Professional Documents
Culture Documents
9
9
The newly released National Measure on the Chinese ETS marks a major
milestone for China’s low carbon development, confirming China’s role as pioneer
among the world’s developing countries and emerging industries. Many of my friends
were excited over the weekend after the official text was posted on the NDRC website
on Friday December 12th, 2014.
Though time has passed quickly, I can still feel the excitement in my coffee when
I sat in my office 10 years ago. At that time I was newly graduated from my chemical
engineering and environmental economics degree at university. I was very lucky to be
hired by a US consulting firm working on environmental financial products in North
America. Back then, my father did not even know what environmental financial
products were. I joined the company with the hope that the US and Canadian
government would develop their own version of an ETS, along the lines of the EU
ETS. After several months working on wetland credits in the US, which was a very
small and niche market, I finally realized that I was naive to believe that a carbon ETS
would be introduced in North America because it went against the core interests of
political parties. Thus, I decided to acknowledge my opportunity costs and moved to
Europe where the world’s largest carbon market was already operating. Luckily, I was
hired by a very fast growing company providing advisory work on the EU ETS and
CDM projects. During that period, the EU ETS was very active, with major cash
in-flow into the market. It was the last Friday of April, when the market suddenly
realized the initial allocation of allowances was too “long”. I, along with my
colleagues, witnessed the first sharp price drop for carbon: 40% in a single day.
Though we were shocked and scared, we did learn the lessons of risk management.
Thanks to sensible design for the bankability of allowances, the price drop only
affected 2005 to 2007 vintage allowances. The market continued to grow rapidly after
I
that until September 2008, when the nightmare occurred. The EU ETS and its
dependents, i.e. the CDM, saw over 60% of their value evaporate by the end of the
year. I still remember a colleague of mine telling me with a trembling voice that he
could not send his son to a private school anymore because he had been laid off by his
company which was a major financial player in the carbon market. That was how
“fear” really educated me - the word my university professor brought up when I asked
him what could hold “greed” in check. With my personal belief that only economic
tools can solve the problem of climate change and other environmental issues, in 2009
I decided to quit my job and study the technicalities of tradable environmental permits.
Luckily again, I was offered a part time research job in Australia, where legislation for
its ETS package had just passed. While working in Australia, I also enrolled in the
Crawford School of Economics at the Australian National University, where many
authors of the Australian ETS package taught. I felt that academic researchers in
Australia utilized their observer’s edge and thoroughly studied the lessons learned
from the EU ETS. In addition, they brought different perspectives on international
trading, FDI, legal, financial engineering, etc. which I myself had never previously
considered. I have to say, this was really stimulating period of time.
At that time, I had already come to the conclusion that China would possibly,
perhaps probably, become the largest environmental market in the world. Considering
the promising news that the Chinese NDRC had announced the formation of regional
carbon ETS pilots, I kindly refused a job offer from a major multilateral organization
in Canada and joined the ranks of a newly created carbon market consulting firm in
China, Environomist Ltd. Since then, I have been actively engaged in the preparation
of the Chinese ETS by providing consultancy services to government bodies at
different levels as well as international development agencies. Now, the Chinese
national ETS is finally upon us. I am quite excited, just as I was 10 years ago.
However, I also worry about the beloved ETS, especially when looking at the painful
experiences I have had in the past. Many questions come to my mind that I cannot
answer. Is the central government ready to address major market instabilities like the
ones I experienced in the EU ETS? Do the local governments have enough capacity to
II
manage the process? Do they have the tools needed for monitoring and administration?
Do the compliance companies and financial players have the right analytics and tools
to play their role? Are they aware of the risks and do they have appropriate tools for
managing these risks?
With the hope of healthy market development, I worked with my team and
partners to produce this year’s annual report. I truly wish that readers of this report
will understand the development of the Chinese carbon market in 2014 while
objectively keeping both risks and opportunities in mind. This is not only important
for one’s job performance but also for the future of China and the world. If the
Chinese ETS is successfully implemented and provides the desired impulse for
China’s low carbon transition, China could become a role model to other developing
countries who want to decarbonize their economies while giving confidence to
international policy makers in using economic tools for managing environmental
issues.
Finally, but most importantly, I would like to share this thought with our readers:
a mismanaged opportunity is a material risk, but an overcome risk presents an
opportunity.
Executive Director
Product Officer
Environomist Ltd.
January 2015
III
Introduction
This report is based on information and legal documents made publicly available prior
to December 31st, 2014, some of which may be out of date by the publication date.
This report was conducted by Environomist Ltd. with co-author efforts made by 2°
Investing Initiative, and it shall not be held liable for any damage, loss and/or claim
that arises from the use of any information, in full or in part, presented in this report.
The working group has drawn on expertise from the following professionals:
Team leader: Mr. Richard Mao
Key experts: Mr. Caspar Chiquet, Mr. Maximilian Horster, Mr. Albert de Haan, Mr.
Lasse Ringius, Mr. William Beloe, Mrs. Ying Zhou, Dr. Bo Chen, Mr. Jakob Thomä,
Mr. Manuel Coeslier, Mr. Stanislas Dupré, Mr. Nan Ma, Mr. Bo Gao, Mr. Jian Lang.
Data controller: Mr. Chang Wei and Ms. Mandy Wu
Editor: Mr. Huw Slater
Reviewer: Mr. Xuan Yang, Ms. Mandy Wu.
The work of the 2°Investing Initiative was realized with the financial contribution of
the French Environment and Energy Agency (ADEME).
IV
Special acknowledgement to the following individuals who have made significant
contributions to the report:
Mr. Xing Xuefei, Dr. Hou Shibin, Dr. Yi Tu, Mr. Ye Ju, Mr. Yu Cui, Mr. Liang Liu,
Mr. Hui Bin, Mr. Chenyu Zhang, Dr. Lei Bi, Mr. Yanshu Wang, Mr. Jackie Cheng,
Mrs. Maria Chen, Mrs. Samantha Anderson, Mr. Jiang Yantong.
V
Environomist Ltd.
Environomist Ltd. was established with the vision of facilitating the low carbon economic
transition and promoting carbon management capacity in the public and private sectors. Over the
past several years, we have become the most reputable professional carbon consulting company,
with rich experience in the area of carbon management in China.
The company has a wide range of backgrounds, both Chinese and western, and is familiar
with international carbon market rules while also deeply understanding the unique characteristics
of carbon management in China. Different from other consulting firms, we serve our customers
with a set of carbon management solutions, which includes both planning and execution, to
achieve the desired goal.
Our team members include registered financial professionals, certified GHG auditors,
international carbon asset managers, registered engineers, carbon management experts and other
senior professionals.
With many high quality service solutions successfully completed, we have developed a rich
network with international organizations, government bodies and private companies. Since our
establishment, we have provided large-scale CDM carbon asset development and management
services to regional governments, a series of training workshops to national-level ministries,
product carbon inventory projects to large state-owned enterprises and low-carbon development
planning and carbon trading rules consulting to several local governments.
VI
South Pole Carbon Asset Management Ltd.
South Pole Group is a sustainable solution and service provider with a global team and
proven impact.
• With over 100 enthusiastic climate professionals from many different countries, we span 6
continents with our experience on the ground.
• Since 2006, we have measured the climate impact of countless companies and products
worldwide. We have screened USD 30 bn+ of investments for their climate impact and we
have developed 270+ projects in renewables, forestry, agriculture, industry and households.
Through our efforts, 50 million tonnes of CO2 have been saved, almost as much as the
annual CO2 emissions of Portugal. We have enabled the production of 35,000 GWh of
renewable energy (more than the annual electricity consumption of Denmark), and mobilized
over USD 6 bn for clean energy investments in emerging markets. In total, our projects have
helped create almost 20,000 jobs in developing countries and we saved 17,000+ hectares of
forest from deforestation, about the size of 24,000 soccer pitches.
VII
International Finance Corporation.
Global
Climate change is not just an environmental challenge – it is a fundamental threat to
development in our lifetime. The World Bank Group has made confronting climate change a top
priority in our push to eradicate extreme poverty and boost shared prosperity. As the World Bank
Group’s private sector arm, IFC is stepping up the investments in climate change mitigation and
adaptation and helping our clients understand and manage the risks and opportunities climate
change presents.
Since 2005, IFC has invested more than $11 billion in 600 climate-related projects that have
helped developing countries meet their energy needs while supporting a green growth path. IFC
made its first investment in renewable energy in 1989 and is now one of the world’s largest
financiers of wind and solar power for emerging markets.
In fiscal 2013, IFC invested a record $2.5 billion in climate-related projects, up 50 percent
from the year before. This funding supported new solar power technology for South Africa, energy
efficiency gains in Cote d’Ivoire, water conservation in Turkey and green buildings in India, plus
innovative financing for renewable and clean power through commercial banks. IFC is also
working to leverage new sources of funding for green growth through its green bonds program
that raised $2 billion in 2013 alone, as well as through the Catalyst Fund and its co-investments
with governments through its blended finance work.
China
In 2011, the National Development and Reform Commission, NDRC, announced that China
would introduce the use of emissions trading on a pilot basis in order to put a price on carbon, thus
leveraging private sector forces to reduce future growth in carbon dioxide (CO2) emissions from
the power, industry, and manufacturing sectors. Seven emission trading pilots are being
implemented during 2013-2015 across the provinces of Guangdong (GD) and Hubei, and in the
cities of Beijing, Shanghai, Shenzhen (SZ), Chongqing and Tianjin. These pilots will provide the
groundwork for a mandatory nationwide emissions trading scheme expected to be rolled out in
2017.
Current regulations only allow for spot trading of allowances so it will be important that
futures contracts and other types of derivatives become available in the market. In the European
carbon market, over 90% of volume comes from non-spot products. NDRC and China Securities
Regulatory Committee (CSRC) are jointly analyzing such products, with emphasis on futures, and
are interested to collaborate with IFC and IBRD in this area.
IFC is keen to work, in collaboration with IBRD, to promote a robust and sustainable carbon
market in China. IBRD's intervention is primarily focused on working at the national level on
framework formulation, monitoring and verification system design and other systemic issues. IFC
proposes to complement this at the local level, beginning with pilot exchanges. Stakeholder
platforms will be established at the local level to support further development of the emissions
trading pilots, through access to global best practices, opportunities for learning and
experimentation, and stakeholder dialogue provided or supported by IFC.
VIII
2°Investing Initiative.
