The first compliance cycle of China’s National Emissions Trading Scheme: insights and implications

Abstract

China’s national Emissions Trading Scheme (ETS), the largest ETS in terms of the amount of CO2 regulated, was launched on the trading platform operated by the Shanghai Environment and Energy Exchange (SEEE) on July 16th 2021, and has successfully completed its first compliance cycle on December 30th, 2021. During the operation of its first cycle, China’s national ETS differs from other international ETSs in many aspects, including trading products and participants, allowance allocation method, compliance term, and offset mechanism, leading to certain unique trading patterns. Some unique settings are worth noticing including key emitters dominated by state-owned enterprises (SOEs) who also dominate transactions, large-scale power groups’ carbon strategies, allowances for 2 years of 2019 and 2020 being processed in one compliance period and allowed inter-year banking of allowances. All these have led to trading patterns characterized by cyclical demand-driven trading, insufficient trading capabilities of regulated entities, stable allowance price and an increased price of CCER. Nonetheless, the successful running of its first compliance cycle offers invaluable experience for future ETS development in operational mechanism improvement, sector coverage expansion, allocation optimization, and introduction of different types of market players and tradable products, and provides a good reference for future international expansion.