In this edition of the Weekly Compliance Digest, we cover China’s national emissions trading scheme, which is now planned to be launched in December 2017.
Chinese National Emissions Trading Scheme
What is it?
In 2015, China announced its intention to launch a national carbon emissions trading scheme (ETS) as part of its commitments to reduce carbon emissions and fight climate change, made under the Paris Agreement. When launched, China’s new ETS will be the largest in the world, and will cover as many as 10,000 enterprises in sectors such as steel, power generation and papermaking, according to a Reuters article. China is the world’s largest emitter of carbon dioxide, but China emits fewer CO2 per capita than countries such as the U.S., Canada, Australia, Russia and others.
To prepare for the national ETS, China has been running seven pilots since 2013 in the country’s largest cities and regions. Under the seven regional carbon exchanges, firms have been required to buy permits to cover for emissions.
When is the ETS going to be launched?
The launch of China’s ETS was initially planned for the first half of 2017, it was then delayed to November 2017, and now it has been pushed to December 2017. Delays were due to a range of issues, including gaps in legislation, the valuation of permits in the existing seven pilot exchanges, as well as data accuracy and transparency problems in some industrial sectors, Reuters said. In addition, Reuters reported that authorities were worried that unreliable data in some industrial sectors would undermine the integrity of the market and allow firms to “game the system”.
During an initial phase that will last three years, regulators will seek to identify and address any issues before China’s ETS is fully implemented in 2020. The ETS will begin with power generators and expand to include eight key sectors by 2020, including steel, cement and aluminium, according to The Guardian.
What are the impacts on non-Chinese firms?
The first immediate impact will be felt by global organizations that have operations and plants in China, especially those involved in the key sectors affected. But there may also be indirect impacts on companies that are part of supply chains that include Chinese firms impacted by the ETS. An article by The Guardian makes a great point about Scope 3 carbon emissions, which include all indirect emissions due to the activities of an organization, including emissions from suppliers and consumers (e.g. purchased goods and services, waste disposal, transportation and distribution, etc.).
For many firms, Scope 3 emissions constitute the largest part of their carbon emissions, compared to Scope 1 direct emissions (e.g. company facilities and vehicles) and Scope 2 emissions (e.g. purchased electricity). Many multinationals are targeting their Scope 3 supply chain emissions. For example, Walmart recently asked its suppliers to help remove one gigatonne of carbon dioxide from its Scope 3 supply chain sources by 2030, The Guardian says. Chinese companies affected by the country’s ETS may also be inclined to take similar initiatives to reduce their carbon footprint, thus impacting non-Chinese firms in their supply chains.
Here are articles with more background information on China’s ETS:
- Spotlight on China as New Emissions Trading System is Set to Revamp the Global Market
- China CO2 Market Launch Set for November at Earliest: Government Researcher
- Xi Jinping is Set for a Big Gamble With China’s Carbon Trading Market
- Will China’s Cap-and-Trade Scheme Revive the Dream of a Global Carbon Market?
- China’s Emissions Trading Scheme Puts Australian Companies on Notice
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