China publishes rules for carbon emissions trading scheme

China's ministry of ecology and environment has published rules that will govern the nationwide carbon emission trading scheme expected to commence trading in June, as part of efforts to develop a home-grown carbon marketplace.

The rules for managing the ETS -- which will initially be rolled out to the power sector -- lay out the broad framework within which emissions trading will be permitted, and were released on the ministry's website on May 19 under three categories governing registration, trading specifications and settlement.

A key feature of the rules is the setting up of regulatory bodies to intervene if carbon prices see abnormal fluctuations, emphasis on risk management and built-in mechanisms to protect against market volatility.

That takes on increased significance in the backdrop of the wide price swings seen in the Europe ETS market in recent months.

The latest set of rules supplement the first set laid out by the environment ministry on Feb 1. They now together form what the government calls the '1+3 framework' for its ETS trading system.

ETS rules -- registration, trade and settlement

A National Carbon Allowance Registry Authority will be formed to oversee registration procedures, and the entities allowed to trade carbon emissions include eligible companies under designated industrial sectors, institutions and individuals, according to the registration rules published May 20.

This setup paves the way for individuals to participate in China's carbon trading markets in future.

Each registered entity is only allowed to open one account in the national ETS, and the registration rules cover the holding, transfer, compliance and invalidation of allowances in the national registry. Other rules have also been stipulated for account management and supervision.

The second set of rules are related to trading and the creation of a National Carbon Trading Authority, which will handle the "market adjustment and protection mechanism".

"When unusual fluctuations in transaction prices trigger the protection mechanism, MEE can adopt approaches such as open market operation and adjusting Chinese Certified Emissions Reductions usage," the trading rules state.

Currently, entities registered under the national ETS can utilize voluntary credits called CCERs to meet up to 5% of their compliance obligations, according to the rules published in Feb.

One traded ETS unit will equal one ton of CO2 , the tick value will be 0.01 Yuan, and the National Carbon Trading Authority will set caps on price increments as well as the maximum tradeable volume to help stabilize the market if needed, the trading rules state.

The final set of rules are related to ETS settlement and state that at the end of each trading day, the ETS registry will fully settle each transaction and a risk warning system will issue warnings or limit accounts if there is confirmed misconduct or suspicious activity.

Milestones for China ETS

The three sets of rules will be effective before the official start of trade in June but the exact date was not specified.

China is currently running a pilot ETS program across several regions that will transition into the nationwide ETS, with the Hubei Emission Exchange in charge of ETS registration during the transition period.

Hubei will also manages ETS account opening, operation and maintenance together with Shanghai Environment Energy Exchange, another pilot ETS program.

Besides the pilot exchanges in Hubei and Shanghai, China has another seven pilot emission trading platforms that were launched since 2011.

The environment ministry's action plan stipulates that the nationwide ETS will be first rolled out for the power sector, with 2,225 power plants eligible for certain emissions allowances retroactively between 2019 and 2020.