Policy Brief: Chinas National Carbon MarketThe development of China nationalEmissions Trading System (ETS)After a series of preparatory work in the recentyears (Figure 1.), the National Development andReform Commission (NDRC) issued the “WorkPlan for Construction of the National EmissionsTrading System (Power Sector)” in 17 December2017, marking the official launch of Chinasnational unified carbon market.Figure 1. The development of China ETSKey Messages: The upcoming simulation trading phase of national ETS is expected tobegin around the end of 2019 or early 2020; The current pilot ETSs are in operation stably with low carbon price; In March 2017, the Chinese government suspended the acceptance ofthe filing and application for Chinese Certified Emission Reductions(CCER) due to unclear policies; In mid-2019, China filed application to ICAO to include CCER as aneligible emission reduction unit under the Carbon Offsetting andReduction Scheme for International Aviation (CORSIA).In March 2018, the institutional reform plan wasapproved by the National Peoples Congress ofChina, including the establishment of a newMinistry of Ecology and Environment (MEE) toreplace the Ministry of Environmental Protectionto be responsible for climate policy (including ETSdevelopment). In April 2019, MEE released the“Interim Regulations on the Management ofCarbon Emissions Trading (Draft for Comment)”for public consultation, which is one of the keypreparations for Chinas national ETS.China is currently in the first phase of its nationalETS implementation the completion of marketinfrastructure. In September 2019, MEE releaseda trail plan for allocating emissions allowances tothethe power sector. This plan is expected to be thebasis for further refinement of the allocationplan for the upcoming simulation phase, which isexpected to begin around the end of 2019 orearly 2020.The characteristics of China national ETS Part to WholeIn terms of the space scope, the development ofChinas national ETS is a form of developmentfrom region to country (from pilot to national).At present, China has seven emissions tradingpilots and one newly added non-pilot area ofFujian. Simplicity to ComplexityChina national ETS currently will start from thepower sector due to its good quality of emissiondata and a relatively easy accounting method.With the further development of China nationalETS, the industry coverage will be graduallyextended to include other carbon-intensivesectors such as petrochemical and steel.The status quo of eight regional ETSsTill now, the cumulative trading volume of theeight ETSs was 364 million tons, with a totalturnover of 7.98 billion yuan; In terms of carbonprice, the average carbon price is concentratedmostly within the range of $2.85-$5.69, whileBeijing has the highest carbon price ($11.38)Chongqing has the lowest, at $1.42. Even thecarbon price in each ETS shows a stable trend, itis still low for effective emission reductions.12Main issues in China national ETS Top design needs to be strengthenedAt present, China national ETS is a spot markettransaction, whether it is a carbon allowancetransaction or a Chinese Certified EmissionReduction (CCER) transaction. The trading ofcarbon financial derivatives is very limited.Based on functions of MEE, it can only developthe carbon spot trading market. From theexperience of several internationally active ETSs,the futures market which can provide investorswith long-term stable expectations is the mainmarket for carbon trading, as it can enrichcarbon trading varieties and activate the carbonmarket. Data lack of transparency and accuracyExcept for power sector, other high-emissionssectors are difficult to set a unified accountingstandard, hindering the identification of thecorporates real emissions data and furtheraffecting the quota allocation method. Theenterprise quota allocation and transactionrelated data, and the transaction price of theCCER of the exchanges are not disclosed in eightregional ETSs, which is quite unfavorable for thehealthy development of national ETS. The mechanism from the pilot market to thenational unified market is undecidedFor the current power enterprises in the pilots,the most pressing question is whether theallowances retained in the pilot market cancontinue to be circulated in the national unifiedmarket, or is it written off by local authorities?As the degree of economic growth, allowanceallocation rules, and trading rules vary fromregion to region, the national ETS must abide bythe same rules by considering the balance andcoordination of interests. Capacity building remains weakDue to institutional reform in March 2018, MEErecruited new personnel responsible for climatework, while these personnel did not engage inrelated work, hence a new round of capacitybuilding is imminent. In addition, many carbon-intensive enterprises in the pilot ETSs have notestablished specific carbon asset managementdepartments. Inadequate market preparationwill pose