Zhigang Luo

The key elements analysis of Guangdong & Shenzhen ETS & tips for China national ETS construction

ABSTRACT The only joint effort area of provincial and municipal governments resides in Guangdong Province and Shenzhen City in China’s carbon emission trading system (ETS) pilots, which characterize the national carbon ETS plots. The present study on the operating experience from this area has important reference value for the national carbon ETS. Analysis and comparison of the key elements show many differences in coverage, total allowance, allowance allocation, and MRV mechanism between Guangdong and Shenzhen carbon ETS. The present study provides the following explanation: (1) the design characteristics of carbon ETS (e.g. coverage, total quotas, the allocation, and MRV mechanism) depend on the local geographical conditions and policy goals. The differences of economic structure in Guangdong Province and Shenzhen City result in different coverage, which then result in differences in other management elements. (2) The operating state of the carbon market is affected by overall design of carbon ETS: in the case of tighter total allowance, lower proportion of China Certified Emission Reductions, and harsher punishment, the carbon market is relatively active, which intends to produce carbon financial market. Based on deep analysis of operation characteristics of carbon ETS in Guangdong and Shenzhen, the present study suggests that (1) the allowance should be allocated freely at the beginning stage and then gradually transited to the voluntary paid auction; (2) the allowances assigned to companies shall be linked up with their energy-saving objectives; (3) the output fluctuations and economic influence on the allowance allocation should be properly handled to maintain the fairness and consistence of allowance allocation standards; (4) stable public expectation is one of the key elements to maintain the regular operation of carbon ETS; (5) constrained carbon emission behavior outside ETS can contribute to social justice; and (6) the improvement of professional skills of relevant personnel in the enterprise and independent third party can enhance carbon emissions data reliability.

Guangdong Pilot ETS Allowances Allocation Mechanism

The “cap-and-trade”-based ETS follows two principles for free allowance allocation: “Grandfathering” and “Benchmarking”, which apply to different conditions and objects (Carbon Trading Task Group of CAS Guangzhou Institute of Energy Conversion, Q and A about Design and Practice of Guangdong Emissions Trading Scheme. China Environmental Science Press, 2014, [1]). Grandfathering is a free allocation based on average historical emissions of covered enterprises. It is applicable to the companies (e.g., in chemical and electronics sectors) that have complex process, multiple categories of technologies, and a great variety of products. And, it costs much to gather their emission data. In case of Benchmarking Allocation, the allowances are the production/value of a working procedure or a product, which is multiplied by unit emissions.

Guangdong Pilot ETS Coverage Scope and Allowances

The ETS is comprised of seven components: coverage scope, allowances setting, allowance allocation, transaction management, legal framework, MRV rules, and linkage with external carbon markets. The coverage scope is the primary part, since its reasonable coverage, to a certain extent, that decides the operational efficiency of the ETS. However, most of the Chinese current researches focus on total allowances calculation and allocation, instead of on industry coverage of the ETS. In fact, the number and ownership of the covered companies decide the allowances total amount and allocation standard of the ETS.

Micro-impact Assessment of Guangdong ETS

The ETS is an organic system that requires an all-round assessment from the perspective of systematology. In order to evaluate the administration efficiency of Guangdong ETS, our research team computed the relative efficiency of Guangdong ETS with DEA Model. The outcome is considered as a key criterion for judging the appropriateness of Guangdong emissions allowances allocation. For employing this model, we used the 31 provinces/municipalities as the study samples, and 26 of them were defined Decision Making Unit (DMU) through screening.

Global ETS Operation and Their Merits and Demerits

Since the Kyoto Protocol (KP) was signed in 1997, all parties to the KP have been actively exploring the path to transit to a low-carbon economy, and using a market mechanism to cut Greenhouse Gas (GHG) emissions and save the cost for emission reduction. On January 1, 2005, European Union Emission Trading Scheme (EU ETS) was launched, which was followed by Regional Greenhouse Gas Initiative (RGGI), Midwestern Greenhouse Gas Reduction Accord (MGGRA), Western Climate Action Initiative (WCI), and California Cap-and-Trade.

Development Track and Policy Context of Guangdong Carbon Market

Since implementing the reform and opening-up policy in 1978, China has been making considerable progress in building a socialist economy with Chinese characteristics, and exhibiting the intrinsic value of land, labor force, and capital which function as production factors in value creation and distribution. While the Chinese economic volume keeps expanding the resources and environment, energy and carbon emissions credits have become scarce elements that have received attention of policymakers. As such, establishing a market mechanism with energy consumption and carbon emissions as basic elements has become an especially important task.

Impact of Guangdong ETS on Macroeconomy

Policy evaluation is an analysis and study of the policy scheme’s effect and efficiency using some methodologies during formulation and implementation of regional policies or afterward, which is for the purpose of improving rationality and effect of the policy. By setting up a series of evaluation criteria and indicators, policy evaluation is able to inform policy-makers and the public of the implementation effect of emissions reduction policies, and demonstrate the essence of such policies and commitments of the proponents.

A Brief Overview of China’s ETS Pilots: Deconstruction and Assessment of Guangdong’s Greenhouse Gas Emission Trading Mechanism

Overview of Guangdong Carbon Emission Trading Mechanism Operation -- International GHGs Emission Trading Mechanism -- Guangdong’s Energy Consumption & Structure Analysis -- Guangdong’s CO2 Emission & Structure Analysis -- The Coverage and allocation amount of Guangdong Carbon Emission Trading Mechanism -- The Allocation Mechanism of Guangdong Emission Trading Mechanism -- Monitoring, Reporting, Verification in Guangdong Emission Trading Mechanism -- The Trajectory & Logic of Guangdong Carbon Market -- Mitigation Efficient & cost of Guangdong Emission Trading Mechanism -- Macroeconomic Impact of Guangdong Emission Trading Mechanism.

Guangdong Carbon Emissions Status Quo and Main Characteristics

Guangdong energy consumption mix—dominated by fossil fuels—has generated high level of carbon emissions. The statistics revealed that aggregate energy consumption had been increasing year by year, and the evolution process could be split into three stages during 1995–2012. In Stage I (1995–2002), aggregate energy consumption increased with an AAGR at 6%. During this period, Guangdong economy grew at a slow pace, and consumption of coal, petroleum, and electricity achieved at an AAGR at 5, 7, and 14%, respectively.

Overview of Chinese Pilots ETS and Characteristics

For the purpose of fulfilling China’s carbon emissions reduction targets by 2020 through a cost-efficient market mechanism, and expediting transformation of economic growth pattern and upgrading industrial structure, China’s State Council, at the end of 2011, issued the Work Plan for Greenhouse Gas Emissions Control during the 12th Five-Year Plan Period, which requires to “explore and establish a national unified carbon emissions trading market.” In response to the State Council’s plan, the NDRC, in October 2011, initiated a carbon emissions trading pilot program in seven regions, including five municipalities as Beijing, Tianjin, Shanghai, Chongqing, and Shenzhen, and two provinces as Hubei and Guangdong, the earliest pilot ETS which open its carbon market is Shenzhen ETS in June, 2013, and the latest launched is Chongqing ETS in June 2014.