Linking emissions trading systems - Energy and Climate Change Committee Contents


Annex


China visit meeting notes

Sunday 19 October

Paul Lengthorn, Director, China, Mott MacDonald; Jan Van der Van, Director, Asia, Carbon Trust; Mark Hewlett, Associate, Atkins; Chas Pope, Director, China, Arup

Discussion on UK-China bilateral low carbon and climate change cooperation, and the opportunities and barriers facing British low-carbon businesses operating in China.

Monday 20 October

Renato Roldao, ICF international and partner organisations

Discussion of Euroaid's €5 million emissions trading system (ETS) capacity building project with the key implementing organisations.

·  ICF International were supporting the design of a national ETS by providing knowledge and capacity to ensure any lessons learnt in the seven pilot ETSs were incorporated into the national ETS.

·  The Chinese Government will replace the pilot ETSs with a national ETS.

·  While technical differences between the pilots were small, linking them was impractical due to the diversity of experience including; the price and allocation of allowances, sector coverage, whether the cap is fixed or intensity based, and the level of enforcement.

·  The national system will come into force in 2016. It will draw on the best attributes of each of the pilots. All parts of the country will likely be included by 2018 or 2020. It will cover the most economically developed parts of the country first. The pilot areas, for example, were considered to cover more than 40 per cent of China's gross domestic product (GDP).

·  The Government will develop a national legal framework to ensure compliance.

·  Linking a national ETS with systems in other countries has been a consideration. The Government would not want to make a system that was incompatible with others around the world.

Li Junfeng, Director-General, National Centre for Climate Change Strategy and International Cooperation (NCSC)

Discussion on emissions trading in China, climate change policy more generally and perspectives on the UNFCCC negotiations.

·  The Chinese Government has given a clear signal that it will reduce its carbon intensity. China is able to control its emissions but there are economic risks in doing so. For example, to displace coal with solar energy could cost up to 20 per cent of GDP. This makes it difficult to determine when its emissions will peak [On 12 November 2014 China announced that it intends to achieve the peaking of CO2 emissions around 2030].

·  China recognises that there are various approaches to reducing emissions which differ greatly. The United Kingdom (UK) and the United States (US) are often held up as taking different approaches. Many people believe that China is following a US model to emissions reduction. The Chinese Government has not yet decided how it will reduce emissions. It is likely to give an indication of its approach in 2015. Achieving emissions reductions of even 1% a year will be very challenging.

·  China would like to exploit its shale gas resources. There are several barriers frustrating exploitation including; water, infrastructure, sand and geology. In addition, more companies need to be allowed to explore for shale gas and the Government should encourage technical innovation.

·  There is currently a debate about whether a market price (ETS) or a government price (tax) should be used to control emissions. Linking a Chinese ETS will be difficult without a global market.

Lu Hao, Chairman, National People's Congress (NPC) Environmental Protection and Resource Conservation Committee (EPRCC)

Discussion on the role of legislation in the establishment and linking of carbon markets, the status of China's draft climate legislation and the role of climate legislation over the long-term in the transition to a global economy.

·  China's rapid development has led to severe environmental problems. The Chinese Government takes this issue seriously and has been making unremitting efforts to address the problem. It has introduced environmental pollution laws and tasked 10 cities and regions to tackle air pollution using industrial action plans. These will have co-benefits of addressing local pollution as well as climate change.

·  The Government has recently passed a legally binding resolution to tackle climate change. It has set out targets that it is now trying to achieve. It aims to increase renewable energy capacity by 11.4 per cent. China is the largest installer of several renewable technologies including wind power. Challenges remain including, for example, integrating technologies into the electricity system and ensuring the provision of the renewable energy law is implemented.

·  An ETS will be important to help address climate change and improve air quality in China. Introducing legislation for implementing a national ETS will be a key issue for consideration. But still at the very beginning stage of this work studying and debating different options. Believe that China should put carbon trading on its legislative agenda as soon as possible. During the legislative process we will draw on different experiences from inside and outside of China.

