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Environmental Protection Series No. 15 - Carbon Neutrality: Key compliance issues for enterprises under the new Carbon Emission Rights Trading Regulations.

2021.03.15 ZHU, He (George)、 NI, Tianling (Carey Nee)、 WANG, Zhengming

Preface: On January 5th, 2021, the Ministry of Ecology and Environment (hereinafter referred to as “MEE”)promulgated the Carbon Emissions Rights Trading Regulations (Trial) (hereinafter referred to as the "Regulations"), which came into effect on February 1st, 2021. The Regulations aim to regulate the national Carbon Emission Rights trading activities and marks the official operation of China's Carbon Emission Rights trading system (national carbon emissions trading market). The Regulations form part of China's goal of achieving carbon peak and carbon neutrality. With the establishment and improvement of the national carbon emissions trading market, enterprises in specific industries will be able to participate in national carbon trading. Such enterprises are obliged to meet relevant compliance obligations. In combination with other relevant regulations and policies, this article aims to remind relevant enterprises of certain compliance obligations that deserve attention.

I. Which enterprises are listed as Key Emissions Entities of greenhouse gas under the Regulations

According to the Regulations, enterprises in industries covered by the national carbon emissions trading market and whose annual greenhouse gas emission reaches 26,000 tons of carbon dioxide shall be included on the List of Key Greenhouse Gas Emissions Entities (hereinafter referred to as “Key Emission Entities”). Key Emission Entities may adopt the transfer by transfer, one-way bidding or other methods in accordance with other applicable regulations to trade under the Carbon Emission Quota in the National Carbon Emission Trading System. The trading price shall be determined by the trading parties in terms of the market supply and demand. Until now, MEE has only issued the 2019-2020 National Carbon Emissions Right Trading Quota Setting and Allocation Plan (Power Generation Industry) and the List of Enterprises Included in the Administration of National Carbon Emissions Right Trading Quota for 2019-2020 (such enterprises are hereinafter referred to as “Included Enterprises”) for the power generation industry. Therefore, the Included Enterprises that can participate in the national carbon emissions trading market are limited to those in the power generation industry. The remaining seven key energy-consuming industries (i.e. petrochemicals, chemicals, building materials, iron and steel, non-ferrous, paper and civil aviation) are expected to be gradually included by the administration of a national carbon emissions right trading quota in the future.

It is worth noting that some provinces or cities such as Beijing, Shanghai, Shenzhen, Chongqing, Guangzhou, Tianjin, Hubei and Fujian have previously launched relevant pilots. Since the launch of the pilot work, pilot regions have promulgated a series of local regulations on carbon emissions trading, pioneering the establishment of a national legal system for carbon emissions trading. However, there are still differences in the scope of the industries covered by each pilot, and some of the pilot markets have lower emission standards for the included enterprises than those of the national carbon emissions trading market. The Key Emissions Entities included in the national carbon emissions trading market will no longer participate in the local trading pilot markets.

II. What are the key compliance obligations that enterprises identified as Key Emissions Entities need to pay attention to

Enterprises included in the Key Emissions Entities can trade Carbon Emissions Quotas in the Carbon Emissions Rights trading market. Key greenhouse gas emitters should still comply with some compliance obligations, or they may face penalties in the pilot areas in terms of credit management, social notification, financial support and/or project approval in addition to the adverse effect such as fines and Carbon Emission Quota reduction in the Regulations.

1. Key Emissions Entities shall formulate and implement the monitoring plan. Although the Regulations do not cover the obligation of enterprises to monitor carbon emission data, we have noticed that the Provisional Measures for the Administration of Trading of Carbon Emission Permits (the “Provisional Measures”) and some local pilot regulations request that Key Emissions Entities shall formulate monitoring plans,  file the plans with  the relevant authorities of carbon trading, and strictly perform monitoring in accordance with such monitoring plans that have been filed. After the Regulations are promulgated, how Key Emissions Entities perform the monitoring obligations required by the Provisional Measures and some local regulations remains to be further observed in practice. This is expected to be further clarified in the relevant supporting regulations.

2. Key Emissions Entities shall perform their obligation of annual reporting. According to the Regulations, Key Emissions Entities shall prepare their greenhouse gas emission reports for the previous year according to the technical specifications for the accounting and reporting of greenhouse gas emissions formulated by the MEE, indicating the emissions, and report them to the provincial-level ecological and environmental authorities where the production and business premises are located, before March 31 each year. Key Emissions Entities shall ensure the authenticity, completeness and accuracy of their greenhouse gas emission reports. The original records and management accounts of the data involved in the emission reports shall be kept for at least five years. The annual greenhouse gas emission reports prepared by Key Emissions Entities shall be regularly made public and be subject to social supervision, except those involving state secrets and commercial secrets.

3. The restriction on offset against the annual Quota of Key Emissions Entities by Chinese Certified Emission Reduction (CCER). Key Emissions Entities shall settle the Carbon Emissions Quota of the previous year to the provincial-level ecological and environmental authorities that allocate the Quota on time every year. The amount subject to settlement shall be greater than or equal to the actual annual greenhouse gas emissions of the emitter confirmed by the verification results of the provincial-level ecological and environmental authorities. Key Emissions Entities may offset their Carbon Emissions Quota by CCER every year, but the offset ratio shall not exceed 5% of the Carbon Emissions Quota to be settled. CCER used for offset (i.e., the greenhouse gas emission reductions quantified and certified for the greenhouse gas emission reduction effects of renewable energy, forestry carbon sinks and methane utilization projects in China and registered in the national greenhouse gas voluntary emission reduction transaction registration system) shall not come from emission reduction projects included in the Quota management of the national Carbon Emission Rights trading market.

III. Suggestions for enterprises

1. Enterprises in the power generation industry and the other seven key energy-consuming industries mentioned above, (namely petrochemicals, chemicals, building materials, iron and steel, non-ferrous industry, paper and civil aviation), are to be familiar with the Regulations, pay attention to national legislative developments, follow-up compliance requirements especially in regards to offset requirements when they are subject to the Regulations along with the expansion of Included Enterprises, and evaluate in advance whether it is necessary to purchase additional Quotas and CCERs for the purpose of fulfilling offset obligations and reducing performance costs. Such enterprises shall also actively fulfill the compliance obligations under the Regulations and supporting measures in order to prevent administrative penalties or any adverse impact or loss of advantage on corporate credit management due to violations of the relevant compliance obligations or ESG evaluation.(For your information, we have noticed that carbon emission is a key evaluation consideration of some mature ESG evaluation systems such as the ESG evaluation system of MSCI; the establishment and implementation of carbon neutral plans by enterprises will also have a positive effect on their ESG evaluations.)

2. The concept of carbon neutrality is now a long-term national policy. Qualified enterprises (especially, manufacturing enterprises with large greenhouse gas emissions) may,  on the premise of fully considering PRC laws and regulatory requirements,  take the lead in formulating their own comprehensive carbon neutrality plans based on their life cycles (covering the whole process from the purchase of raw materials and energy, transportation, production to product delivery), promote the implementation of such a plan and strengthen the capacity to manage carbon emissions and carbon assets (including the capacity of the supply chain management and the coordination of the upstream and downstream of the supply chain to achieve carbon emission reduction targets). If necessary, enterprises may update relevant production processes, technology and equipment, in order to control greenhouse gas emissions and gradually achieve the goal of carbon neutrality.  Enterprises may also further discuss with their environmental lawyers or consultants any specific questions regarding the Carbon Emission Rights trading or their plans or approaches to carbon neutrality.

If you have any specific questions, please contact us via email:ecoenvpro@junhe.com.

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