New Regulation Quick Review | National Carbon Market Expansion Plan Released

LABEL： Engineering, Energy and Infrastructure ,

Since its launch in 2021, the National Carbon Emissions Trading Market ("National Carbon Market") has mainly covered the power generation industry. After three years of operation, the market mechanism has become increasingly mature, laying a solid foundation for further expanding coverage.

Since 2024, the expansion of the national carbon market has significantly accelerated. The Ministry of Ecology and Environment has successively released multiple draft documents for soliciting opinions, including the "Guidelines for Accounting and Reporting of Enterprise Greenhouse Gas Emissions in the Aluminum Smelting Industry", "Technical Guidelines for Verification of Enterprise Greenhouse Gas Emissions in the Aluminum Smelting Industry", "Notice on Soliciting Opinions on the Guidelines for Accounting and Reporting of Enterprise Greenhouse Gas Emissions in Cement Clinker Production", and "Technical Guidelines for Verification of Enterprise Greenhouse Gas Emissions in Cement Clinker Production", further releasing positive signals of plans to include relevant industries in the national carbon market.

On September 9, 2024, the Ministry of Ecology and Environment released the "Work Plan for National Carbon Emission Trading Market to Cover the Cement, Steel, and Electrolytic Aluminum Industries (Draft for Comments)" and its preparation instructions ("Expansion Plan"), which clearly proposed to include the cement, steel, and electrolytic aluminum industries in the national carbon emission trading market. The plan includes two stages: (1) 2024-2026 as the implementation phase. 2024 will be the first control year for the cement, steel, and electrolytic aluminum industries, and the first performance work will be completed by the end of 2025; And (2) entering the stage of deepening and improving after 2027. This stage will further complete the policy and regulatory system, as well as the supervision and management mechanism. This is the first significant expansion of carbon market coverage after the power industry.

This article will analyze this important policy shift from the differences between the expansion industry and the power generation industry, changes in specific coverage areas, and data regulation.
1、 The difference between the expansion industry and the traditional power generation industry

After the traditional power generation industry, the "Expansion Plan" plans to include the cement, steel, and electrolytic aluminum industries in the national carbon emission trading market. This measure will mark the expansion of the national carbon market from a single energy production industry to a diversified manufacturing industry, and also bring new challenges and opportunities for carbon market management.

Although the newly added industry, like the traditional power generation industry, is an energy intensive industry that involves the use of a large amount of fossil fuels and is the main source of China's carbon emissions, there are still differences between the two.

On the one hand, compared with the traditional power generation industry that mainly uses fossil fuels and has relatively unified technological routes, different enterprises in the three newly added manufacturing industries may adopt different production processes, resulting in significant differences in emission intensity and characteristics. This diversity requires carbon market managers to be more flexible and meticulous in formulating policies and standards to adapt to the actual situation of different enterprises.

On the other hand, compared to the power generation industry that mainly faces the domestic market, the three newly added industries are facing greater international competition pressure. Cement, steel, and electrolytic aluminum are important commodities in international trade and are susceptible to fluctuations in the international market and trade policies. In addition, in the context of inconsistent global carbon pricing mechanisms, these industries are more susceptible to changes in international carbon market rules. For example, they are all covered by the European Union's Carbon Border Adjustment Mechanism (CBAM), which requires the formulation of relevant systems and policies to take into account international standards.

In addition to the above differences, there are also differences between the newly expanded industries and the traditional power generation industry in terms of emission reduction potential, production processes, cost structure, etc. These differences mean that when incorporating the cement, steel, and electrolytic aluminum industries into the national carbon market, targeted policies and management measures need to be designed to adapt to the characteristics and needs of these industries.
2、 Expand coverage range

In terms of the main body, greenhouse gas emission units belonging to the aforementioned three industries with an annual greenhouse gas emission of 26000 tons of carbon dioxide equivalent will be identified as key emission units and included in the management of the national carbon emission trading market. The 'Expansion Plan' maintains the same inclusion standard of 26000 tons of carbon dioxide equivalent annual greenhouse gas emissions as the power industry. After the inclusion of these three industries, about 1500 key emission units will be added, covering an additional emission of about 3 billion tons. The proportion of emissions covered by the national carbon emission trading market will reach about 60% of the total national emissions. The proposed national carbon market expansion plan will further tap into the emission reduction potential of the carbon market.