The 2° Investing Initiative (2°ii) is a multi-stakeholder think tank working to align the
finance sector with 2°C climate goals. Our research seeks to:
• Align investment processes of financial institutions with 2°C climate scenarios;
• Develop the metrics and tools to measure the climate performance of financial institutions;
• Mobilize regulatory and policy incentives to shift capital to energy transition financing.
The association was founded in 2012 in Paris and has projects in Europe, China, and the
United States. Our work is global, both in terms of geography and engaging key actors. We bring
together financial institutions, issuers, policy makers, research institutes, experts, and NGOs to
achieve our mission. Representatives from all of the key stakeholder groups are also sponsors of
our research.
Our upcoming research
Developing 2°C investing metrics
2° Investing Initiative is leading a European research consortium currently pursuing a
three-year, $3 million research program with the objective to develop 2°investing metrics. The
project involves a range of research partners and has received support letters from all relevant
stakeholders (German Environment Ministry, French Prime Minister’s Office, BNP Paribas,
Allianz, Axa, KfW, AFD, MSCI, Bloomberg, Oxford University, Cambridge University, IEA,
UNEP, etc.). The research outputs will include the development of 2° C financing roadmaps,
climate performance assessment frameworks for financial assets and portfolios, as well as
associated turnkey tools.
Analysis of energy transition risks for the finance sector
The 2° Investing Initiative will be developing an extended research programme around
energy transition risks to the finance sector. The project will help financial regulators and financial
institutions develop new stress-testing models and risk management approaches to reduce the
uncertainty associated with these risks. The project will deliver two research outputs. The first
output will be designed as a specific technical guidance on managing energy transition risk –
focused at financial institutions. The technical guidance will include guidance on data relevant for
risk metrics, the current state-of-the-art of energy transition risk methodologies, covering every
stage of the capital allocation chain. Based on this analysis, the research will provide guidance on
how these risks can be managed. The second output will constitute a focus report on the issue of
time horizons in the finance sector. The report will be a key component in helping to develop the
guidance to frame the issue of the time horizons of energy transition risks and the time horizons in
the investment chain – from the physical asset to the ultimate asset owner.
IX
Glossary
CCER:China Certified Emission Reduction
X
Catalogue
Preface ........................................................................................................................................ I
Introduction ............................................................................................................................. IV
Glossary .....................................................................................................................................X
3. The Role of Financial Institutions in the Present and Future ETS ............................... 58
3.1. The Role of Financial Institutions in the Present Carbon Market ............................ 59
XI
3.2.3. Carbon Derivative Financial Instruments................................................................. 68
4.4. Measuring carbon risk at physical and financial asset level .................................... 87
4.6. Way forward for measuring carbon risk by financial institutions in China ............. 98
5. Conclusion ................................................................................................................... 99
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China Carbon Market Research Report 2015
the COP process, but its significance was profound. There were five key outcomes:
“Firstly, world leaders made strong commitments to reach a meaningful and universal
climate agreement at the Paris climate conference in 2015; Secondly, the public and
the private sectors made clear commitments to climate finance; Thirdly, government
and business leaders supported the implementation of carbon pricing mechanisms
through a variety of means; Fourthly, it stated that strengthening the ability to cope
with climate change is a wise and necessary investment; Fifthly, new alliances should
be established to tackle the range of climate change challenges.”5
In December 2014, the Lima Climate Conference was held over two weeks, with
five further key outcomes: “Firstly, various countries need to formulate and submit
post-2020 nationally determined contributions (NDCs) by early 2015, and details of
their commitments; Secondly, adaptation was given recognition within the NDCs, and
countries could include adaptation in their NDC voluntarily; Thirdly, a draft of the
Paris agreement was generated at this conference as a basis for drafting the text of the
Paris agreement.”6
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area in 2030 should be at least 40% lower than the 1990 level, renewable energy
should account for at least 27% of total energy use in the EU, and energy efficiency
should improve by at least 27%.8 The establishment of the Framework will contribute
to the effort of keeping the global temperature rise to less than 2 degrees Celsius
within this century, and support the negotiations in Paris in 2015.9
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At present, the EU ETS is in its 3rd Phase (2013-2020), with the following goals:
emissions in 2020 should be 20% lower than 1990; in relation to allowance allocation,
free allowances should account for not less than half of the total from 2013, moving
gradually towards 100%. All six GHGs under the Kyoto Protocol are to be controlled
within this phase: carbon dioxide, methane, nitrous oxide, fluorocarbons,
perfluorocarbons, and sulfur hexafluoride. National Allocation Plans have been
canceled during the third phase and the total allowances are distributed uniformly by
the European Commission, reducing linearly by 1.74% annually. Issued allowances
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China Carbon Market Research Report 2015
should be registered. The European Union Transaction Log (EUTL) established for
the EU ETS will record the allocation, holding, transferring and abandonment of
allowances, and if anomalous events occur, the EUTL cannot continue operation
before the issues are solved. In Phase II, operators were required to pay 100 Euros per
ton if they were unable to surrender sufficient permits before April 30th, and these
fines will increase in accordance with the European Consumption Index from January
1st, 2013. These operators also have to surrender the missing allowances in the
following year in addition to allowances for that year’s emissions.10
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publicity of the potential reward and punishments measures. Just 4 of the 114
enterprises under the cap did not surrender allowances before the deadline,
representing a compliance rate of 96.5%.21
On March 19th, the Shenzhen Interim Measures on Carbon Emissions Trading
was officially published, clarifying some relative regulations of the principle aspects
on allowance management, carbon emission quantification, reporting, verification and
compliance procedures, and provisions for permit registration and trading. On June
4th, Shenzhen Emissions Exchange introduced Bank of China as a third-party
depository bank, followed on November 20th by China Citic Bank. There are currently
five third-party depository banks: China Construction Bank, Industrial Bank,
Shanghai Pudong Development Bank, Bank of China, and China Citic Bank. 22 The
healthy competition and product differentiation between depository banks are
conducive to the healthy functioning of the ETS, enriching depository choices for
trading participants.
Beijing’s first market compliance period ended on June 15th 2014. More than half
of the enterprises under the cap had not surrendered allowances, prompting the
municipal government to issue a Notice on Ordering Regulated Units to Launch
Carbon Dioxide Emissions Compliance Work within Deadline.23 On November 17th,
the government issued a Call for Comments on the Beijing Carbon Emission
Monitoring Guidelines. Attached to this notice were guidance documents on carbon
emission data accounting, third-party verification, monitoring, and other relevant
documents. These documents addressed policy and operational issues that may be
encountered in the ETS.24
On April 26th 2014, Chongqing published a Notice on Interim Measures of
Carbon Emissions Permit Trading Management. The Measures put forward
requirements for allowance allocation, management and exchange, as well as
provisions for carbon emissions monitoring, reporting and verification.25 In addition,
on May 28th, Chongqing published relevant detailed rules, norms, and guidelines for
carbon emissions reporting, verification, and allowance management in order to
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12th Five-year Plan requires the establishment of a carbon market; Carry out low
3/16
carbon provinces and cities
NDRC General Office Notification on Carrying out ETS pilots in Beijing, Shanghai,
10/29
2011 Tianjin, Chongqing, Shenzhen, Guangdong, Hubei
12/01 NDRC Notification on 12th Five-year Work Plan for Controlling GHG Emissions
State Forestry Bureau Notification on Action Points for the 12th Five-Year Plan to
12/31
Respond to Climate Change in Forestry
3/18 The People’s Republic of China Climate Change Law (draft exposure)
Notice on Climate Change Technology Development Plan for 12th Five-year period
5/04
(MOST)
NDRC Notice on Interim Measures for GHG Voluntary Emission Trading
2012 6/13
Management
Information Office of the State Council issues Report on China’s Policies and Actions
11/21
for Addressing Climate Change
12/31 Joint MIIT NDRC MOST MOF Notice on Industry Climate Change Action Plan
The State Council approves the country’s Second National Communication on
2/18
Climate Change
5/2 NDRC NBS Notice on Strengthening Statistical Work in relation to Climate Change
2013 NDRC General Office Accounting Methods and Reporting Guidance on GHG
10/15
Emissions for initial batch of 10 industries
NDRC Climate Department Training Material on Low Carbon Development and
10/24
Provincial GHG List Compilation
NDRC Notice on Interim Measures for Energy Conservation and Low Carbon
1/06
Technology Promotion
NDRC Notice on Organizing and Implementing GHG Emissions Reporting Work for
1/13
Carbon-intensive Enterprises and Public Institutions
3/21 NDRC Notice on Carrying out Low Carbon Community Pilots
General Office of the State Council Notification on Action Plan for Energy
5/15
Conservation, Emissions Reduction and Low-carbon Development for 2014 and 2015
5/29 MIIT NDRC Publication of initial list of National Low Carbon Industrial Park Pilots
2014 NDRC Notice on Responsibility Assessment Approach for Emissions Intensity
8/06
Reduction Goal
9/19 NDRC Notice on Tackling National Climate Change Plan (2014-2020)
11/12 Sino-US joint statement on climate change
Call for Comments on proposed 10 National Standards for GHG Accounting Methods
11/21
and Reporting Guidelines in the Power Sector
Guidance on Innovation in the key fields of investment and financing mechanisms for
11/26
encouraging social investment
12/12 NDRC Climate Department Interim Measures on Carbon Emissions Trading
Data source: desk research by Environomist
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China Carbon Market Research Report 2015
In order to prepare for the 2015 Paris Climate Summit and the upcoming national
ETS, the government has recently published a large number of inter-ministry and
cross-cutting policies on GHG emissions management and promoting the
development of the carbon market.
In October 2013, in order to help achieve the goals of both the 12th Five-Year
Plan31 and the specific Five-Year Plan Work Program to Control GHG Emissions,32
the NDRC published its Accounting Methods and Reporting Guidance on GHG
Emissions (Trial) for an initial batch of 10 industries.33 This provided reference for
the pilot ETSs in establishing the GHG emission reporting system and improving the
GHG emission statistics accounting system.
On May 8th, 2014, the State Council published Opinions on Further Accelerating
the Healthy Development of the Capital Market. Article 15 encouraged the
development of the futures market. This reform will promote the capability of the
carbon-related service industry and enhance the resource pricing mechanism. As a
result, a range of futures products will continue to be developed. Developing trading
tools like share options, commodity indexes, and carbon emissions trading tools is
important, giving full play to the role of futures in market price discovery and risk
management. The futures market’s capability for serving the real economy would also
be strengthened. Eligible institutional investors will be permitted to use futures
derivative tools to hedge risk, and previous unnecessary limits on using risk
management tools will be eliminated.34 The concept of emissions futures proposed in
this document has profound significance for the fledgling carbon market, as it will
promote the healthy development of ETS and a robust multilevel carbon market. In
the futures market, if the financial instruments are allowed to discover market price
and locate risk, it would promoted activity in the ETS well and accelerate the
development of the property value of carbon assets.
