EU-China ETS Quarterly Newsletter Issue 01
06/27/2022

Snapshot

  • ‘Support for Emissions Trading Policy Dialogue and Cooperation Between EU and China, Phase2’ was officially kicked off in December 2021, which signals continually enhanced cooperation between EU and China on climate change with concentration on carbon market.
  • Earlier this month, MEPs voted in favour of amendments of the EU ETS to accelerate industrial decarbonise and expand its scope to new sectors, including maritime transport, which is a hot topic advocated by MEPs and observers for many years.
  • In China, the Climate Change Department is dealing with emissions data issue, aiming to prepare for the second compliance cycle of its national ETS. As one outstanding issue in the first compliance cycle, data fraud attracted attentions from all market stakeholders. It is believed that China will improve its rule of law structure construction in terms of emissions trading and further strengthen data quality management.

Project Progress

Kick-off of the implementation. ‘Support for Emissions Trading Policy Dialogue and Cooperation Between EU and China, Phase2’, was officially kicked off in December 2021, which is duly initiated aiming to provide continuous support and facilitate China improve the functions of its ETS throughout the period of two years of project implementation over four components overarching Policy Dialogue, Capacity Building, Joint Research and Unforeseen Requirements.

Follow-up of Minister’s Policy Dialogue. In February 2022, a bilateral meeting between the EU DG CLIMA and Climate Change Department of China’s MEE was successfully organised, in which both parties discussed follow-up items raised by Vice Minister Zhao Yingmin of China’s MEE and DG Mauro Petriccione of DG CLIMA in the third EU-China ETS Cooperation Policy Dialogue on October 19, 2021, and agreed the next steps of further strengthening EU-China cooperation on emissions trading through the support of the Project.

Key Policy Highlights

EU ETS: Fit for 55 in 2030: MEPs vote for Emissions Trading System reform

On May 17, 2022, Members of the European Parliament (MEPs) voted in favour of amendments to the EU ETS, aiming to incentivise industries to further reduce emissions and invest in low-carbon technologies. The package includes a series of measures to accelerate the decarbonisation of industry, including to annually increase the annual reduction of emission allowances, to adopt a bonus-malus-system from 2025 to make the most efficient installations get additional free allowances, to phase out free allowances, and to expand the EU ETS inclusion scope to maritime transport. It also proposed that the separate new ETS for commercial buildings and transport shall be established on January 1, 2025, while it will not cover private buildings and private transport before 2029 so as to prevent additional energy costs to citizens.

Increase annual reduction of emission allowances: MEPs want the annual reduction of emission allowances to increase annually by 0,1 percentage points compared to the previous year until 2030, starting from 4,2 % in the year following the entry into force of this amendment. 

Incentivise best-performers and innovation: In this bonus-malus-system, which is going to be introduced 2025, the most efficient installations in a sector will be awarding additional free allowances, and those who do not implement the recommendations of the energy audits or certified energy systems or do not establish a decarbonisation plan will get punishment, losing some or even all free allowances.

End free allowances: This amendment proposed that the free allowance in the EU ETS should be phased out from 2026 and disappear by 2030, when the European Parliament wants the Carbon Border Adjustment Mechanism (CBAM) to be fully operational. The free allowances should be reduced to 90 % in 2025, 80 % in 2026, 70 % in 2027, 50% in 2028, 25% in 2029 and 0 % in 2030.

Extend to maritime transport: Until the end of the year 2026, all emissions from intra-European maritime transport routes as of 2024 and 50% of emissions from extra-European routes from and to the EU as of 2024 will be covered. From 2027, emissions from all trips should be covered 100% with possible derogations for non-EU countries where coverage could be reduced to 50 % subject to certain conditions. 75% of the revenues generated form the auctioning of maritime allowances shall be put into a specific public fund to support energy efficient transition and increase the EU maritime sector’s climate resilience.

ETS II for commercial buildings and transport: This separate new ETS for fuel distribution for commercial road transport and buildings shall be established on January 1, 2025, and to prevent that citizen have to bear additional energy costs, private buildings and private transport should not be included before 2029. MEPs also propose to insert a price cap of 50 EUR so that if the average price of allowances in ETS II exceeds this cap prior to 1 January 2030, 10 million allowances should be released from the Market Stability Reserve.

