China strengthens state control on carbon emissions trading, cracks down on data fabrication with new regulation

China has tightened regulations governing its national carbon trading market, as it seeks to extend the market mechanism, which has been designed to reduce greenhouse gas emissions, to more sectors of its economy.

The State Council, China's cabinet, released an interim regulation with several provisions for the management of carbon emissions trading signed by Premier Li Qiang over the weekend. The regulation, which strengthens state control and cracks down on emissions data fabrication, will be effective from May 1.

The regulation provides a legal framework for the operation of China's national Emissions Trading Scheme (ETS).

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"Previously, there were no laws or administrative regulations for the management of carbon emissions trading in China," the Ministry of Ecology and Environment (MEE) said in a statement published on its website on Sunday.

"The operation and management of the national carbon emissions trading market based on existing regulations had lower legislative levels and lacked authority, making it difficult to regulate trading activities, ensure data quality and punish illegal acts."

China launched the national ETS in July 2021 to help the country reach peak nationwide carbon emissions by the end of this decade and net-zero emissions by 2060.

The State Council has given MEE more power to oversee and manage carbon emissions trading activity. It also provides details about the products eligible for trading, the trading methods allowed and the distribution of carbon emissions allowances.

The new regulation also toughens up penalties for emissions data fabrication. Emitters that fail to report, or misreport, or fabricate their emissions data, can receive a fine of up to 2 million yuan (US$279,000) and face deductions from future allocations of carbon allowances.

The national ETS covered 2,257 enterprises from China's power sector as of the end of 2023. The scheme covers around 5.1 billion metric tonnes of carbon-dioxide emissions annually, or more than 40 per cent of China's total annual emissions, and is the world's largest carbon trading market in terms of emissions covered.

The national ETS has struggled with the hurdles of poor-quality data and low trading levels since the start of operations, undermining the scheme's effectiveness in reducing carbon emissions.

According to the State Council, as of the end of last year, a total of 440 million metric tonnes of carbon emissions were transacted, with the transaction volume reaching 24.9 billion yuan. However, carbon prices remain relatively low at a bit over 70 yuan per tonne so far, as compared to more than €80 per tonne (US$86) under the EU Emissions Trading System.

The new regulation also hints at reducing free carbon allowances handed to key emitters, mentioning that it will gradually push for a hybrid approach combining free and paid allowances.

It also signals the national ETS's expansion to more key emitting industries soon, by mentioning carbon accounting in the aviation sector. The national ETS aims to eventually cover eight of China's heavy emitting sectors - power generation, oil refining, chemicals, steel, building materials, non-ferrous metals, paper and aviation - by 2025.

However, expansion beyond the power sector has yet to be realised due to data quality issues, according Chinese media reports.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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