·  They are interested to learn about the UK and EU's experience of developing legislation to address climate change.

Jiang Zhaoli, Director, Department of Climate Change of the National Development Reform Commission (NDRC)

Discussion on China's progress towards achieving its low carbon goals during the 12th Five Year Plan. Market mechanisms, including emissions trading pilots, progress towards the national scheme, and the prospects for linking with other countries was also discussed.

·  In 2009 China committed to improve its carbon intensity by 40-45 per cent by 2020. The 12th 5 year plan set out how this would be achieved. So far the Chinese Government has made good progress and is confident it will meet its targets. It is optimistic that it could go even further in its 13th 5 year plan and may revise its targets. This ambition has been driven by a need to tackle China's severe environmental problems and climate change.

·  Several factors have contributed to the progress made including; installing renewable and low-carbon energy technologies such as wind, solar, hydropower and nuclear; increasing forested areas; implementing caps on coal consumption in specific economic regions; and a general slowdown in manufacturing and exports.

·  Emissions will continue to rise but this will slow as energy efficiency improves. This will not, however, be evenly distributed across the country. In some regions carbon intensity is rising. In order to meet China's national targets some regions that have already made progress on reducing their carbon intensity will have to shoulder more of responsibility.

·  The seven ETS pilots were launched in 2011. Five pilots have now completed a trading cycle. Each pilot has a fixed cap. Different sectors (e.g. power, chemical, building, aviation etc) are treated differently and either have a grandfathering or benchmarking approach. China's pilots are already the second largest ETS in the world. The pilots have had 96-100 per cent compliance from companies because the penalties for non-compliance are severe. Lessons are, however, still to be learnt from the pilots. These include the need for; a strict ETS law to ensure compliance, a stricter accounting methodology and more third party verifiers. The most importance conclusion reached from the pilots is that they are possible and necessary. China has drawn upon experience from the EU ETS and the systems in the US.

·  A national ETS will replace the pilots by 2016. Each pilot had to ensure that the value of an allowance was the same across each of the pilots. This will also ensure that existing allowances will be valid in the forthcoming national market.

·  In future linking China's national ETS with other systems could be possible but will be dependent on whether an international agreement can be reached which ensures the nature of trading is the same between ETSs. Linking ETS also requires political trust that the systems have integrity.

Vicky Pollard, Counsellor-Environment and Climate Change, Delegation of the European Union to China; Gailius Draugelis, Head of Partnership for Market Readiness Programme, World Bank; Wu Qian, Consultant, Ecofys; Mr Mei, General Manager, Beijing Environment Exchange.

Discussion on the successes and challenges of the current emissions trading pilots, linking the pilots, and design and implementation of the national scheme.

Tuesday 21 October

Lu Lunyan, WWF; Li Rusong, Carbon Disclosure Project; Li Lailai, World Resources Institute; Guo Peiyuan, Syntao

Discussion of work to support the government and private sector implementation of emissions trading and the challenges still facing China in the low carbon transition.

·  China has been discussing the potential to cap total emissions by 2030. This is unprecedented. Carbon trading is currently high up on the policy agenda. The focus is currently on increasing efficiency rather than overall reduction. It is currently difficult to determine how effective the pilots have been at either improving efficiency or reducing emissions.

·  Development of China's seven pilot emissions trading systems have exceeded expectations and officials at every level are happy. The pilots have made the prospect of implementing a national trading system between 2016 and 2020 more concrete.

·  Challenges to developing a national system remain. These include ensuring robust monitoring, reporting and verification systems are in place and trusted; scaling up or linking the different pilot systems; and ensuring compliance from participants at a local level.

·  Removing the pilot systems and replacing them with a national system will be difficult because of China's size and because the pilot systems are already up and running. A hybrid system is most likely. How influential participants, such as the power sector, view the pilots and the development of a national system will be important.

·  It is unlikely that linking will be approved by the central Chinese Government in the near future.