On May 15th, 2014, the General Office of the State Council published notice of its
2014-2015 Action Plan for Energy Conservation, Emissions Reduction and
Low-Carbon Development, which reiterated the need to establish carbon emissions
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Time Content
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China Carbon Market Research Report 2015
2014/04/04 Hubei Interim Measures on Carbon emissions permit management and trade
Hubei Implementation Plan on Energy-Conservation Emission-Reduction and
2014/10/27
Low-Carbon Development
2014/12/08 Hubei Carbon Emissions Exchange Carbon Emissions Trading Rules (Trial)
2014/12/11 Allowance Custody Business Enforcement Regulation (Trial)
Shanghai Interim Measures on Carbon Emissions Verification Third-parties
2014/01/10
Management
2014/03/12 Shanghai Regulation on Carbon Emissions Accounting (Trial)
Notification on Completing Surrender of Emissions Allowance Work in 2013
2014/05/28 Notification on Volume of Business Examination and Approval of Carbon Emission
Trading Enterprises Pilots
Notification on Volume of Business Examination and Approval of Pilot Enterprises with
2014/05/30
Baseline-Method
Shanghai DRC Announcement on Adjustment of Issued Allowances for 2013
2014/06/13
Compliance Period
Shanghai Environmental and Energy Exchange Notice on the Issue of Auctioning of
2014/06/16
2013 Allowances
Shanghai Environmental and Energy Exchange Notice on Revised Emissions Trading
Rules and Member Management Measures
Shanghai
Shanghai Environmental and Energy Exchange Emissions Trading Rules (Revised
Draft)
Shanghai Environmental and Energy Exchange Member Management Measures
(Revised Draft)
2014/09/03
Shanghai Environmental and Energy Exchange Notification on Declaring Carbon
Emissions Trading Institutional Investors
Interim Implementation Measures on System for Institutional Investors in Carbon
Emissions Trading
Open Accounts Guidance for Shanghai Environmental and Energy Exchange
Institutional Investors
Shanghai Implementation Opinions on Further Accelerating Healthy Development of the
2014/09/15
Capital Market
Notification on New-construction Protects’ Allowance Declaration Work about Carrying
2014/09/30
out Carbon Emissions Trading Industrial Enterprises
2014/01/03 Tianjin Emissions Exchange Member Management Measures (Trial)
Notice on Carrying out Emissions Accounting Work for ETS Pilot Enterprises in 2013
2014/05/21
Compliance Period
Tianjin Emissions Exchange Notification for Enterprises under the Cap on Surrendering
2014/07/08
Allowance in Time
Tianjin
2014/07/09 Tianjin Announcement on Trading Listing Allowance in 2014
Announcement on Surrendering Allowances by ETS Pilots Enterprises in 2013
2014/07/28
Compliance Period
Announcement on List of ETS Pilots Enterprises to Surrender Allowances in 2013
2014/08/15
Compliance Period
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China Carbon Market Research Report 2015
Shenzhen Published the List of Enterprises under the Cap Surrendering Allowances in Time
2014/07/03
Published the List of the Enterprises under the Cap Surrendering Allowances Late
Shenzhen Emissions Exchange Announcement on Adding China Citic Bank as a Third
2014/11/20
Party Depository Bank
Enforcement Regulation on Exception Handing (Trial)
Enforcement Regulation on Violation and Default Handing (Trial)
Management Regulation on Hosting Members (Trial)
2014/12/12
Management Regulation on Broker Members (Trial)
Settlement Regulation (Trial)
Management Regulation on Risk Controlling (Trial)
Shenzhen Emissions Exchange Announcement on Opening Carbon Emissions
2014/12/17
Hypothecated Loan Application
2014/03/07 Notice on Completing Submission of Emission Reports for Accounting Related Issues
China Beijing Environment Exchange Carbon Emissions Trading Rules and Supporting
2014/04/29
Details (Trial)
2014/04/30 Notice on Publishing Carbon Emissions Intensity Advanced Value
2014/06/10 Management Measures on Public ETS Operation (Trial)
Notice on Supervising and Urging Carbon-Intensive Entities to Accelerate
2014/06/11
Surrendering of Allowances
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2014/09/02 Notice on Regulated Entities Emissions Verification Work for 2013 Compliance Period
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China
19.5% th
Dec.19 Emissions Allowance, Public bidding,
Guangdong (Compared to CO2
2013 Exchange CCER Negotiated transfers
2010)
(Guangzhou)
Shanghai
19% th
Nov.26 Environmental Allowance, Listed trading,
Shanghai (Compared to CO2
2013 and Energy CCER Negotiated transfers
2010)
Exchange
Spot trading,
15% Shenzhen Electric bidding,
Jun.18th Allowance,
Shenzhen (Compared to CO2 Emissions Fixed price, Block
2013 CCER
2010) Exchange trades, Negotiated
transfers
Chongqing
17% th
Jun.19 Carbon Allowance, Public bidding,
Chongqing (Compared to CO2
2014 Emissions CCER Negotiated transfers
2010)
Exchange
To be continued
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Continued
Pilot
Trading Participants Compliance Coverage
Region
Companies under the cap and other Companies emitting more than 20,000 tons
Guangdong institutions, enterprises, CO2 in power, iron and steel, petrochemical,
organizations, and individuals and cement sectors
Companies under the cap, reporting Enterprises, institutions, state organs and other
companies voluntarily participating, institutions registered within the territory of
Beijing
and other institutions; natural person China emitting more than 10,000 tons of CO2
according with criteria annually, both direct and indirect.
To be continued
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Continued
Pilot Allowance Reserve and
Reporting Obligations Only Allowance Allocation
Region Banking
The method in 2014 is baseline and
historical emissions; some are free and Allowance reserve and
some need to be purchased. 95% free banking is 38 million tons
Individual companies emitting
allowances in the power sector; 97% in 2014, including new
Guangdong more than 5,000 tons but less
for iron and steel, petrochemicals and project allowance and
than 10,000 tons of CO2.
cement. Paid allowances are issued by market regulation
bidding, and companies can decide allowance
whether to buy or not.
8% set aside from total cap
Companies consuming more
Allocation for free. Exploring with initial annual quota,
Hubei than 8,000 tons of standard
allocation of paid allowances. surplus reserved for new
coal per year.
entrants.
The method of baseline and historical
Other companies emitting Government sets aside a
Shanghai emission. During the pilots, Emissions
more than 10,000 tons of CO2. portion by regulation.
issued freely.
Industries such as iron and
steel, chemical, power,
heating, petrochemicals and Based on industrial emissions, mainly
Tianjin extractive industries as well as issued for free with partial allowance N/A
civil buildings, which emit allocation drawing a charge
more than 10,000 tons of CO2
annually.
Based on historical emissions,
The competent department
Companies emitting more than allocation for free or against a charge.
reserves 2% of the total
Shenzhen 1,000 but less than 3,000 tons Free allowances are not lower than
allowance as a new
of CO2 annually. 90%. Charging for allowances includes
entrants allowance reserve.
both fixed price sales and auctioning.
Manufacturing, other secondary and
Enterprises, institutions, state
service industries receive allowances
organs and other institutions No more than 5% of total
Beijing based on historical emissions; power
consuming more than 2,000 allowance.
and electricity industries based on
tons of standard coal per year.
historical carbon intensity.
Based on historical emissions and
Chongqing Companies under the cap. industrial emission potential, issued N/A
allowance by register.
To be continued
23
China Carbon Market Research Report 2015
Continued
Pilot
Offset Mechanisms
Region
Use CCERs to offset enterprises’ actual emissions; not more than 10% of the total
emissions, and at least 70% of it should be within the province. CCERs generated within
Guangdong
the enterprises’ emission boundary cannot offset enterprises’ emissions in the provincial
area.
Hubei CCERs should be in the provincial area; not more than 10% of the initial allowance.
CCERs not more than 5% of the total allocated allowance; allowance that enterprises
Shanghai owned every year in the future couldn’t be less than 50% of corresponding allowance every
year received by allocating.
Entities can use CCERs to offset emissions up to 10% of their annual emissions. CCERs
generated in Shenzhen cannot offset emissions in Shenzhen ETS. Specific management
Shenzhen
measures on emissions offset will be formulated by competent department separately, and
be implemented later with government permission.
CCERs produced after Jan. 1st 2013. Not more than 5% of the allowance allocation. CCERs
obtained from Beijing area should be more than 50%, from outside the area should be less
than 2.5%; CCERs produced from projects under cooperation agreement signed with Hebei
and Tianjin for tackling climate change, ecological construction, atmospheric pollution
governance are preferential. Energy performance contract projects signed after Jan. 1st 2013
Beijing in Beijing area or energy conservation and technology reform projects after Jan. 1st 2013;
energy conservation projects should produce actual emission reductions; should verify the
actual emission reductions produced by energy projects operated continuously and steadily
in a year; carbon sink projects in Beijing area; the land used by carbon sink afforestation
project should be non-forest land at Feb. 16th 2005; forest management carbon sink projects
should be started after Feb. 16th, 2005.
CCERs, but the amount should be less than 8% of certified emissions. Emission projects
should be put into operation (carbon sink projects are not included), and should be one of
Chongqing the following types: energy conservation and energy efficiency promotion; clean energy
and non-hydro renewable energy; carbon sinks; energy activities, industrial producing
procedure, agriculture, waste disposal, etc.
To be continued
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China Carbon Market Research Report 2015
Continued
Pilot
MRV
Region
Mar. 1st, 2013, Guangdong Interim Measures on Emissions Trading Pilot; Mar. 18th,
Enforcement Regulation on Guangdong Enterprises Carbon Information Report and
Guangdong
Verification (trial), Guangdong Enterprises CO2 Information Report Guidance
(trial); Guangdong Enterprises Carbon Emissions Accounting Specification (trial)
Jun. 1st, 2014, Hubei Interim Measures on Carbon emissions permit management
Hubei
and trade
Published One plus Eight GHG Emissions Accounting and Reporting Guidance; Jan.
