Chinese activists force coal-fired power company to meet emissions obligations

A group of Chinese activists from non-governmental organizations have successfully forced coal-fired power company Shangcheng Power Co. Ltd. to meet its outstanding emissions obligations that had accumulated for years under the country's national compliance carbon market through a lawsuit, state media China Environment News reported late June 19.

This is the first publicly reported case in China where environmental groups sued a company that failed on its emissions obligations and it reflects the evolving role of such activists in the country's carbon ecosystem as NGOs have traditionally had limited influence in this space.

Notably, China Environment News is the mouthpiece of the Ministry of Ecology and Environment, which oversees the country's carbon market development, and the regulator's willingness to publicize this case also shows its inclination to tighten the enforcement of emissions rules even if it involves indirect means.

"The lawsuit prosecuted by the NGOs should be seen as a useful move that has pushed the company to fulfill its liabilities, pay for its emission allowance deficits, and cut future emissions," the report said.

The plaintiffs -- the NGOs -- said Shangcheng Power emitted 821,596 mtCO2e in excess of its free emissions quota assigned under the national compliance carbon market in 2019-2020. Shangcheng Power, a small privately-owned power company in Xingyi, Guizhou province of southwest China, needed to buy equivalent emission allowances from other companies to cover these excess emissions.

Under government regulations, companies had to surrender all emissions allowances by Dec. 31, 2021, for their 2019-2020 emissions. But up to Jan. 20, 2022, Shangcheng Power had only purchased 3,448 mtCO2e of emission allowances, resulting in an 818,148-mtCO2e emissions allowance deficit.

To put the number into context, in June, the average daily emissions allowance trade volume was 123,200 mtCO2e for all companies in China's national compliance carbon market.

The defendant Shangcheng Power said it did not miss the deadline on purpose but was facing financial difficulties, and purchasing the emissions allowances required at least Yuan 60 million ($8.26 million), which was unaffordable at the time, according to the report. Shangcheng Power could not be reached for comment.

During the litigation process, the company eventually paid for the full outstanding 818,148 mt of emission allowances by Dec. 28, 2023, despite its financial difficulties. The company ended up spending Yuan 73.18 million as the carbon prices had risen in two years.

China's national emission allowance or CEA price was at Yuan 91.41/mtCO2e ($12.59/mtCO2e) on June 20, official exchange data showed. The CEA prices used to be Yuan 40-50/mtCO2e in December 2021.

Broader implications

China's compliance carbon market currently covers 5.1 billion mt of CO2 emissions annually and the majority of the emissions are from large, state-owned power companies, instead of small, private companies like Shangcheng Power, an analyst with a local carbon consultancy said.

"However, this case is still interesting and meaningful. It shows that NGOs in China have started to drive changes in the country's carbon market development. Meanwhile, it reveals the struggles of such small companies who do not have the capability to manage their carbon assets," the analyst added.

China is working to expand its compliance carbon market to cover more sectors besides power generation, notably iron and steel, cement and aluminum.

"It is very important to support these newly onboarded companies, especially small, private ones, to build up both awareness and knowledge, so similar stories won't happen again," another China-based carbon analyst said.

While Shangcheng Power will not be penalized further as they already made payments during the litigation process, the local court still required the company to issue a public apology on local media for emitting excess CO2 and damaging the environment.

State media also pointed out that besides the carbon market, there's currently no policy instrument to penalize companies that emit excess CO2 and damage the environment. In contrast, for pollutants like Particulate Matter (PM), regulations have already been established to quantify the environmental damages brought by a company and the respective penalties.

New legislation

China's national compliance carbon market itself has been firming its implementation policy to penalize defaulters.

The MEE enforced a new rule May 1 under which companies that fail to meet deadlines will have to pay 5-10 times the market price of their allowance deficit.

For companies that still don't meet emissions obligations, the government has the right to halt production and force them to pay for the allowance deficits, the new legislation showed.