China: Three key ETS design features will shape carbon trading in Hubei pilot
China’s latest emission trading system (ETS), the Hubei pilot, has three key design features that will shape how carbon is dealt in this market, according to its designer Qi Shao Zhou. The Hubei ETS launched on Wednesday 2 April.
Firstly, if a compliance company’s emissions exceed its allocation by 20% or more, or if it emits over 200,000 tonnes of CO2 in 2014, the company can receive additional free allowances from the government to cover the shortfall.
Specifically, a compliance company can choose one of these two options to maximise the benefit it receives from the rule.
For example, the state-owned Wuhan iron and steel group, one of the biggest local CO2 emitters, should choose the latter, according to the designer. As the company already receives a large number of allowances, it is unlikely that its emissions will exceed its allocation by more than 20%. But by choosing to measure itself by the 200,0000 tonnes of CO2 emitted instead, it can easily claim additional allowances from the government.
If a compliance company emits less than 200,000 tonnes of CO2 in 2014, it has to buy allowances to cover any potential shorfall by going to the market.
These rules are desgined to limit the emissions’ costs of local compliance companies, by guaranteeing that they will only pay for emissions up to the 200,000 tonnes mark.
Secondly, Hubei has opted for a ‘tight’ initial allocation and a ‘loose’ reserve of allowances. Hubei used the grandfathering method to calculate initial allocation, meaning allocation is based on historical emissions.
This means that the initial allocation of allowances has left many companies in the Hubei system short, as the figures are based on lower emissions during the financial crisis.
As Hubei is a fast-developing province, the local government has created a reserve of allowances to allocate to new entrants or projects in the future which can be dipped into to cover a potential rise in emissions.
The number of allowances in the reserve, however, which will go to new projects, was based on projected emissions and are thus more generous.
Furthermore, the Hubei government has capped local emissions in 2014 at 97% of 2010 levels. If emissions this year surpass the set cap, the government will adjust the allocation upwards.
Thirdly, a company will lose its allowances if it fails to trade. To boost liquidity, the Hubei government will allocate and adjust allowances annually. If a compliance company doesn’t trade in a year, its allowances for that period will be cancelled. Ling Ma
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