10th 2014, Shanghai Interim Measures on Carbon Emissions Verification
Shanghai
Third-parties Management; Mar. 12th, Shanghai Work Regulation on Carbon
Emissions Accounting (trial)
Dec. 24th, Enterprises Report Compiling Guidance and Five Industries Accounting
Tianjin
Guidance
November, 2012, Organizations GHG Emissions Quantification and Reporting
Specification and Guidance, Organizations GHG Emissions Verification
Specification and Guidance; April, 2013, Structure GHG Emissions Quantification
Shenzhen
and Report Specification and Guidance (trial), Structure GHG Emissions
Verification Specification and Guidance (trial); Mar.19th, 2014, Shenzhen Interim
Measures on Shenzhen Emission Trading Management
November 2014, Beijing Notification on Publicly Collecting Relevant Documents
Opinions of Emissions Monitoring Guidance, Beijing Enterprises (Units) CO2
Emissions Verifying and Reporting Guidance (2014 edition), Beijing Emissions
Beijing
Monitoring Guidance, Beijing Emissions Report Third-parties Verification
Procedure Guidance, Beijing Emissions Third-parties Verification Report Writing
Guidance
To be continued
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China Carbon Market Research Report 2015
Continued
Pilot
Incentives and Non-compliance Fines
Region
If the company didn’t fulfill its compliance responsibility, it will have twice the level of
non-compliance deducted from the next year’s allowance, and fined 50,000 RMB; for making a
false or incomplete report, or refusing to surrender allowances, as well as for hindering verification
Guangdong organizations or refusing to supply evidence, fines are 10,000 RMB to 30,000 RMB; in cases of
gross violation, fines are 50,000 RMB; for not publishing trading information, not establishing or
implementing risk management systems as ordered by provincial DRC, fines are 10,000 RMB to
50,000 RMB.
If enterprises are non-compliant, they will be fined 1 to 3 times the balance, but not more than
Hubei
150,000 RMB, and double the allowances deducted from next year’s allowance allocation.
Failure to surrender allowances, providing false documents or hiding important information, fines
from 10,000 RMB to 30,000 RMB; unreasonably refusing and hindering verification institutions,
Shanghai
fines from 30,000 RMB to 50,000 RMB; not surrendering allowance, fines from 50,000 RMB to
100,000 RMB.
Unsatisfactory verification report: 10,000 RMB to 30,000 RMB for incorrect or overdue; 50,000
RMB to 100,000 RMB for serious circumstances. Failure to submit sufficient allowances or
CCERs: deducted forcibly, directly deduct the insufficient portion from next year’s allowance, and
Shenzhen
fines three times the average price of last six months’ allowance price. Failure to surrender
allowances before transfer, dissolving or bankruptcy liquidation, deducted forcibly, fines for
insufficient portion three times the average price of the last six months’ allowance price.
Failure to submit report and not corrected, fines the enterprises under the cap not more than 50,000
Beijing RMB. Discharge more than allocation, based on the emissions balance, fines 3 to 5 times of
average price.
Failure to submit report and not corrected, fines from 20,000 RMB to 50,000 RMB. Allowance
Chongqing management units not surrendered or incomplete, fines three times of the average price of the last
month before the surrendering allowance date.
To be continued
26
China Carbon Market Research Report 2015
Continued
Pilot Amount of key
Reporting Date Surrender Date Total allowance
Region units
End
27
China Carbon Market Research Report 2015
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emissions reports to the competent department by the first quarter of each year.43
Hubei’s Interim Measures on Emissions Management and Trading specified that
enterprises should surrender allowances and/or CCERs equal to last-year’s actual
emissions by the end of May each year. Trading participants may include regulated
entities, the legal representative, other organizations and individual voluntary
participants. Trading products involve allowances and CCERs. Trading may be by
public bidding in specified trading institution. Before the end of February, regulated
enterprises should summit last-year’s emissions report, and before the end of April
they must submit a verification report.44
In Shanghai, a document outlining the government’s Views on Implementing
Pilot Emissions Trading specified that carbon-intensive industries including iron and
steel, petrochemicals, chemicals, nonferrous metals, electric power, building materials,
textile, paper making, rubber, and chemical fibers would be covered. For these sectors,
a threshold of more than 20,000 tons of CO2 emissions would apply (including direct
emissions and indirect emission). Other industries such as aviation, ports, airports,
railways, finance, business, and hotels, would also be covered, with a threshold of
10,000 tons CO2 emissions. Other enterprises CO2 emissions of more than 10,000
tons should implement an emissions reporting system. Trading participants are the
pilot enterprises, though some other actors may also be eligible. 45 The Shanghai
Emissions Management Trial Implementation Measures specified the method of
historical baselines to determine emissions quotas. Regulated units should surrender
allowances between June 1st and June 30th.46
Tianjin’s Notice on Implementing an Emissions Trading Pilot Scheme specified
that the regulated entities would include carbon-intensive emissions industries
including iron and steel, chemicals, power, heating, petrochemicals, oil and gas
exploitation, and civil construction with emissions of more than 20,000 tons.47 The
Tianjin Emissions Trading Interim Measures specified that allowance allocation
would mainly be free, supplemented by auctioning or fixed price sales. Regulated
entities should surrender allowances before May 31st annually. CCERs are allowed for
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China Carbon Market Research Report 2015
not more than 10% of the actual emissions. Allowances not cancelled may be carried
over to the next year. Regulated entities should summit emissions reports and
verification reports to the municipal Development and Reform Commission.48 The
Tianjin Emissions Exchange Emission Trading Rules (trial) specified that emissions
trading could use online spot trades, negotiation, and auctions. Domestic and overseas
institutions, enterprises, communities, and individuals may all participate in emissions
trading.49
The Shenzhen 12th Five-year Plan specified that CO2 emissions per unit GDP
should achieve a cumulative total decline of 15%. The Shenzhen Interim Measures on
Emission Trading Management specified the regulated entities as follows: companies
emitting more than 3,000 tons of CO2, owners of large public buildings and
government office buildings with an area bigger than 10,000 square meters, voluntary
and approved companies involved in carbon emissions management, and other
emitting companies designated by the government. Companies emitting more than
1,000, but less than 3,000 tons of CO2 annually must submit a report to the competent
department. Allowance allocation involves both free allocation and purchased permits.
Free allocation includes pre-allocation allowances, a new entrants reserve, and
adjusted allocation allowances. Purchased allowances may be sold by auction or at
fixed price. The competent department should reserve 2% of total allowance for new
entrants. Allowances sold by auction should be not less than 3% of total allowances.
Regulated entities compile emissions reports based on GHG emissions quantification
and reporting standards, and submit them to the competent department via the
municipal GHG emissions information management system before March 31st.
Regulated entities should engage carbon verification institutions to verify their
emissions report after submission and submit verified emissions reports before April
30th. Regulated entities should summit allowances or CCERs to authorities before
June 30th. Entities should use CCERs for not more than 10% of their total emissions.
Trading products include allowances, CCERs, and other approved products. Trading
methods involve spot trading, electronic bidding, fixed price, block trades, and
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China Carbon Market Research Report 2015
negotiated transfers.50
Beijing Emissions Offset Management Measures (trial) specified
carbon-intensive entities may use CCERs to offset not more than 5% of their total
allowance. CCERs produced outside Beijing may not be more than 2.5% of the total
allowance.51 Beijing Emissions Trading Management Measures (trial), specified an
adjustment amount not more than 5% of the total allowance used for allowance
adjustment and market regulation. Trading participants are carbon-intensive entities
and other voluntary participants. Trading products include emissions allowances as
well as verified emission offsets. 52 The Notice on Implementing the ETS Pilot,
authorizing a cap-and-trade mechanism for Beijing, specified that the scheme would
only cover CO2, with CO2 emissions allowances as the main commodity, although
CCERs would be allowed to offset a certain proportion of emissions. Entities with
CO2 emissions of more than 10,000 tons units are required to control their CO2
emissions through trading. Other entities which consume more than 2,000 tons of
standard coal may participate voluntarily and be managed like regulated entities. The
previous year’s emissions report must be submitted before April 15th and the
verification report before April 30th. CCERs may not account for more than 5% of
allowances and at least 50% should be produced within the Beijing municipal area.53
Chongqing’s 12th Five-year Plan on Controlling GHG Emissions and Low-carbon
Pilots Work specified that CO2 emissions per unit GDP in 2015 should be 17% lower
than 2010. The Chongqing Emissions Allowance Management Detailed Rules and
Regulations (trial) specified that industrial enterprises with annual emissions of more
than 20,000 tons CO2 equivalent during the period 2008-2012 should be involved in
allowance management. Entities’ allowances will be calculated from the year with the
highest emissions during 2008 and 2012 as the base year. The total allowances will
then be reduced by 4.13% annually. Covered entities must surrender allowances
during two periods, the first before June 20th 2015 and the second prior to June 20th
2016. CCERs shall account for not more than 8% of verified emissions in each
period.54
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China Carbon Market Research Report 2015
Since 2013, several regions, such as Jiangsu Province, Hebei Province, Jilin
Province, as well as some cities like Zhaoqing, Hangzhou, Weifang, Hefei, and
Lanzhou, have expressed that they would implement carbon emissions trading to
control the amount of GHG emissions in their own administrative region.
Subsequently, Jiangsu Province has taken the lead in preparations for establishing an
ETS. This section, therefore, introduces the relevant policy documents on ETS in
Jiangsu.
On April 8th 2011, in response to the China’s 12th Five-Year Plan requesting
the establishment of a carbon emission trading system in China and the development
of low carbon pilot provinces/cities, Jiangsu Province released Suggestions on
Reducing the Carbon Emissions in Jiangsu Province. According to this report,
obstacles regarding the low-carbon technology and market are the main challenges. In
this case, the establishment of local carbon funds can be attempted, so that a
commercialized operation mechanism would be induced sooner. In addition, the
synergy between the low carbon economy and the development of CDM projects
should be closely monitored. The introduction and transfer of advanced international
technology and capital need to be accelerated as well. At last, a carbon emissions
trading platform will be explored in Jiangsu Province, which will allow more
international investments in the context of a low carbon economy. Concrete political
documents and event progresses in major cities and the overall Jiangsu Province
during 2012-2014 are shown in Table 1-7.
