progress, paving way for real trading transaction to take place. Following the latest policy development, the national ETS is expected to start operation in the coming months. Downloaded from Refinitiv Eikon by Yuan.Lin on 12/04/2020 082140 Visit R Refinitiv Carbon Research By Yuan Lin Senior Analyst, Carbon Research Yuan.LinR Downloaded from Refinitiv Eikon by Yuan.Lin on 12/04/2020 082140