By Paul Davies, Andrew Westgate, and Bridget Reineking

China’s chief economic planning body, the National Development and Reform Commission (NDRC), has today announced the launch of its national Emissions Trading System (ETS). The ETS is an ambitious effort that likely will surpass every other emissions trading system in the world, including that of the European Union.

Many observers anticipated that China would launch the national ETS at the 23rd Conference of the Parties (COP 23) to the Paris Agreement in Bonn, Germany, in November 2017. However, Chinese officials at COP 23 merely previewed that the national ETS still required government approval. The delay in launching the national ETS likely stems from the system’s logistical challenges, including the following:

  • The need for timely and comprehensive emissions data for each industrial sector covered by the system
  • Issues relating to the determination of consistent methods for setting benchmarks for free allowances
  • Coordinating utilization of offset credits to satisfy compliance obligations during the initial compliance period

In January 2016, the NDRC issued a number of ETS guidance documents, including a list of eight industries the ETS would cover: chemicals, petrochemicals, building materials, iron and steel, non-ferrous metals, paper, power, and aviation. However, today’s NDRC announcement indicates that, initially, the ETS will cover only China’s power sector. Nevertheless, the initial launch will include roughly 1700 companies. This includes all qualifying Chinese companies emitting more than 26,000 tons of carbon annually, which amounts to an excess of three billion metric tons of regulated carbon emissions — making China’s carbon market the largest in the world.

China’s national ETS program is several years in the making. Since 2013, China has operated pilot programs throughout seven regions of the country — including Guangdong, Hunan, Beijing, Shanghai, Shenzhen, and Tianjin. Under the seven regional pilot programs, companies must purchase permits to cover their emissions.

Although some details of China’s ETS are now clear, a number of important questions remain. In particular, the NDRC has not yet released the rules governing the methods of allowance distribution and allocation of any free allowances. However, China’s announcement signals that the country is positioning itself for an efficient and successful national ETS launch.

For more information about China’s ETS and pilot programs, please see Latham’s previous post here.

This post was prepared with the assistance of Tegan Creedy in the London office of Latham and Watkins.