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China Carbon Market Research Report 2015
Table 1-7 Progress of Jiangsu low carbon pilots policy from 2012 to 2014
Trading Platform,
Provincial ETS,
Key emissions statistical South of Jiangsu Emissions Trading
Carbon-financial
Content accounting, area ETS Area Emissions Local Legislation
Products
Trading
Date 2013.3.28 2014.1.22 2014.2.12 2014.6.27
Opinions on
Nanjing Atmosphere Phase II General Comprehensively
Event Pollution Prevention 2014 Work Plan Reform Promoting Deepen Financial
Regulation Plan Reform innovation
Nanjing Development
Emissions Statistics,
Initially Put forward
Key Monitoring, Constructing ETS Promoting ETS
Emissions Total
Content Examination, ETS before 2015 Pilots
Allowance Trading
Construction
Date 2013.6.19 2013.9.3 2014.9.1 2014.11.26
Launch several
Low-carbon Cities 12th Five-year
Leading the GHG cooperation on
Pilots Work Controlling GHG
Event report work in the carbon emissions
Implementation Plan Emissions and
whole province trading with
Huai’an Report Low-carbon Cities
Shenzhen
Financial System like CCER, ETS
85 key to establish ETS
Key Green Credit and connecting Shanghai
energy-consuming before the end of
Content Loan, Security, and Shenzhen
enterprises 2016
Insurance, Trust Trading Platform
Date 2013.2.22 2013.7.2 2014.2.25 2014.4.10
Key carbon
Zhenjiang low-carbon Efforts to create a
Zhenjiang Test carbon platform enterprises online
Event urban construction national low carbon
this month monitoring platform
work plan in 2013 demonstration cities
phase II construction
33
China Carbon Market Research Report 2015
carbon accounting
peak carbon, carbon
carbon emissions and management, the 48 enterprises
platform, carbon
Key accounting and three systems emitting more than
evaluation, carbon
Content management (collecting, 25,000 tons of
assessment innovation
platform, ETS accounting, carbon emissions
work
management)
Date 2012.12.19 2013.6.19 2013.10.25 2014.3.12
The first
Low carbon pilot
environmental energy Suzhou 12th five-year
cities Suzhou low-carbon
Event trading center of plan outline interim
implementation plan development plan
Jiangsu was report
Suzhou report
established in Suzhou
regional ETS, carbon trading
Key carbon trading carbon emissions carbon emissions platform, carbon
Content channel reporting and trading platform allowance system,
verification CCER, ETS pilots
Observing the Table 1-7, the key events classified by administrational area and
dates are clear, identifying the order or progress. For example, after the Notice on
Implementing the Second Batch of Low-carbon Provinces and Cities Pilots, Jiangsu
Province and Suzhou, Huai’an and Zhenjiang Municipal governments issued several
relevant policy documents in order to promote low-carbon development. Meanwhile,
the capital of Jiangsu, Nanjing, is exploring the potential for ETS. On December 19th
2012, the first Environmental Energy Exchange was established in Suzhou, providing
a channel to the carbon market for the whole province. In the future, Zhenjiang,
Nanjing and Huai’an also plan to put establishing a carbon trading market on the
agenda. Since June 2013, these cities have gradually improved MRV systems, which
is a basic, but critical element for developing an ETS. On June 19th 2013, Huai’an
proposed to establish a financial system including green credit and loans, insurance,
securities, and trusts, in order to broaden access to finance channels for low-carbon
enterprises. On February 12th 2014, Nanjing also planned to establish fundamental
elements of an ETS prior to 2015. On April 10th 2014, Zhenjiang began the second
phase of online monitoring of emissions from key companies, selecting 48 enterprises
that emit more than 25,000 tons of CO2, in order to establish a real-time monitoring
34
China Carbon Market Research Report 2015
Although only seven regions have been currently listed as pilot sites for carbon
trading in China, there is a clear trend towards establishing a carbon trading system at
the national level in the future. Both opportunities and challenges exist simultaneously,
meaning that sound preparation is necessary in the transition to low carbon economy.
Several suggestions, which referred to the situation of pilot areas and the carbon
market establishment evolution of non-pilot areas, can be provided to non-pilot areas:
Research relevant emissions trading policy documents from different levels and
regions domestically, as well as overseas. Market reports from dedicated
professional institutions are helpful in this regard.
Domestic and international policy documents and problems encountered are good
reference points. Regions should make adjustments accordingly when formulating
policy in order to avoid these problems.
Relevant enterprises, government institutions, and financial institutions, should
conduct thorough market research.
Theory should be linked with practice. After all, each region features a different
economic, social, and cultural background. Direct duplication is not feasible, and
regions should find the most reasonable solution for their circumstances.
Organize preparatory research and policy development teams in order to design
local emissions management measures.
After conducting theoretical studies and market research, policy makers can set
up a special team to discuss management practices or norms and develop guidelines.
Promote social awareness, using various methods to publicize and educate.
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36
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37
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700
600
Beijing
500
Tianjin
Shanghai
400
Guangzhou
300 SZA-2014
SZA-2013
200 Hubei
100
Figure 2-1 ETS pilots daily trading volume during 2014 (thousand tons)
14,000
千
12,000
Beijing
10,000 Tianjin
Shanghai
8,000 Guangzhou
SZA-2014
6,000
SZA-2013
Hubei
4,000
2,000
Figure 2-2 ETS pilots daily trading value 2014 (thousand RMB)
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China Carbon Market Research Report 2015
100
90
80
70
Beijing
60
Tianjin
50 Shanghai
40 Guangzhou
30 SZA-2014
20 SZA-2013
10 Hubei
6
Firstly sort Daily Trading Volume, secondly select the former 20%, thirdly, summation, fourthly, divide the total
Trading Volume.
7
Firstly sort Daily Trading Value, secondly select the former 20%, thirdly, summation, fourthly, divide the total
Trading Value.
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China Carbon Market Research Report 2015
On June 19th 2014, Chongqing opened its ETS, however since then no formal
deals have been put in place. Therefore, the results for Chongqing have not been
included in the comparative analysis.
Total trading volume of Guangdong was approximately 953.5 kilotons. However,
the Trading Volume degree of concentration was 99.89%, and the trading value
degree of concentration was 99.99%, both the highest of all the pilots. So in terms of
liquidity, Guangdong is not high given that nearly half of the time no transactions
take place during trading days. Further, on days when trading does occur, volume
and value are concentrated within a handful of days.
Hubei opened its ETS later. However, the trading volume and value of Hubei
were both biggest, 7.0 million tons, 167.4 million RMB respectively. The trading
volume degree of concentration was 42.93%, the trading value degree of
concentration was 54.73%, with both values lowest of all the pilots. As its demand
for carbon credits is steady rather than volatile, Hubei’s trading activity appears quite
balanced. As a result, the Hubei ETS allows for more reliable prediction as well as
decision-making.
Shanghai’s carbon trading volume reached 1.97 million tons, while trading value
reached 75.36 million RMB. The average price in the market was 38.26 RMB. The
trading volume degree of concentration and trading value degree of concentration
were both more than 86%. Therefore, Shanghai’s exchange activity is high and quite
volatile.
Tianjin’s trading value was about 20.5 million RMB, and trading volume was
1.01 million tons. Tianjin’s average price was 20.23 RMB/ton, the lowest of all the
pilots. The trading volume degree of concentration was 93.43% and trading value
degree of concentration was 90.27%. The trading activity was smaller than other
pilots and exchanges occurred mostly during several intensive days, showing that
Tianjin’s ETS is relative “quiet”.
The trading volume of Shenzhen was approximately 1.8 million tons, equivalent
with Shanghai, and Trading value was approximately 112.2 million RMB, following
40
China Carbon Market Research Report 2015
Hubei. The settlement price was the highest of all the pilots, namely 61.9 RMB/ton.
As the allowances allocated in the Shenzhen ETS were less than the demand for
carbon credits, regulated entities had to pay a higher price for allowances to offset
their emissions. Observed from exchange intensive degree indices, both were at
approximately 87%. Exchanges happen intensively and on almost all days that the
market is open.
Finally, trading on Beijing’s exchange had reached 1.08 million tons, which was
more than Tianjin and Guangdong. Benefiting from a higher average price of 60 RMB
per ton, the trading volume had reached 63.87 million RMB. The trading value degree
of concentration was 88.08% and trading volume degree of concentration was 89.18%,
so trading happened relatively intensively.
Shanghai and Shenzhen completed compliance on time and have the highest
compliance rates of all the pilot areas. Guangdong and Tianjin postponed their
compliance deadlines to July. The overall compliance results were good, although a
8
6.27 this date is the regulated surrendered date in BDRC (2014) NO.1300 Document, but actually many units
surrendered after 6.27, detailed surrendered time no formally declare.
9 th
97.1% this data publicized on BDRC website on Sep.25 , 2014, without detailed list of units didn’t surrender.
41
China Carbon Market Research Report 2015
few individual enterprises did not comply with the ETS requirements. Similarly,
Beijing also postponed its deadline, issuing a new June 27th compliance deadline.
The official date for full compliance has not been announced, however, as several
companies completed their performance after June 27th. This can be partly explained
by the fact that Beijing’s ETS features a number of large and unique regulated
entities. This will be further explained in section 2.1.3.
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China Carbon Market Research Report 2015
This survey was completed using the online questionnaire platform “Diaochapai”,
operated by Environomist. The areas covered included: Basic Information of
Enterprise (1 - 5), Carbon Asset Management Ability (6 - 13), Trading Ability (14 -
22), Trading Market (23 - 36), and Carbon Trading Outcomes (37 - 43). There were
99 enterprises participating in this survey from December 24th, 2014 to January 19th,
2015. There were 43 questions in the questionnaire, included as an Appendix to this
report, and the results will be summarized and analyzed in this section. In Table 2-4,
questions and their requirements or introductions are highlighted in green, while the
frequency and ratio of responses are colored gray (question 43 only lists elements and
their average score). Questions 15, 17, 18, 23, 36, and 38 – 42 were multiple choice,
so the sum of answer frequencies is not equal to 99, and the sum of answer ratios is
larger than 100%.
43
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44
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45
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46
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47
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48
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33. Will the enterprise be willing to sell or buy the residual allowance quantity got from assessing
or predicting?
Yes 95 95.96%
No 4 4.04%
34. Does the enterprise need a tool which could lock the price and amount of future allowance?
Yes 97 97.98%
No 2 2.02%
35. Do you worry about a situation where there is not enough transaction parties when you carry
out allowance trading?
