Corporate Net Zero Pathways: What is new in the Chinese ETS (Carbon Emissions Allowance -CEA) quota setting and distribution plan for 2021 and 2022?

A few days before the beginning of COP27, the Chinese Ministry of Ecology and Environment (MEE) released a draft for consultation of the National CEA Quota Setting and Distribution Implementation Plan for 2021 and 202220212022年度全国碳排放权交易配额总量设定与分配实施方案(征求意见稿)》for the power industry. According to the MEE, the new quota formulation and distribution plan will prioritize energy security and stability of the power generation industry. It will favor sources with high capacity and efficiency, such as CHP, and those engaged in peak regulation. In parallel, the plan also demonstrates a tightening of carbon emissions control.

Quota setting and distribution methodology

New CEAs will continue to be distributed for free to the key emitters in the power industry. The benchmark value will remain the key indicator for emissions quota calculation for four power generation types:

  • conventional coal fleet >300MW,
  • conventional coal fleet <=300MW,
  • unconventional coal fleet
  • natural gas fleet.

The calculation methodology remains similar to that of the implementation plan for 2019-2020, except that CHP fleets will have more headroom for quota than before, due to the adjustment of the correction factor:

Unit emissions quota = power supply benchmark value × actual power supply amount × correction factor + heating supply benchmark value × actual heat supply amount.

New concept of breakeven balance value is introduced

In the new rules, the concept of breakeven balance value (盈亏平衡值, hereafter Balance Value) is introduced for the first time. The Balance Values refer to the corresponding benchmark values of different unit-types such that their carbon emissions quota is equivalent to their actual emissions. According to the consultative draft, the 2021 balance value is calculated based on the verified emissions of each type of unit in 2021 and the allocation method of the quota determined by the implementation plan, reflecting the actual carbon emission intensity of each type of unit.

Based on the Balance Value, benchmark values of different unit-types will be determined by the regulators, in combination with the carbon intensity reduction targets and other factors. From the figure 1, we can deduce that the emissions control focus of MEE in 2021 will fall on the conventional coal fleet (<=300MW) and the unconventional coal fleet as their benchmark values (power supply) fall by 2% and 3% against the Balance Values of 2021 while the other two unit-types (conventional coal and natural gas fleet) remain almost intact. In 2022, the focus will shift to the conventional coal fleet (>300MW) and natural gas fleet as the benchmark values go down 1% compared to the actual emissions (Balance Value) in 2021.

The new benchmark values seem much lower than those for 2019-2020, does it mean China will aggressively tighten emissions control?

Compared with the implementation plan for 2019-2020, for which benchmark values were formulated based on theoretical estimations and other factors such as economic growth targets, covid impact, etc, the new benchmark values for 2021-2022 are developed based on the Balance Values which represent the actual emissions intensity. Under such circumstances, it is reasonable to consider the Balance Values as the baseline value of different unit-types. The variation between benchmark values and the Balance Values would point to the emissions reduction gaps emitters will strive to fill. From the depiction 1, the emitters of different unit-types (power supply) will need to reduce emissions intensity by 0-3% respectively in 2021-2022. In addition, it can be safe to estimate that the emitters should probably have less surplus quota in 2021-2022 than 2019-2020 because the allocation will rely on the actual verified emissions data. It is possible that there will be less quota to be traded in the CEA market for the compliance settlement of 2021- 2022, which will take place at the end of 2023.

(MEE)

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