Xia Yong, Vice-Minister and Deputy Director, Legislation Affairs Office of the State Council

Discussion of the status of China's climate legislation, what is included in the legislation, how this will support the establishment of the national ETS and future plans for China's climate legislation framework.   

·  China is developing a law to tackle air pollution. This will include legal and technical measures to try and mitigate emissions. Liability will be placed on local governments who have responsibility for environmental protection.

·  China is exploring the potential for a national emissions trading system. From a legal perspective implementing an ETS is difficult, especially monitoring, reporting and verification provisions. They want to make sure they get it right. They are currently learning from the experience of China's seven pilot systems as well as the experience of other countries. They are keen to learn from the UK's experience.

·  It is currently difficult to say when a national system will be implemented because they are still learning from the experience of the pilots. Only when they are satisfied that the issues identified in the pilots have been solved will a national system be put in place. This includes ensuring that local governments strike the right balance between economic development and environmental protection.

·  Agree that ETS should be compatible and potentially able to link up because climate change is a global problem.

Wednesday 22 October

Bin Zhao, Vice Director-General, Hubei Province

Discussion on the progress of Hubei's ETS and low carbon related policy.

·  Hubei province is working on restructuring its economy and growth model encouraging the development of new industries such as renewable and service industries. This work is led by the Hubei Provincial group on climate change, chaired by the Governor of Hubei. Carbon per unit of GDP reduced by 3.5%. Higher than the national goal of 3%.

·  Hubei is also one of the seven ETS pilots in China. Total volume of traded allowances was over 5 million tonnes in 2014.

·  The UK is a world leader in developing a low-carbon economy and has a lot of experience. China has the largest market for the low-carbon economy. There is potential for new and continued cooperation between the UK and China on this issue.

Visit to Wuhan Optical Valley Exchange

Tour of the trade hall and discussion with officials and participating companies of their experience of Hubei's emissions trading system.

·  Hubei emissions trading system is one of the seven Chinese ETS pilots. The local government has been very supportive of the ETS.

·  In comparison to the other ETS pilots, Hubei had 46 per cent of all volume traded (the next largest was 13 per cent) and 29 per cent in value terms. The average daily transaction volume represents 50 per cent of China's total. Hubei is the nation's most dynamic ETS.

·  The scheme currently covers 138 sizeable schemes. The threshold is for inclusion in the scheme is 16 tonnes (144,000 tonnes of CO2). Allowances are allocated either by 'grandfathering' or 'benchmarking'. Allowances will be auctioned in future.

·  Hubei is the first ETS in central China. They would like to grow and expand in central China and establish China's first carbon financial centre. This market could be worth 50bn RMB. They would also like to move towards a national ETS.

·  They are interested in collaborating with the UK.

Prof Feng Youmei, Deputy President, Dean, School of Medicine Wuhan University

Discussion of the Hubei ETS, next steps and how they plan to prepare for a national ETS.

·  Hubei ETS is the only ETS in central China. It is the largest by volume in China and the third largest in the world. It covers about half of the emissions in the Hubei region.

·  Hubei has a high growth rate and has a large industrial sector. Growth in emission has also been high.

·  The Hubei ETS has a rigid cap and a flexible structure. It currently focuses on major enterprises in the power, cement, chemicals, glass and steel industries. It has a strict 'off set' policy and a strict default penalty. Currently 3 per cent of allowances are auctioned. Non-covered entities, such as banks and individuals are also able to trade. There is a price stability reserve. As such the price has tended to be stable. The average price is 23 RMB. Highest is 29 RMB. 20 RMB is the bottom price because that is the price the government sells at.

Meeting with Wuhan DRC at Eco City

Thursday 23 October

Xu Ruisheng, Vice Governor, Guangdong

Discussion of Guangdong's low carbon development.

·  Guangdong is trying to move to a more low-carbon economy. It will have a general ecological plan for every city in the province. The plan will, however, try to strike the balance between economic development and ecological protection.

