1. Background
The Premier of the State Council, Li Qiang, recently signed a decree, announcing the release of the Interim Regulations on Carbon Emission Trading Management (hereinafter referred to as the “Regulations”), which will come into effect on 1st May 2024. These Regulations formally establish a carbon emission trading market in the form of administrative law, filling the gap left by the previously market-dependent Carbon Emission Trading Management Measures (Trial) (hereinafter referred to as the “Measures”). Based on the content of the Measures, the Regulations further clarify China’s carbon trading management system, providing new guidance for the carbon market. The Regulations consist of thirty-three articles. Below are the key interpretations of the Regulations provided by our lawyers:
2. Interpretation of Key Provisions
(1) Declaration of National Carbon Peak and Carbon Neutrality Goals
The Regulations explicitly declare the national goal of achieving carbon peak and carbon neutrality. This reflects the country’s active commitment to implement the central government's major decisions on ecological and environmental governance through legislation.
(2) Establishment of Five Basic Principles for Managing Carbon Emission Trading
In comparison with the four principles set out in Article 3 of the Measures, the Regulations revise and establish five basic principles for managing carbon trading:
- Upholding the leadership of the Communist Party of China and implementing the policies and decisions of the Party and the State Council;
- Balancing greenhouse gas emission control with economic and social development;
- Combining government guidance with market regulation;
- Ensuring fairness, justice, and transparency;
- Strengthening international cooperation and exchanges.
(3) Clarification of Supervision and Management Systems for Carbon Emission Trading
Articles 4, 5, and 17 of the Regulations specify the supervisory bodies and their corresponding duties, including the Ministry of Ecology and Environment, local governments, the State Administration for Market Regulation, the People's Bank of China, and the banking regulatory authority. These bodies have the right to conduct on-site inspections of trading entities and technical service providers. Failure to cooperate may result in fines of up to RMB 200,000. The Regulations also establish a public disclosure system, promoting societal supervision and transparency. Additionally, Article 16 mandates the establishment of a national carbon emission trading platform by the Ministry of Ecology and Environment to ensure comprehensive monitoring of carbon quota allocation, settlement, and emissions data.
(4) Framework for Carbon Emission Trading Management System
1. Establishment of Legal Status and Responsibilities of Registration and Trading Entities
Article 5 clearly defines the functions and responsibilities of the national carbon emission registration and trading entities. These entities are required to improve business rules, establish risk control measures, and introduce disclosure systems. Specific risk control mechanisms include limits on price fluctuations, maximum holdings, large entity reporting, risk warnings, abnormal trading monitoring, and temporary trading restrictions in case of emergencies.
2. Clarification of the Scope, Products, Participants, and Trading Methods
Scope of Coverage: The scope of greenhouse gases and industries covered by the trading market is to be approved by the State Council. In comparison with the Measures, which delegate this responsibility to the Ministry of Ecology and Environment, the Regulations stipulate that the Ministry, in coordination with the National Development and Reform Commission (NDRC), will submit proposals for approval by the State Council.
Trading Products: The Regulations specify that trading products are primarily “spot” carbon emission allowances, subject to State Council approval, but may not be limited to carbon quotas as stated in the Measures.
Conflict of Interest: To prevent insider trading and ensure fairness in carbon trading, Article 7 prohibits employees of supervisory authorities, trading institutions, and technical service providers from participating in trading activities. Violations will be subject to legal penalties, including confiscation of unlawful profits, fines, and sanctions against public officials.
3. Obligations of Key Emission Units
The Regulations outline the duties of major carbon emitters, specifying that the Ministry of Ecology and Environment, along with relevant departments, will set criteria for identifying key emission units. These units will be required to control emissions, report data accurately, and meet stringent compliance deadlines.
4. Allocation of Carbon Emission Quotas
Article 9 adjusts the quota distribution method. While the Measures focused on free allocation with occasional paid distribution, the Regulations will gradually introduce a mixed allocation system, requiring polluters to bear more economic responsibility. This aims to incentivise carbon emission reductions, thus promoting market fairness and helping achieve emissions reduction targets.
5. Responsibilities of Local Authorities and Technical Service Providers
Local environmental departments are tasked with verifying emission reports and providing feedback within a specific timeframe. Article 13 requires the creation of a comprehensive data management system to ensure transparency and accountability in carbon reporting. Third-party service providers must also act independently, impartially, and responsibly, with penalties for failure to comply.
6. Clear Rules on Compliance and Market Regulation
The Regulations clarify that carbon quotas may be used for trading, and emphasise the legitimacy and transparency of these transactions. It is illegal to manipulate or disrupt the carbon trading market, with fines of up to RMB 5 million for organisations and RMB 1 million for individuals who breach the market order.
(5) Building a National Market Management Platform and Promoting Data Sharing
In the context of the growing importance of big data, the Regulations propose the establishment of a national market management platform to facilitate information sharing and data connectivity across different government departments, thus addressing regional barriers in carbon trading and ensuring comprehensive market oversight.
(6) Introduction of Multi-departmental Decision-making and Public Consultation Procedures
The Regulations depart from the previous single-department decision-making process, introducing a system where most issues will require collaboration between the Ministry of Ecology and Environment and other departments. Some significant matters, such as the scope of greenhouse gases covered by the carbon trading market, will require approval by the State Council.
(7) Penalties for Key Emission Units and Service Providers
The Regulations emphasise the importance of lawful and compliant carbon emission trading, establishing clear penalties for fraudulent activities, particularly data manipulation by key emission units and technical service providers. These penalties have been significantly increased compared to the previous Measures.
1. Penalties for Key Emission Units:
- False reporting of emissions: Fines ranging from RMB 10,000 to RMB 30,000.
- Failure to meet emission quota deadlines: Fines ranging from RMB 20,000 to RMB 30,000.
2. Penalties for Technical Service Providers:
- Issuing false or misleading reports: Fines ranging from RMB 20,000 to RMB 100,000.
- Failure to comply with the rules may lead to loss of accreditation or business bans.
The Regulations clearly stipulate that third-party service providers must not issue false or fraudulent inspection or testing reports. Reports or audit opinions must not contain major defects or omissions, nor should they alter, falsify, or use fraudulent data or engage in any other dishonest activities. In such cases, illegal gains will be confiscated, and fines will range from five to ten times the amount of the illegal gain. If there are no illegal gains or if the illegal gains are less than the prescribed amount, fines will range from RMB 20,000 to RMB 100,000. Moreover, these violations will impact the institution’s and the responsible individuals’ qualifications and may result in a ban on future business activities. Responsible individuals may even face a lifetime ban from engaging in relevant business.
(8) Introduction of a Credit System for Market Participants
The Regulations introduce a credit system, where penalties and administrative actions are recorded and made publicly available. This is intended to encourage compliance and self-regulation among carbon trading entities and service providers, thereby reducing the risks and costs associated with carbon trading.
(9) Prohibition on the Establishment of New Local Markets
The Regulations specify that local carbon trading markets in Beijing, Tianjin, Shanghai, Chongqing, Guangdong, Hubei, and Shenzhen will continue to operate, but no new local markets will be established. Additionally, key emission units are restricted from participating in local carbon trading markets for the same greenhouse gases or industries.