From the perspective of gas control and emission scope, the 'Expansion Plan' fully considers industry characteristics and reflects attempts to align with the international carbon market. Firstly, compared to the power generation industry, there are differences in emission characteristics, emission reduction potential, and regulatory complexity among these three newly added industries. Therefore, based on the characteristics of greenhouse gas emissions in various industries, the controlled gases for power generation, cement, and steel are carbon dioxide, while the controlled gases for the electrolytic aluminum industry include not only carbon dioxide, but also carbon tetrafluoride (CF4) and carbon hexafluoride (C2F6). In addition, the "Expansion Plan" also specifies that only greenhouse gas emissions directly generated by the use of fossil fuels and other sources will be controlled for the three newly added industries, in order to align with international regulations. On the one hand, this makes the work of regulatory agencies more efficient and to some extent reduces the burden on enterprises. On the other hand, it also enhances the comparability with other countries' carbon markets, which is conducive to strengthening the ability of enterprises to cope with possible future carbon tariffs such as CBAM and participate in the international carbon market.
3、 The improvement of the system and technology for data supervision

The 'Expansion Plan' refers to the experience of some power generation industries in data supervision. For example, the "Expansion Plan" explicitly requires enterprises to record and store key parameters such as fossil energy consumption on a monthly basis, and submit them through the national carbon emission trading market management platform, so that regulatory authorities can detect and handle data anomalies more quickly. This measure will help improve the transparency and reliability of carbon emission data, providing solid data support for the stable operation of the carbon market and policy-making.

In addition, the 'Expansion Plan' adopts innovative systems and measures to further ensure data quality. For example, the "Expansion Plan" proposes a three-level review mechanism, namely the "national provincial city" three-level data quality review system. This multi-level review mechanism clarifies the responsibilities of governments at all levels in data review, strictly controlling key parameters such as fossil energy consumption from the source. This type of multiple review not only improves the comprehensiveness of data quality control, but also utilizes the local government's understanding of local enterprises to enhance audit efficiency and accuracy.

In addition to institutional innovation, the 'Expansion Plan' also emphasizes the use of digital technology. For example, it is proposed to combine intelligent means such as blockchain and big data to timely detect abnormal data and innovate accounting methods, improve and refine the measurement, accounting, and verification requirements of activity data at the hierarchical level, and explore the possibility of conducting online monitoring of carbon emissions. The application of these technologies helps to achieve real-time monitoring and dynamic management of carbon emission data. By implementing these measures, the healthy development of the carbon market can be ensured, while also providing more accurate and timely information for participants in the carbon market.
4、 The impact of expansion on the development of the national carbon market

For the development of the national carbon market, the 'Expansion Plan' also has a considerable positive impact.

From the perspective of market size and coverage, the Chinese carbon market has been the world's largest carbon market in terms of emissions coverage since its launch in 2021. Before the expansion, the national carbon market now included 2257 key emission units, with an annual coverage of about 5.1 billion tons of carbon dioxide emissions, accounting for more than 40% of the country's carbon dioxide emissions. After the expansion, the national carbon market will add about 1500 key emission units, covering about 3 billion tons of new emissions, further increasing the proportion of emissions covered by the national carbon emission trading market to about 60% of the total national emissions. This expansion further clarifies the position of China's carbon market as the world's largest carbon market in terms of emissions coverage, which is also the foundation for China's carbon market to have the opportunity to further develop into the world's largest carbon market.

From the perspective of trading volume, the Chinese carbon market, due to its late start and limited inclusion of industries and traders, still has a certain gap in trading volume and liquidity compared to the European Union Carbon Market (EU ETS). For example, in 2020 alone, the trading volume of EU ETS carbon quotas reached 8.1 billion tons, while in other years, the trading volume of EU ETS carbon quotas was also in the billions of tons range. From January 1 to August 30, 2024, the trading volume of carbon emission quotas in the Chinese carbon market was 31 million tons. Even if there are large transaction volumes at the end of the year, there is still an order of magnitude gap with the EU ETS. By expanding to include more traders, it will help further activate the vitality of China's carbon market, increase trading volume and coverage, further improve market liquidity and stability, and lay a solid foundation for the future development of carbon finance, futures, and derivatives markets.
summary

The release of the "Expansion Plan" is an important milestone in the development of the national carbon market. It not only expands the coverage of the market and increases industry participation, but also provides a solid foundation for the healthy development of the carbon market by strengthening data supervision. These changes will help the national carbon market to promote domestic emissions reduction while also making greater contributions to global climate action.

We expect that with the inclusion of industries such as cement, steel, and electrolytic aluminum, the trading scope, volume, and liquidity of the national carbon market will be substantially improved, fully leveraging the role of the national carbon market as a market-oriented tool to promote emissions reduction, further tapping into the emission reduction potential of various industries, and promoting more effective low-carbon transformation of these industries while helping to achieve the national "3060" target.