·  The Guangdong ETS is in its pilot stage. They expect problems but are confident that the amount of trading in the ETS will increase over time.

·  There is, however, a negative perception of the ETS in Guangdong which they would like to change.

Wu Daowan, Deputy Director-General, Guangdong Develop and Reform Committee (DRC)

Discussion of Guangdong's ETS and how it could be improved and expanded.

·  The Guangdong ETS has successfully completed its first compliance period and is currently running its second. It has helped to raise awareness and acceptance of the ETS among businesses. They are trying to resolve any remaining issues with the ETS design as quickly as possible in order to make a contribution to the national ETS.

·  They are currently exploring how the ETS could be expanded to including additional industries and attracting participants from the banking and financial sector. This will help reduce carbon but also move Guangdong industries up the value chain.

·  The Guangdong and Shenzhen ETSs are currently exploring the potential to link with each other. The lessons learnt from this could help to inform the national system. Linkage has been endorsed by the national government.

·  In addition to the ETS they are exploring other measures including, for example, carbon taxes to incentivise carbon reduction and a public awareness initiative on the importance of living a green lifestyle. They support using a package of approaches. The main one will, however, be defined by the central government.

·  They recognised the importance of exchanging ideas on ETS and want to learn from the experience of developing the EU ETS.

Economic Information Commission and representatives from business.

Discussion on energy efficiency policy and targets set for businesses in Guangdong.

Visit to the new British Centre at the IFC building.

ETS seminar - Guangdong - Shenzhen ETS linkage Workshop

Discussion of the linkage project between Guangdong and Shenzhen ETS.

·  If the Guangdong and Shenzhen ETS can be linked there will be benefits for both ETS. There are, however, many challenges before linking can be achieved. The markets are very different. There is a focus on increasing the knowledge of both markets to improve the prospects of linking in future. They are optimistic about the prospect of linking and want to put it into practise as quickly as possible.

·  They hope that they will be able to link the two systems without making major changes to either ETS. They hope that prices will converge over time but this depends on the liquidity of both markets.

·  As part of the project they have drawn on the experience from different international examples including the EU and Canada.

Reception at the British Consul Generals residence with government contacts, implementing partners and academics.

Friday 24 October

Visit to the UK Guangdong CCUS centre

Mr Lu Xiulu, Deputy Mayor, Dongguan City

Discussion of the challenges facing Dongguan's low-carbon transition.

Tang Jie, Vice Mayor, Shenzhen City

Discussion of the Shenzhen ETS and better understand their ambitions for expansion of the scheme.

·  The Shenzhen ETS has been successful. Based on their experience, they believe that ETS is a more effective tool for reducing carbon emissions than taxes. China's experience of emissions trading has effectively resolved concerns that China will tackle climate change and maintain economic growth. Competitiveness concerns have been addressed.

·  The ETS has started to encourage a transition to a more low-carbon economy. For example, there is a move away from high energy consumption products towards lower energy products. As a result, emissions intensity is declining. Emissions will soon peak and start to decline.

·  The Shenzhen ETS is cooperating with London, the EU ETS and California on emissions trading.

XingAn GE, Vice president, China Emissions Exchange, Shenzhen

Discussion of the Shenzhen Emissions Exchange-one of China's first exchange platforms for voluntary greenhouse emissions trading-which has played a major role.

·  The Shenzhen exchange was established in 2013. It is one of seven centres in China which is registered to facilitate trading.

·  The Shenzhen pilot has successfully reduced the carbon intensity of its participants by a third. The ETS has tried to be innovative by, for example, issuing bonds and attracting international investors.

·  In future they would like to see the Shenzhen ETS expand and contribute towards the establishment of a national ETS.

·  Linking Shenzhen and Guangdong ETS would be very difficult. There are significant differences between the two markets. These considerations make it more likely that the national ETS will start from scratch rather than seek to link the existing pilot scheme.


 
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Prepared 17 February 2015