Emissions Trading System

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The start of trading represents a significant opportunity for businesses able to achieve meaningful reductions.

By Paul A. Davies and R. Andrew Westgate

Nearly four years after China’s national emissions trading scheme (ETS) was announced in late 2017, trading of emissions quotas officially commenced on July 16. The start of trading represents a significant step in China’s adoption of market-based mechanisms for addressing climate change, while also signifying a major opportunity for businesses able to achieve meaningful reductions.

More than 4.1 million tonnes of Chinese Carbon Emission Allowances (CEAs) traded on the first day at a price of RMB52.78 (or US$7.42) per tonne — an amount that was in line with analysts’ expectations for launch. Although this price is significantly below the prices of allowances in the EU ETS (€52.89 per tonne on July 16) or California (US$18.80 per tonne at the May 2021 auction), it is close to the allowance price in the Regional Greenhouse Gas Initiative (RGGI) — a cap-and-trade program covering 11 states on the east coast of the United States (US$7.97 per tonne at the auction held on June 2, 2021). Like China’s ETS in its initial phase, the RGGI covers only power plants. Since the launch, prices have largely held steady, although volume fell significantly after the initial flurry of activity.

The newly published Energy White Paper establishes a domestic trading scheme and sets out plans to clean out energy. 

By Paul A. Davies and Michael D. Green

On 14 December 2020, the UK Government published its Energy White Paper (the Paper). The Paper builds on previous green economy plans, setting them “in a long-term strategic vision, […] consistent with net zero emissions by 2050”.

The Paper further details ambitions unveiled by the Prime Minister in mid-November, in his Ten Point Plan. Moreover, the Paper sheds more light on previously established initiatives, such as the UK Emissions Trading Scheme, previously set into law through the Greenhouse Gas Emissions Trading Scheme Order 2020.

The Commission’s 2030 Climate Target Plan sets out required actions for a number of sectors.

By Paul A. Davies and Michael D. Green

On 17 September 2020, the European Commission (Commission) presented its 2030 Climate Target Plan, which calls for a greenhouse gas (GHG) emissions reduction target of at least 55%, compared to 1990 levels; sets out required actions for a number of sectors; and identifies key changes to be made to existing legislation.

To announce the 2030 Climate Target Plan, the Commission released a Communication, a synopsis report that analyses responses to previous consultations, and an impact plan.

The proposals outline the potential new UK system after Brexit, which could be linked to the EU Emissions Trading System. 

By Paul Davies and Michael Green

On 1 June 2020, the UK’s Department for Business, Energy and Industrial Strategy (BEIS) published proposals outlining a new UK-wide Emissions Trading System (UK ETS) contained within a response document to a consultation conducted in May 2019. The proposals were jointly designed by the UK, Scottish and Welsh governments, and the Northern Irish Executive (together, the government). The government has stated that the proposals are a “crucial step” towards achieving the UK’s net zero carbon emissions target by 2050.

The public consultation on adjusting the GHG emission allowance auction process for 2021-2030 is open for comment until August 6.

By Joern Kassow and Alexander Wilhelm

In order to deepen cooperation in the energy sector and to build up a stronger Energy Union, the European Parliament and the Council revised Directive 2003/87/EC (ETS Directive) in March 2018 to implement the ambitious targets of the 2030 EU Climate and Energy Framework. The European Commission (EC) therefore plans to adjust the rules on auctioning greenhouse gas (GHG) emission allowances to maintain pace with these recent EU Emissions Trading System (EU ETS) developments. Prior to adopting a Delegated Regulation to amend Regulation (EU) No 1031/2010 (Auctioning Regulation), the EC is inviting comments on the draft until August 6, 2019.

As China begins to implement its emissions trading system, the country may look around the globe for regulatory guidance.

By Paul A. Davies and R. Andrew Westgate

China established its national emissions trading system (ETS) as a key component of the plan to meet its commitments under the Paris Agreement. The country’s participation in the Paris Agreement is significant not only because it contributes 15% toward total global carbon emissions, but because China was a key proponent of the agreement during its negotiation.

China’s initial hurdle was how to systematically collect the emissions data necessary to design and implement the emissions trading scheme. Accurate and comprehensive emissions data is critical not only for setting the level of the overall cap, but also in determining how free allowances will be allocated to regulated companies. Determining the rate at which the emissions cap declines also requires predicting future emission rates and market demand levels.

The EC is seeking feedback on its roadmap for the next EU Emissions Trading System revision.

By Paul A. Davies, Lars Kjølbye, Elisabetta Righini, and Guendalina Catti De Gasperi

The European Commission (EC) has launched an initiative for the revision of EU-wide rules for the free allocation of emission allowances under the EU Emissions Trading System (EU ETS). Under the initiative released on March 20, 2018, the new rules would be applicable in the fourth trading period of the EU ETS (2021-2030). In particular, the initiative will:

As a first step, the EC has published a roadmap (Roadmap) describing the scope, purpose, and timing of the revision, and the main features of its consultation strategy. Stakeholders can provide their feedback on the Roadmap until April 17, 2018.

By Paul Davies and Andrew Westgate

Chinese policymakers have indicated that the country’s Emissions Trading System (ETS) — which will be the largest system of its kind globally and the centerpiece of Chinese climate change policy — is likely to launch in November 2017 “at the very earliest”. The delay will enable China to announce the launch at the next UN Climate Change Conference in Bonn, Germany. However, Chinese officials have privately indicated that this likely will be a “formal” launch only, with allocation of emissions allowances and compliance obligations coming into effect during 2018. As a result, several of the existing ETS pilot programmes in Chinese provinces and major cities have begun to announce new allowance allocations for 2017, including for sectors covered by the national ETS.

The delay reflects a number of policy challenges that regulators at the National Development and Reform Commission (NDRC), China’s primary economic policy-making body, have struggled with in designing the ETS. For example, difficulties in obtaining accurate emissions data for each industrial sector covered by the system, determining benchmarks for the allocation of free allowances to industry, and whether pilot programmes may use offset credits (Chinese Certified Emissions Reductions) to satisfy compliance obligations during the initial compliance period. Verifying emissions data has been an issue for regulators managing China’s eight pilot programmes, with the Hubei Province recently delaying its compliance deadline due to problems verifying total emissions for 2016. The carbon market remains concerned about a potential oversupply of offset credits and reports that policymakers will exclude offset credits from the initial compliance phase of the new National ETS.