Yes 96 96.97%
No 3 3.03%
36. Does your enterprise participate or intend to participate in bulk commodity trading?
None 52 52.53%
Coal 28 28.28%
Heavy metal 25 25.25%
Crude oil 21 21.21%
Natural gas 21 21.21%
Agricultural products 14 14.14%
Other 14 14.14%
37. Have carbon emissions reduced year-to-year after participating in carbon trading?
No 52 52.53%
Non-regulated enterprise, participate only in trading 33 33.33%
Yes 14 14.14%
38. What advantage could be obtained from carbon trading? (multiple choice)
Selling surplus allowance to obtain profit 94 94.95%
Reduce enterprise’s emission reduction cost 64 64.65%
Contribute to obtain green financing 59 59.60%
Improve enterprise image and popularity 10 10.10%
Other 0 0.00%
39. What difficulties the enterprise is faced with? (multiple choice)
Difficult to predict development tendency on allowance price 95 95.96%
No specialized professional understanding carbon asset management
90 90.91%
and carbon trading
Policy is not bright and clear, lack of relevant information 84 84.85%
Unfamiliar with the trading regulations and strategy of carbon market 75 75.76%
Difficult to predict future carbon emission situation and carbon
73 73.74%
emission reduction potential
Economic cost of energy consultation and emission reduction is too
27 27.27%
high to undertake
Other 1 1.01%
40. What lessons does the enterprise expect to learn? (multiple choice)
Strategy and experience of carbon emissions trading 91 91.92%
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China Carbon Market Research Report 2015
The following analysis derives from the results presented in Table 2-4. Given the
sample size, the full picture for enterprises around China is not represented here, and
the range of experts consulted for this research is limited. This analysis, therefore, can
serve only as a reference for assessing the capacity for carbon trading in each region
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China Carbon Market Research Report 2015
Question 4 in Table 2-4 showed that enterprises in the non-metallic minerals and
petrochemical industries, the traditionally energy-intensive sectors, respectively
accounted for 35.35% and 16.16% of the enterprises participating in this survey, or
51.51% overall. There were 19 enterprises in the financial industry, accounting for
19.19%. The development of the carbon market was reflected to some degree in the
enthusiasm that financial institutions placed on carbon trading.
Figure 2-4 shows the distribution of enterprises. Enterprises in the major pilot
regions of Shanghai and Guangdong were best represented, together accounting for 41%
of the enterprises that participated in the survey. 27% of the enterprises surveyed were
from non-pilot regions, including 6% from Shandong.
Shenzhen Chongqing
Tianjin
6% 3% Liaoning
6% Guangxi
Hubei Sichuan 2%
Hunan 2%
8% 1% Inn.
1%
Henan Mongolia
Zhejiang 1%
3%
1%
Guangdong Hebei
18% Other 1%
27% Jilin
Other
2%
3%
Shandong
Shaanxi
Shanghai 6%
Beijing 2%
23% Jiangsu
8%
2%
The number of ETS regulated enterprises was 53 and the number of voluntarily
participating enterprises was 46. Their distribution is shown in Figure 2-5. The region
with the most voluntary enterprises surveyed was Shanghai (14). The highest number
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China Carbon Market Research Report 2015
30
Regulated Enterprises Voluntary Enterprises
25
20
15 14
26
10
18
1
5 5
9
6 6 7
3 3
0 1
52
China Carbon Market Research Report 2015
personnel was still at an early stage, meaning that the autonomous capabilities for
carbon management were not mature.
The channels for these enterprises to understand carbon trading policies were
primarily through either government documents or third-party service agencies.
Carbon trading personnel from 40% of enterprises surveyed understood carbon
trading policies very well. 67.68% of all enterprises trained their carbon trading
personnel less than 3 times a year. The main training approach used was domestic
specialists training on location and the content primarily involved relevant knowledge
on carbon trading policies, regulations and carbon trading theories. About 80% of
enterprises did not set carbon trading performance indicators, 85% had no rewards for
carbon trading, and 85% did not designate a certain budget for carbon trading.
In summary, carbon trading personnel mostly understood the basic knowledge
needed for the early stage of the carbon market. However, they were still not familiar
with detailed operational processes, and indicators for performance appraisal and
financial support were insufficient, meaning that carbon trading personnel were yet to
be motivated to fully carry out their role.
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54
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necessary throughout the carbon trading cycle. This will increase the liquidity of the
carbon market and allow for better price discovery. This chapter introduces the role of
financial institutions in the present carbon market and predicts its changing role in the
future. It concludes by suggesting a role for Public Private Partnerships (PPP) and
analyzing its application within low-carbon development.
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Table 3-1 Cooperative agreement between financial institutions and trading platforms
Financing
Beijing Guangdong Shenzhen Tianjin Shanghai Hubei Chongqing
Institutions
China Strategic
Everbright Bank Member
Cooperation Escrow
China
Escrow Agreement, Escrow Bank,
Construction Member
Bank Escrow Bank Credit
Bank
Bank Agreement
Carbon
Bank of
Trading
Communications
Member
Escrow
China Minsheng
Strategic Bank,
Banking Corp,
Member Credit
Ltd.
Agreement
Intention Strategic Strategic Strategic
Shanghai
Strategic Credit Cooperation Cooperation Cooperation
Pudong Credit Strategic
Cooperation Agreement, Agreement, Agreement, Agreement,
Development Agreement Agreement
Agreement Escrow Escrow Escrow Escrow
Bank
Bank Bank Bank Bank
Intention Strategic Strategic
Cooperation Escrow
Credit Cooperation Cooperation
Industrial Bank Agreement, Bank, Cooperation
Agreement, Agreement, Agreement,
Co, Ltd. Escrow Credit Agreement
Escrow Escrow Escrow
Bank Agreement
Bank Bank Bank
China Escrow
Merchants Bank Bank
Carbon
Escrow
Bank of China Trading
Bank
Member
Strategic
China Citic Escrow
Cooperation
Bank Bank
Agreement
Data: desk research by Environomist
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China Carbon Market Research Report 2015
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Industrial
Sep.9th, Hubei Yihua 40 million RMB, no other collateral
Bank Co,
2014 Group Co., Ltd. condition
Ltd.
China Huaneng
Nov.26th, 300 million RMB, some allowance
Construction Wuhan Power
2014 and most enterprises fixed assets
Bank Generation Ltd.
Carbon Asset
China Hubei Jin’ao
Collateral Nov.26th, 100 million RMB, 10% is Carbon
Everbright Technology
Loan 2014 asset collateral
Bank Chemical Ltd.
Green Shanghai
Credit Baotan New
5 million RMB, pledge guarantee was
th Energy
Bank of Dec.11 , CCER, no other condition, which was
Environmental
Shanghai 2014 the first CCER hypothecated loan in
Protection
China
Science and
Technology Ltd.
Industrial
Bank Co, N/A N/A No published
International
Ltd.
Carbon
Shanghai
Factoring Yunnan a
Pudong May 14th,
Business Hydroelectric 30 million RMB, emissions reductions
Development 2012
Project
Bank
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China Carbon Market Research Report 2015
China Beijing
Jan. 28th, China Low-carbon Credit Card
Environment
2010 (Windmill Edition)
Industrial Exchange
Bank Co, Shanghai
Green Credit Ltd. Jun. 1st, Environmental China Low-carbon Credit Card
Card 2010 and Energy (Greenery Edition)
Exchange
China China Beijing
Mar. 2nd,
Everbright Environment Green Carbon-free Credit Card
2010
Bank Exchange
The first Private Placement Carbon
Fund in our country; Jiatan KaiYuan
investment fund, trading object was
CCER, scale was 40,000 thousand
Shenzhen
RMB, operation deadline was 3 years,
Jiatan Shenzhen
Oct. 11th, investing on CCER projects of new
Capital Emissions
2014 energy and environmental protection;
Management Exchange
Carbon Funds Jiatan KaiYuan Balance Fund,
Co., LTD.
allowance, 10,000 thousand RMB, ten
months, allowance special private
placement fund, earnings by buying
low selling high.
Lion Fund 30,000 thousand RMB, Carbon
Nov. 26th, China Huaneng
Management Emissions Special Assets
2014 Group
Co., Ltd. Management Project Fund
Shanghai
Shenzhen
Pudong
Emissions
Development CGNPC wind power additional carbon
May 12th, Exchange and
Bank earnings medium-term notes, 1 billion
2014 China
China RMB, 5 years
Guangdong
Development
Nuclear Power
Bank
Carbon Bonds
Industrial Industrial 2014 XingRMB Second Stage Green
Sep. 16th,
Bank Co, International Financial Credit Assets Backed
2014
Ltd. Trust Co. Ltd. Security
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China Carbon Market Research Report 2015
Kehui
Industrial th On due date, beside interest income,
Carbon Financial Nov. 27 , Electronics
Bank Co, not less than 1 thousand tons
Structural Deposits 2014 (Shenzhen) Co.,
Ltd. Shenzhen Carbon emissions allowance
Ltd.
Beijing
Huayuan The first buy-back financing
CITIC Dec.30th,
Buy-back Financing Thermal agreement, financing total scale
Security 2014
technology co., reached 13,300 thousand RMB.
LTD
Data: desk research by Environomist
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China Carbon Market Research Report 2015
premise of risk control began to flow and the market developed capital strength.
Figure 3-1 presents the amounts and trends of carbon funds since 199910.
Although there are quite a number of carbon funds in the global carbon market,
most of their business models have been limited to CDM related business (see Further
Readings), including CER trading and CDM project equity investment. But this kind
of trading experience can be replicated in other areas, for example funds resulting
from China's first published 'carbon emissions specialized assets management plan’
(see Table 3-2).
In the next few years, China will inevitably see a period of rapid development of
carbon funds, but not all will feature the same rules as in the early development of
global carbon markets. Because they are not influenced by international law and
domestic carbon-related professionals are relatively more abundant than in the early
international market, China's carbon funds are likely to feature both state-owned
capital and private capital developing at the same time. In view of their different
resources and social advantages, it is state-owned capital rather than private capital
that is likely to take the lead in large assets. This includes large power companies
10
CDC Climate Research, based on data from Environmental Finance 2010, Point Carbon and funds' websites
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China Carbon Market Research Report 2015
buying CCER assets from new energy (especially wind and solar power). Meanwhile,
private capital has advantages in flexibility, so it will be more focused on distributed
energy and medium-sized CCER carbon assets.
Although the current conditions for the development of China's carbon funds are
better than in the early international carbon funds markets, there are still some
challenges that need to be overcome, including:
The domestic legal framework is relatively loose. The legal basis for property
rights of allowances or CCERs needs the support of legislation by the National
People's Congress and local People's Congresses.
Supportive finance and taxation policies, accounting standards for carbon assets
and regulation of supporting policies remain to be proposed.
There is an extreme lack of high-level professionals. Professionals with several
years of carbon commodity trading and specialized industry knowledge need to
be recruited and trained vigorously.
There is a lack of risk control tools. Large amounts of capital entering the market
need the support of risk control tools, which presently need to be developed,
especially for data management and hedge trading.