a obstacle to the readiness ofenterprises participating in the ETS.Policy recommendations Establish a clear timetable for building a national ETSChina national ETS has been established slowly,lagging far behind market expectations. It issuggested that the competent authorities of thecarbon market formulate and promulgation aclear timetable for the construction of thenational ETS, including the time when otherindustries participate in the national ETS, andthe unified time of the local pilot carbon marketand the national carbon market. Only by settinga clear timetable can we include all sectors andmarket players to step up efforts to promotethe national ETS. Establish a carbon emission information disclosure systemIt is critical to establish a carbon emissioninformation disclosure system to create a moreopen and transparent market environment.Chinese enterprises should improve disclosureof their carbon emission information, makingthe competitive environment more fair, fullyutilizing the rules of the carbon trading market,accelerating the process of energy saving andemission reduction, and creating better returnsfor enterprises. Accelerating the transformation ofallowance allocation approachThe current allowance allocation approach ismainly based on free allocation. However,because it may not touch the interests ofenterprises, it is not conducive to strengthenenterprises action on emission reductions.Hence, China needs to promote the auction-based allocation method early on, which wouldbring greater competition awareness toenterprises and reduce more GHG emissions. Establish a timetable for the acceptance of CCERsIn mid-2019, China applied to ICAO to includeCCER as an eligible emission reduction unitunder the CORSIA; however, the registration ofCCER projects has been suspended by theauthority since 2017. Therefore, establishing atimetable for CCERs “return” can reduceuncertainty and make efforts to the national ETSand CORSIA. We expect to see the future CCERcould be more robust and transparent byconsidering environmental integrity andsustainability.Policy Brief: Japans Carbon PricingThe development of Japans carbonpricing policiesSince the Kyoto Protocol was released in 1997,Japan has been pushing for the adoption ofmeasures to combat climate change. Carbonpricing is one of the efficient policy tools toachieve Japans climate commitments. AlthoughJapanese government has not yet adopted anationwide emissions trading scheme (ETS), theTokyo metropolitan government introduced theTokyo Cap-and-Trade Program (Tokyo ETS) in2010. One year later, the Saitama Prefecturelaunched the Target-Setting Emissions Trading(TSET) Program and started linking with TokyoETS. In addition, Japan implemented a carbontax on oil, gas and coal imports in 2012, withrevenues going towards measures to curb CO2emissions. Besides, Joint Crediting Mechanism(JCM), a project-based bilateral offset creditingmechanism, was introduced in 2013 (Box. 1).Figure 1. The development of Japans carbonpricingKey Messages: In March 2019, the Tokyo government has finalized regulations for thePhase III (2020-2024) of its ETS which aims for a 30% reduction below2000 levels by 2030; Japanese carbon tax rate remains very low at less than $3 per/ton; The Japanese government is currently working on a carbon pricingproposal about its national emissions trading scheme; The Joint Crediting Mechanism (JCM) is currently established with 17partner countries to promote climate action.Currently, both two ETSs are in operation duringthe second compliance period. In March 2019,the Tokyo government has finalized regulationsfor the Phase III (2020-2024) of its ETS whichaims for a 30% reduction below 2000 levels by20302030, with a fourth compliance period yet to beannounced. As for carbon tax in Japan, the priceof this remains very low at under $3 CO2e/ton.Japans environment ministry is currently workingon a carbon pricing proposal (Japans national ETS)after a study released by an expert committee oncarbon pricing in 2018 assessing how carbonpricing could help Japan achieve its long-termtargets, although opposition remains in parts ofthe government, especially from the Ministry ofEconomy, Trade and Industry (METI).The characteristics of Japan regional ETSs The Tokyo ETS1. Designed for office buildingsThe main target of Tokyo ETS is office buildings.In Tokyo, many manufacturing facilities moved toother regions because of stringent environmentalregulation in the 1970s, therefore, the majorityof GHG emitters in Tokyo belong to commercialor office sector, accounting for approximately 80percent of regulated facilities.2. Financial sector plays a limited roleThe Japanese industry association was against theintroduction of ETSs, as they believed that an ETSwould invite speculation by financial companies,weakening its effectiveness. In response to thiscriticism, the Tokyo government allows that onlyemitting entities can participate in trading, andthat one can earn