The impact of the carbon-neutrality target on China’s national ETS

A post by Li ZHOU (Institute of Energy, Environment and Economy, Tsinghua University), external collaborator of the project LIFE DICET

On 22 September, China’s President Xi Jinping gave a speech on China’s new climate change target at a meeting of the United Nations General Assembly. China, the President announced, aims to peak CO2 emissions by 2030 and to achieve carbon neutrality before 2060. Emission trading is one of the most important and effective policy tools for addressing climate change. To implement China’s new target of first peaking carbon dioxide use and, eventually, becoming carbon-neutral, China should accelerate the construction of a national carbon market; something emphasized by Han Zheng, Vice President of China, at a symposium in the Ministry of Ecology and Environment on October 13. These new targets will have a significant impact on the design of the national Chinese carbon market, particularly over the long term


In the initial stage of China’s national ETS, the cap will be intensity-based reflecting the current overall mitigation target. The combination of “bottom up” and “top down” methods is part of the cap setting. This kind of approach is one way to overcome current political difficulties. Achieving new mitigation targets, China’s national ETS might have an absolute emissions cap in the future. And it is supposed that the transition period will be as short as possible. The question is how soon to introduce an absolute cap and how much this will help in achieving carbon neutrality.


Entities to be covered in the first stage include enterprises and public-service institutions whose annual comprehensive energy consumption stands at the equivalent of about 10,000 tonnes of coal (about 26,000 tonnes CO2-eq) in eight different sectors. It is expected that thresholds will be lowered to take in those firms who reach 13,000 tonnes CO2-eq, or whose annual comprehensive energy consumption reach 5,000 tce. Under new mitigation targets and absolute control caps, carbon markets will play a key role in reducing emissions in the future. The question is how soon to expand the threshold and what preparations and technical fixes need to be made now.

Allowance allocation

The power industry is the first sector to be covered. The Implementation Plan for the Allocation of CO2 Emission Allowances for Key Emission Entities in the Power Industry (Including Captive Power Plants and Cogeneration Plants) (Draft) in 2019 was used for trial allocations with suggested benchmark values. There are generally 11 types of turbines with different fuels, with different scales and with different technologies. It is impossible to set a single benchmark value for all units in China in the initial phase. There were some discussions about dividing all thermal power units into three or four groups. On 20 November, 2020, 2019-2020 National Carbon Emission Trading Cap Setting and Allocation Implementation Plan (Power Generation Sector) was published. Comments and suggestions are being collected by MEE for four benchmarks with relative benchmark values, for conventional coal-fired units above 300MW, conventional coal-fired units with 300MW or lower, unconventional coal-fired units and gas-fired units. It is hoped that the first transaction will be completed later this or next year. At the same time, the enterprise’s allowance shortage was limited, to a maximum of 20%. In order to encourage the development of gas-fired units, when the verified emission of gas-fired units are not less than free allocated allowances, the surrender obligation is the total amount of free allowances obtained. When verified emissions are lower than those freely allocated, the surrender obligation shall be free allowances equivalent to the verified emissions.

The allowance allocation methods and the relative benchmarks for electrolytic aluminum and cement have been discussed since 2016. Methods with benchmark values have been used for trial allocations in some provinces. It is hoped that these two sectors will be covered after the power sector. With support from Platform for Policy Dialogue and cooperation between the EU and China on Emission Trading project, allowance allocation and benchmark setting for the chemical and the steel sector in the national ETS are being researched on the basis of cooperation between Chinese and European experts. The energy consumption proportions of ammonia, methanol and calcium carbide in the whole chemical industry account for, respectively, 16.94%, 21.74% and 5.38%. These three products have been suggested for inclusion in a future detailed benchmark study.

In the sector study, current benchmark values for each sector will, it is suggested, lead to an allowance shortage in each sector. It is supposed that most enterprises could absorb the economic impact of shortages in the initial stage. Under the new mitigation targets, it is expected that benchmark values will be much stricter in the future. This trend complies with one of the principles of allowance benchmark setting: “a step by step approach tightened gradually over time”. The question now is how fast to tighten the benchmark values.

Generally speaking, carbon-neutral targets would enhance the importance of the carbon market in emission reduction, mean greater attention from businesses and industries, enhance confidence in carbon market construction, and bring new challenges to construction and development. It goes without saying that the establishment and implementation of China’s national carbon market will have a profound impact on the global carbon market.

The views and opinions expressed in this post are solely those of the author(s) and do not reflect those of the editors of the blog of the project LIFE DICET.