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University of Finance and Economics Climate and Energy Finance Research Center61
11 th
Its predecessor is ECX, which was purchased on Apr.30 , 2010
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China Carbon Market Research Report 2015
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On May 18th 2014, the NDRC website issued a list of the first batch of 80 PPP
projects, involving hundreds of billions of dollars of capital, many of which were
clean energy projects: a total of 35 (including 30 for demonstration zone for the
large-scale application of distributed photovoltaic solar).
On Nov. 26th 2014, the State Council website issued its Guidance on Innovative
Investment and Financing Mechanisms for Encouraging Social Investment. This
document encouraged social capital to participate in clean energy projects in five
areas. Part IX requires the establishment of sound PPP mechanisms, and its active
promotion.
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creation are no longer viable, even as their financial liabilities – in the form of stocks
and debt – are still owned by capital market actors, notably financial institutions. A
changing economic environment then leads to significant value destruction, which in
turn may create risks for the owners of the associated liabilities – in many cases
financial institutions. The objective of this chapter is to analyze this type of risk in the
case of carbon risk and explore the implications for financial institutions in China.
Organization of chapter. The chapter is organized as follows. First, the analysis
will specify the nature of carbon risks, in particular the source of carbon risk and its
potential iteration. The discussion will then explore which types of sectors are likely
to be affected in which way. The discussion will then look at how this risk can be
measured and ‘tested’, beginning at the risks to physical assets and ending with
methodologies to ‘stress-test’ risk at financial institution level. Based on this analysis,
the discussion will explore the data needs associated with these methodologies. The
chapter will conclude by providing a perspective on the way forward for financial
institutions in terms of managing this risk.
12
The social cost of carbon emissions is defined as the present net cost of adaptation and damages related to global warming.
According to the US government, the social cost per metric ton of CO2 ranges from $20 to $60.
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emitters, their clients, and their suppliers. However, a forward looking analysis
suggests that financiers and owners might also directly face risk factors related to
their ‘financed emissions’ via an evolution (real or perceived) of investment
regulatory frameworks. In other words, as climate policies directly target financial
institutions, an example being the Green Credit Guidelines, they may also give rise to
carbon risks insofar as they are material for those financial assets in a portfolio that
are in some form connected to GHG-emitting physical assets (such as the bond of a
company that owns coal-fired power plants).
While the analysis seeks to identify different groups affected by carbon risks, it
should be noted that the risks to one actors can be ‘transferred’ to another actor. Thus,
the ‘external costs’ associated with GHG-emissions will ultimately become real costs
to an economy, costs that can in the first instance be allocated simply to ‘society’.
Equally, ‘society’ can decide to pass these costs on in a ‘boomerang’ effect to those
companies that originally signed responsible for these external costs. In this way, the
risks to one group are transferred to another group. Globally, five groups of actors can
be identified that may be subject to GHG-emissions risk, the last three of which are
the main focus of this chapter:
• Society / taxpayers: The first and most prominent ‘risk’ correlated with
GHG-emissions relate to their external cost. Based on IPCC report, the
existence of a cost is almost certain. The main uncertainties relate to
magnitude and burden sharing.
• Investees: For carbon-intensive companies the risks will materialize in the
form of increased costs, reduced revenues, and impairments related to
‘stranded assets’ (this term will be elaborated further in the last section).
These risks can be calculated through an adjustment of valuation (Discounted
Cash Flow, market value) based on an alternative scenario (e.g. reduced
demand and/or prices aligned with a 2°C goal13).
13
A 2° C goal is the goal of limiting average global temperature increase to 2° C. A « 2° investment roadmap » directly derives
from the IEA’s ETP 2DS scenario, a scenario which describes an energy system consistent with such a goal.
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China Carbon Market Research Report 2015
• Banks: The risks faced by the investees are partly transferred to lenders via
losses at default in an adverse scenario or a rise in the cost of capital if the
credit rating of the asset is downgraded. In turn, these risks are transferred to
the bank’s shareholders and financiers, or investors in case the loan is
securitized.
• Investors: Institutional investors hold securities (equities, bonds, ABS) and
therefore face credit and market risks in case future cash flows and credit
worthiness of the investees are significantly altered by the introduction of new
constraints during the holding period. These risks are transferred to other
investors when the security is traded.
• Ultimate asset owners: The ultimate asset-owners are those at the end of the
investment chain, who hold the security or have their benefits hit “when the
music stops” (i.e. the carbon risks materialize). Depending on the magnitude
of the impact, they might (or might not) be able to transfer the cost to tax
payers if “too big to fail” institutions are in the front line (a.k.a. moral hazard).
Choosing a broad or narrow definition of carbon risk. Depending on the
perspective and the groups included / excluded from the carbon risk analysis, the
definition of carbon risks can be specified. Thus, carbon risks can be defined based on
a narrow definition, where it only includes the risks faced by the investees
(companies) and credit and market risk faced by the lenders (banks) and investors
during the holding period. This narrow definition would also include regulatory risks
related to investment frameworks. A broader definition then also includes the risks for
the ultimate asset owners, based on the idea that the ultimate loss of value will appear
at some point on the balance sheet of an investor. Finally, an extended definition
includes the social cost of emissions assuming that this ‘off-balance sheet’ liability
will at some point become ‘on-balance sheet’ and be paid by those ‘responsible’ for
those off-balance sheet costs.
Distinguishing carbon and climate risks. It is important at this stage to
distinguish ‘physical’ and ‘carbon risks’. Traditionally, risks associated with climate
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change are usually grouped into a category of physical risks to assets that arise out of
climate events, such as a drought or a flood. There is increasing evidence of these
physical impacts on the planet and – by extension – on assets in the real economy,
productive or otherwise. Over the next century, it is these types of events that will
likely be the most prominent when thinking about the risk associated with climate
change. Despite the significant rise of these impacts, they are not the focus of this
chapter.
Instead, the chapter seeks to understand the potential risks specifically associated
with assets that emit GHG. Whereas physical impacts relate to the social costs
discussed above, they appear as carbon risks only to the extent that their costs are
ultimately in a ‘boomerang’ effect passed on to these actors, based on the historical
GHG-emissions. The issue of historical and annual GHG-emissions accounting will
be returned to later in the chapter in the discussion of data needs associated with these
risks.
The following section tracks the different types of risk factors and their
materiality for financial intermediaries. The discussion is based on the mapping and
typology of carbon risks in Dupré et al. (2014). Thus, carbon risks can be grouped
into five categories (Fig. 4-1).
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China Carbon Market Research Report 2015
Figure 4-1: The carbon risk landscape for financial intermediaries (Source: 2°Investing Initiative
2013)
source at least in the short- and medium-term for carbon risks are industrial
carbon-related policy risks. They include for instance caps on GHG
emissions, ETS (or Carbon tax), and norms regarding vehicles emissions. For
financial intermediaries, the risk relates to a sharp and unanticipated change
(real or perceived) in public policies at global or national during the holding
period. Whilst measures labeled as carbon are the most obvious risk, fossil
fuels are already facing increasing uncertainty, which leads to consideration of
other market factors under B. in the next paragraph. In the context of this
report, this type of risk also includes the risk from changes in prices on carbon
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markets. While these are ‘market based’ risk in the technical sense, carbon
markets are clearly a function of industrial carbon-related policy.
B. Market constraints linked with carbon emissions. An energy transition will
see changes in the demand and prices for different energy options. This could
be linked to a range of factors including falling prices for alternatives,
economic slowdowns, technological advances, efficiency measures, etc.
Carbon emissions are also highly correlated with other impacts such as
resources depletion, local air-pollution, local environmental impact of
extractive activities, water consumption, etc. Carbon intensity can therefore be
used as a proxy for risk exposure to other environmental and energy efficiency
policies (e.g. air quality and mpg standards for cars), contested operation
licenses (e.g. for fracking), and increasing market prices (e.g. energy). For
financial intermediaries, the risk relates to a sharp and unanticipated change in
national public policies or changes in global market prices (e.g. oil) during the
holding period.
C. Climate litigation. This is the long-term risk that lawsuits targeting
companies with high cumulated past emissions create liabilities, based on the
company’s ‘share of responsibility in the cost of global warming. It is not
limited to direct emissions and likely to occur in countries where
extra-territorial jurisdiction and class action lawsuits exist. To date all cases
are pending or have been dismissed. For financial intermediaries, the risk
relates to a first wave of prejudices or settlements occurring during the
holding period and turning the cumulated emissions of their investees into
liabilities. In an alternative scenario, financial intermediaries can directly face
claims based on their ‘financed emissions’. To a certain extent, reputational
risks faced by banks today can be seen as a first step towards these new types
of claims.
D. Investment regulatory frameworks. Investment regulatory frameworks
include all ‘top-down’ mechanisms that directly or indirectly impact the cost
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investors, they can in turn file suits against banks and investees, based on their
lack of disclosure of tail risks (e.g. Rico lawsuits in the US, case).
14
The time frame is 2014-2100. We specifically refer the RPC3PD scenario used in IEA roadmaps, under which the global
economy reaches carbon neutrality in 2070, and has negative net carbon emissions afterwards.
15
We took the MSCI World as a proxy for equity portfolios exposure and the Barclays Global Aggregate for bonds portfolios,
assuming that on average the sector exposure mimic the indexes weighting.
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manufacturing. These activities are usually not specific sectors in equity and
bonds classification. Their weight in bonds and equity portfolios is
respectively 1.8% and 3.9%.
• Financial institutions at first glance appear perhaps as a strange addition to
this list, given the focus on actual GHG-emitting sectors. However, given the
exposure of financial institutions to these sectors, it is appropriate to include
them in a list of sectors potentially affected by carbon risks. In the first case,
financial institutions may be affected by carbon risks using a narrow
definition of carbon risk, in particular through the liabilities of the companies
in the sectors highlighted above. Beyond, regulatory frameworks and the
exposure of financial institutions using a broader and / or extended definition
of carbon risk is worthwhile to highlight in this regard. Given this discussion
however, it is important to review the actual ability by financial institutions to
measure the materiality of this risk. Indeed, this is similarly relevant for the
companies in the other sectors highlighted in the discussion here. The next
section will review the current state-of-the-art in terms of methodologies to
measure carbon risk.
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Figure 4-2: Risk tests throughout the investment chain (source: 2°Investing Initiative)
Impairment tests and stranded assets. The discussion will begin with
impairment tests for physical assets. Impairment tests for physical assets are usually
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associated with the concept of stranded assets. While the idea of ‘stranded assets’ is
not specific to climate change, the term has gained particular currency in the course of
the transition to a low-carbon economy.16 The Carbon Tracker Initiative, credited
with introducing the term to the climate change debate, defines stranded assets as
“fuel energy and generation resources which, at some time prior to the end of their
economic life, are no longer able to meet the company’s internal rate of return, as a
result of changes in the market and regulatory environment associated with the
transition to a low-carbon economy.”