credits only after achievingemissions reduction.3. Unique method for measuring GHG emissionsThe majority of emissions from commercial andof34office buildings are from their electricity usage,as indirect emissions, which is different fromother ETS such as EU ETS focusing on emissionsfrom fossil fuel combustion. The Saitama TSET ProgramThe Saitama TSET Program is very similar inmany ways to the Tokyo ETS. However, unlikethe Tokyo ETS Japans first mandatory ETS, theTSET Program is a voluntary scheme and has nopenalties, even when enterprises covered bythe program are not in compliance with theiremission targets.sector does not play a crucial role in the scheme;besides, unlike other ETSs, there is no centrallyadministered market platform in which creditscan be traded. Consequently, the trades havebeen bilateral in many cases, further restrictingmarket liquidity. Until now, there have been fewtransactions in the Tokyo ETS. Tokyo ETS and Saitama TSET Program lackcarbon price floors and ceilingIn general, Tokyo and Saitama government donot control carbon prices. Although the Tokyogovernment offers offset credits for trading incase of excessive price evolution, the averagecarbon price in Tokyo ETS shows a sustaineddownward trend, declining from $31.5 in 2015to $5.89 in 2018. Low carbon tax rateJapans carbon tax rate is currently quite low atless than $3 per/ton, hence Japanese carbon taxcannot act as the main pillar of Japans climateand energy policy to reduce emission.Policy recommendations Extending the scope to other sectors in theexisting two ETSsThe current covered sectors of both Tokyo ETSand Saitama ETS are industry and building sector.Extending the scope of coverage would allow amore comprehensive coverage and emissionlimitation, and a fairer distribution of emissionsreduction responsibilities. Phasing-in auctions for emission allowancesAuction would send early price signals, makethe polluter pay, and allow for the revenues tobe used for climate mitigation and adaptationmeasures such as energy efficiency project. Setting up a carbon price floors and ceilingSince the launch of Tokyo ETS, its carbon pricehas been falling continuously, while the Tokyogovernment does not control the price, hence itis conducive to set up a price floors and ceilingto stabilize the carbon price. Revising the carbon tax policyToo high and too low carbon tax rate could notmake significant impact on emission reduction,so the policy-maker needs to adjust carbon taxrate at an effective level by considering socialjust.Box. 1 Joint Crediting Mechanism (JCM)The Joint Crediting Mechanism (JCM), aninitiative of the Japanese government tofacilitate the distribution of leading low-or zero-carbon technologies or activitiesin developing countries, is implementedunder bilateral cooperation betweenJapan and partner countries.Figure 2. The rationale of the JCMCurrently, the JCM is established with 17 countries, including Mongolia, Laos, Chile, Thailand and other developing countries, helping promote climate action and SDG implementation.Main issues in Japans carbon pricing Tokyo ETS may cause carbon leakage toother regions in JapanIn the Tokyo ETS, some covered enterprises mayhave moved or shifted economic activities toneighborhood prefectures such as Kanagawa orChiba from Tokyo to avoid compliance, as theseregions have not introduced an ETS. Tokyo ETS is not very activeAs mentioned above, only covered entities canparticipate in the Tokyo ETS and the financialsecPolicy Brief: Koreas Emissions Trading SchemeOverviewThe Emissions Trading Scheme is a greenhouse gas(GHG) reduction system as defined in Article 17 ofthe Kyoto Protocol, which allows the governmentto allocate annual emissions allowances tobusinesses that emit GHGs and to conductemissions within the allotted range. The Koreangovernment has introduced The Emissions TradingScheme to replace previous Target ManagementSystem implemented for large GHG emitting firms.Koreas emissions trading system (KETS) is basedon Article 46 of “the Framework Act on LowCarbon, Green Growth” (January 2010), and the“Act on the Allocation and Trading of GreenhouseGas Emission Permit” (May 2012) was enactedfrom January 2015 to support legal sanctions. Thefirst planning period of the KETS is from 2015 to2017, and the allocation standard considers thatthe businesses can accumulate policy experienceand establish the trading system. The secondplanning period (2018-2020) is for the goalfocused on contributing to a significant level ofGHG emissions reduction.Table.1 KETS operational plan by periodKETS is subject to the firms with three years ofaverage annual GHGs emissions of 125,000 tonsor more or with the workplace of emissions of25,000 tons or more and the firms which want toparticipate in voluntarily. There are six chemicalsubstances to be managed: CO2, CH4, N2O, HFCS,PECS and SF6. The standards of allocation methodsare historical emissions-based allocation quota(Grandfathering, GF) and benchmarks (BM)