Revenues to be used exclusively for climate action in EU and member states. MEPs remind that a well-defined share of the auctioning revenue of the ETS should be used as an own resource to finance the EU budget as a general income. Only member states that have adopted legally binding targets for achieving climate neutrality by 2050 and measures for the phase out of all fossil fuels should be eligible for accessing the proposed Modernisation Fund, which is set to improve energy efficiency and modernize the energy system in less wealthy member states. In addition, both EU and member states must spend all of their ETS revenues on climate action but cannot be used to support nuclear energy-related activities and technologies.

China ETS: pressure to improve GHG emission data

A notice on the key tasks related to the management of enterprises GHG emissions reporting in 2022 was issued by the MEE on 15 March 2022. This notice requests provincial authorities to organise key emitting enterprises from the power sector and other key emitting sectors to account and submit their GHG emission reports for the year 2021, moreover, to disclose required information. 

Readiness of next compliance period: In terms of the power sector, according to this policy, enterprises with annual GHG emissions of over 26,000 tonnes of carbon dioxide equivalent in any one year in 2020 and 2021 are required to report their GHG emissions in 2021 by March 31, 2022. The data reported will support to form the name list of compliance enterprises and associated allowance allocation.

Update on grid emission factor: It is worth noting that the grid emission factor in this notice has been adjusted to 0.5810 tCO2/MWh from the previous value of 0.6101 tCO2/MWh, which allows the calculations to be more in line with the actual emissions of the enterprises and echo the needs of incentivising further GHG emission reductions.

Strengthened QA requirements: The power sector is required to apply updated QA rules since April 2022 according to the 2022 guideline, in which more sophisticated and stricter procedures of accounting and testing are given out. In particular to file the original data at monthly basis on official environmental information platform.

Underscore duties of provincial authorities: Provincial authorities shall complete verification of enterprises’ emission data and publish a name list of key emitters. In addition, local authorities are also required to improve their daily supervision of enterprises’ emission data and report their implementation of supervision to the MEE quarterly.

Information disclosure: The power sector is required to disclose their verified GHG emission information in the year of 2019-2020 on the official environmental information platform by 31 March 2021, according to the 2022 guideline.

China ETS: Successful Ending of the Frist Compliance

A notice on the follow-up work related to the first compliance cycle of the national ETS was issued by the MEE on 17 February 2022. The compliance rate in the first compliance cycle of China’s national ETS is 99.5%, which means still 0.5% of emitting enterprises included in the national ETS did not surrender enough allowances by the end of the first compliance cycle. This notice requests provincial authorities to urge the enterprises failed to complete compliance to surrender their allowances by February 28, 2022, and impose penalties on those enterprises in accordance with the relevant laws and regulations. Provincial authorities shall also organise the work related to information disclosure on the allowance of surrendering information as well as associated penalties of the first compliance period.

What We’re Reading

News of Policy development

Strengthening the national ETS development to improve regulation structure and active the market: CCPCC member  (Xinhua Agency)

Promote the implementation of the “1+N” policy system to form an incentive and restraint mechanism to reduce pollution and carbon emissions: Li Gao (China Environment News)

Improving the rule of law system for carbon emission trading to help achieve the "2030&2060" climate targets (Guangming Daily)

Key EU Parliament Committee Endorses Tougher Carbon Reform (Bloomberg)

REPowerEU: A plan to rapidly reduce dependence on Russian fossil fuels and fast forward the green transition (European Commission)

EU prepares to sell more carbon permits to pay for exit from Russian gas (Financial Times)

Shipping moves closer to EU’s carbon trading system as lawmakers push for GHG cuts (Splash247)

Analysis and Reports

Enhancing China’s ETS for Carbon Neutrality: Focus on Power Sector (IEA)

Analysis on CBAM’s impact on China in the context of China’s “30&60” climate targets and corresponding recommendations (Chinese Journal of Environmental Management)

Open Letter: Time to vote for an EU Emissions Trading System that works for climate and industrial transformation (Climate Action Network Europe)

MEPs raise ambition on EU carbon market reform (EU observer)

Fixing the carbon market’s wealth gap is key to fighting climate change, Davos panel says (FORTUNE)

Emissions Trading Worldwide: Status Report 2022 (ICAP)