Stranded assets for fossil fuel reserves. The first work on stranded assets and
impairment tests associated with physical assets in the fossil fuel sector is by the
Carbon Tracker Initiative, which demonstrated the extent to which, under various
scenarios, fossil fuel reserves are ‘unburnable’ (Fig. 4-3). This work uses the concept
of a ‘carbon budget’ associated with a scenario as the benchmark.
Figure 4-3 Stranded Fossil Fuel Reserves under Various Climate Scenarios (Source: CTI 2013)
Stranded assets in the utility sector. Arguably the most prominent example of
existing stranded assets is in the European utility sector, where between March 2012
and December 2013, over 8000 MW of power plants that were 10 years or younger
were either closed or where the closing of the plant was announced, over 40% of all
16
There are ‘stranded utility’ bonds for example, whose economics are entirely disconnected from climate change
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closures. While not all related to climate policies, this shows the potential scope of
stranded assets.
Other sectors. While usually connected to the fossil fuel and power sector,
stranded assets may also apply to other sectors, such as transport and real estate. The
Chinese case of over-investment in real estate and the associated “ghost towns” and
auxiliary transportation infrastructures is an example of this (although not climate
change related). In the future, this analysis related to climate change may become
more relevant.
Measuring carbon risk for financial assets. Currently, carbon risk measurement
at financial asset level mainly relies on adjusting Discounted Cash Flows (DCF)17
and/or forecasted earnings of companies to account for higher direct or indirect prices
of CO2 emissions and the impacts of a carbon-constrained economy on demand for
high-carbon products. Crucially, all of this analysis hinges on the answer to four key
questions: i) understanding the types of risk that should be integrated into the scenario,
ii) the time horizon of these risks, iii) the way they are expected to impact the
analyzed high-carbon industries, iv) and the extent to which they will impact the
equity valuation (or risk of default on credit and bonds) for these industries.
Impact on market capitalization. The first studies in this regard by Carbon
Trust / McKinsey (2008)66 showed the impact of a 2°C scenario on companies’
valuations can reach up to 35% for oil companies, 44% for pure players in coal
mining, and 65% for car manufacturers and aluminum producer. This analysis,
however, is at sector level and not company specific. A subsequent company by
company analysis is provided by HSBC (2012)67, specific to the oil and gas sector.
Their results suggest that a 2°C scenario, with the associated ‘stranded assets’ and
price effects, will impact European oil and gas companies across the board with over
40% reduction in market capitalization (Fig. 4-4).
17
See § on adjusted DCF and company valuation
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From studies to tools. The transition in carbon risk assessment is slowly being
made from studies and research analysis to tools for investors. Bloomberg launched a
Carbon Risk Valuation Tool to measure the potential impact on market capitalization
of five different climate-related scenarios, including scenarios related to oil prices,
and direct changes in EBIT.
Impact on revenues. Whereas the HSBC analysis focuses on market
capitalization, work by Kepler Cheuvreux (2014)68 focuses on revenues. According
to a recent report, Kepler-Cheuvreux estimates potential lost revenues of $28 trillion
for the oil, gas and coal sector until 2035 under the IEA 450 scenario (Fig. 4-5). These
lost revenues are calculated relative to the benchmark IEA New Policies Scenario.
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Figure 4-5 : Lost revenues under a 2°C scenario until 2035 (Source ; Kepler Cheuvreux 2014)
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for each scenario. Mercer concluded that climate policy risks account for about 10%
of total risk exposure of an average portfolio (Fig. 4-6).
Figure 4-6: Climate stress test for an institutional investor (Source: Mercer 2010)
The FRR project launched in 2008 a similar project targeting the definition of
investment strategy, with a wider perspective (environment: climate, fossil resources,
biodiversity and water). The report (self-labeled as preliminary) proposed to
investigate several ways to integrate environmental issues in strategic allocation, on
the basis of four (climate) scenarios. For each, risk/return ratios are built for different
asset classes, and discussed in terms of geographic and sectorial impacts. Till now, the
FRR did not publish its subsequent study results of integrating environment and
climate change in its allocation strategy.
The Green European Foundation in turn sought to assess the carbon risks for the
European banking and pension fund sector. The results showed a limited impact,
specifically a 0.4% loss of total assets in the European banking sector and 2.5% for
the European pension fund sector. Interestingly, there was a significant European
variation among institutional investors, with losses of slightly more than 7% for the
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emissions.
Until recently, carbon footprinting has largely been limited to Scope 1 and Scope
2 emissions. In the past year however, there has been a significant push to expand
carbon footprinting to Scope 3. From a risk perspective, Scope 3 emissions are likely
to be key, as for many sectors they sign responsible for over 80% of the
GHG-emissions of a company (ex. automobile sector and banking sector). For
instance, the Shanghai ETS pilot from China adopted the similar accounting
framework to cover Bank of Shanghai as a regulated emitter.
In addition to Scope 3 accounting, from a risk perspective forward-looking,
‘locked-in’ emissions will become a key data need in the future. ‘Locked-in emissions’
refer to the emissions already on the balance sheet of a company in some form – for
example the carbon reserves of a fossil fuel company, the future GHG-emissions of
power plants, the airplane fleet of an airline, or the high-carbon manufacturing
technology in high-carbon sectors. While this data is not currently collected in this
form, the majority of this type of data is publicly available and thus a key element
here is tracking this type of data and making it available in relevant databases.
Beyond carbon foot printing. Easily available data for investors can help tackle
the issue of time horizon in the measurement of carbon risk. Data such as the EBIT
Margin, assets lifespan and carbon intensities at sector level can help prioritize sectors
when running a company-per-company comparison analysis. This ensures a better
understanding of the potential impact of potential carbon risks on different types of
assets and can help investors integrate forward-looking data in the carbon risk
analysis. Figure 4-7 below provides an overview of the three key metrics mentioned
above, which are easily available for investors and relevant to inform risk analysis:
carbon intensity, EBIT Margin and assets lifespan.18 The figure yields a number of
conclusions:
• Coal mining, oil & gas, electric utilities and air transport have very high
carbon intensities as well as long-term assets.
18
For statistical reasons and to illustrate this metric by sector, we take the median asset lifespan over 10 years.
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Figure 4-7: Carbon Intensity, asset lifespan and EBIT Margin of key sectors exposed to climate
scenarios. Source: Coeslier (2014) based on Inrate/Cross-asset footprint and Datastream data
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costs pass-through capacity regarding fluctuation in oil prices 73. Finally another key
dimension relates to the elasticity of demand (i.e. the impact of higher prices on
demand). This dimensions being highly product and region-specific, the lack of
financial data readily available in financial databases makes it difficult to draw
conclusions at sector level.
Table 4-1: Impact of carbon scenarios on EBITDA exposure after passing on costs for selected sectors
Capital and R&D expenditures74. Carbon risk materializes in the future. Thus,
investors need further forward-looking indicators. The breakdown of capital
expenditures by sector and energy-technology as well as investments in R&D can be
considered as a proxy for the energy-technology exposure of companies in the future.
However, this kind of data doesn’t exist in financial databases and only sometimes in
annual reports (Figure 4-8).
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19
The Standard Industry Classification (SIC) has more than 1000 industries in its most granular level.
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As outlined above, carbon risk is emerging as a new type of risk for financial
institutions. The analysis suggests that this type of risk is somewhat dissimilar to
traditional risks. Many risks associated with the energy transition will be policy and
not market driven, are likely to appear as gradual risk factors as opposed to tradition
economic ‘shocks’, limited to a specific part of the portfolio, and difficult to hedge.
By extension, traditional risk management tools and practices will either have to be
expanded or supplemented with new types of risk management in order to properly
manage this risk.
The urgency to manage this risk is likely to be particularly pronounced in China.
As shown in a study by the Oxford University (2014), stranded assets are likely to be
a particularly prominent problem in the next years. A big driver in this regard is
naturally the launch of the nation-wide ETS and the seven ETS pilots.
While carbon risk is becoming a growing issue for financial institutions in China,
tools to manage this risk are limited. Indeed, financial institutions worldwide face
similar challenge. Equally, while there are gaps financial institutions can already start
to manage this risk. A framework in this regard relates to managing the potential
sources of risk, such as the impact of ETS on the viability and return on investment –
this naturally also by extension frames the sectors at risk.
In terms of broader risk management, two approaches appear interesting to
explore. The first relates to integrating climate impacts into discounted cash flow
models (the ‘bottom-up’ approach) and exploring, at a company-by-company or
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5. Conclusion
In the year 2014, China, as a developing nation, has accelerated its domestic
policy development in the area of Carbon Markets. It has become clear that the
market based policy tool has gained momentum at policymaking level. From
strengthening implementation measures of regional ETS pilots to the launch of
National ETS Measure, a huge step from “Zero” to “One” has been made. It is no
doubt a great and promising start. However, the long march has just started and many
aspects must be thought through very carefully by all stakeholders in the market to
make it work. In our opinion, the further works carried out in 2015 by market
stakeholders will not only be decisive to a healthily operated Chinese ETS, but also
affect the policymakers’ confidence level at both national and international scale.
With this consideration in mind, the working team of this report carried out this
year’s market research with focuses of the development of ETS policy, ETS pilots
operational performance, investment and risk aspects of financial institutions within
the policy framework of carbon. At the end of this report, we truly wish the Chinese
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ETS will be a major milestone of mankind’s efforts in reducing our own effects on the
wonderful living environment that offered us comfort for millions of years. We
strongly encourage the stakeholders to digest the key recommendations made below
and benefit from the features of carbon market.
Policymakers at central government level shall be prepared for any mistakes and
market instabilities during the next years. Lessons learnt from these would
improve the policy design over time.
Officers responsible for the implementation cycle of ETS policy shall further
improve its administrative capacity to ensure the ETS policy is implemented as it
designed for.
Financial institutions interested and affected by carbon market need to consider
the carbon market from both investment opportunity and risk management sides.
The risks involved in aggressive strategy must be addressed to manage the risks
and limit exposures.
Compliance entities, including the ones covered by the National ETS, would
have to be better prepared and equipped. The ETS policy you are facing is quite
different than the traditional environmental policies you have used to deal with. It
would at least require technical and financial capacity to economically fulfill the
compliance needs. Many capacity building programs, financial services and IT
tools offered by the market are ready for you to reach your goals.
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