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Climate Policy Greenhouse Gas Impact Assessment

A Case Study Of Beijing Emission Trading Scheme

This working paper assesses the GHG reduction impact of Beijing Emission Trading Scheme (ETS) and tracks the implementation status of this policy, using the two WRI-developed tools—Greenhouse Gas Protocol: Policy and Action Standard, and Climate Policy Implementation Tracking Framework.

Key Findings

Executive Summary

This study applied the Climate Policy Implementation Tracking Framework (Barua, Fransen, and Wood 2014), called the Tracking Framework, also developed by the World Resources Institute, which provides detailed guidance on tracking indicators in the policy implementation process. Using the Tracking Framework, we developed indicators on finance, licensing, permitting, and procurement; information collection and tracking; compliance and enforcement; and other administrative activities to track the implementation of Beijing ETS. Additionally, we developed a monitoring plan to collect information for ex-post impact assessment. In conducting this assessment, the study team examined the feasibility and applicability of the Policy Standard and the Tracking Framework in the Chinese context. Assessing Beijing pilot should not only provide information to help improve continued emission trading in Beijing, but it should also give insights that could be applied to a larger national emission trading scheme, which is under consideration.

This research began in 2013 and was completed in 2014, whereas the Beijing ETS pilot runs until 2015. Therefore, although some assumptions have been adjusted based on the most recently available data, this is an ex-ante assessment of policy.

What scenarios does this study use to assess Beijing ETS?

To assess the impact of Beijing ETS, this study set up two scenarios: the baseline scenario and the policy scenario. The baseline scenario represents CO2 emissions without the emission trading scheme, while the policy scenario represents CO2 emissions with the emission trading scheme. The difference between the two scenarios represents the CO2 emissions reduced by Beijing ETS.

How is the overall performance of Beijing ETS?

Since the launch of Beijing ETS in November 2011, Beijing has carried out activities including basic research and development, emission allowance allocation, and trading, and compliance—smoothly in most cases.

The assessment results show that Beijing ETS reduced CO2 emissions by 0.41 megatonnes of CO2 (MtCO2) in 2013, 1.56 MtCO2 in 2014, and 2.90 MtCO2 in 2015. These reductions are 0.60, 2.25, and 4.19 percent of the baseline scenario CO2 emissions for the three years, respectively. The cumulative emission reductions for all three years total 4.87 MtCO2. The reductions were modest but the ETS policy changed the emissions trend for regulated companies. Because of the ETS policy, emissions of key emission institutions started to decrease, reversing a trend of increasing emissions under the baseline scenario. Therefore, the ETS contributed to an earlier emissions peak for Beijing.

How is Power Sector Emission Mitigation in Beijing ETS?

Unlike many other emission trading schemes, Beijing ETS requires both power producers and power consumers to surrender emission allowances for power-related CO2 emissions. To avoid double counting emissions, the scheme counts emissions from power generated at plants outside of Beijing and consumed inside Beijing as consumption-, or demand-end, emissions. Total power-related CO2 emission reductions accounted for 45 percent (2.18 MtCO2 over the three-year period) of the total emission reductions by Beijing ETS. Of these power-related emission reductions, 98 percent (2.13 MtCO2 over three years) were by companies who reduced emissions to meet their caps partly by using less electricity. On the production end, emission reductions from power plants inside Beijing were negligible at only 50,000 tCO2.

The reduction in production-side emissions was so small mainly because Beijing’s thermal power plants are already tightly regulated and many have already installed or are about to install new technologies, and because Beijing ETS set lenient CO2 caps for thermal power plants based on their historical emission intensities. To further reduce direct emissions from thermal power plants, Beijing ETS might consider changing the emission allowance allocation method. Rather than benchmarking an individual plant’s historical performance, Beijing ETS could instead benchmark the emission intensity of all electricity produced by power groups. This design would allow power companies to further mitigate emissions by switching fuels or increasing their renewable portfolio, instead of relying only on reducing the emissions of coal-fired generating units.

Alternatively, Beijing might consider excluding the power sector from ETS coverage altogether. Since other administrative measures have been implemented to reduce emissions from power plants, and the current design of ETS does not drive further emission reductions, the power sector could be spared the effort of participating in ETS. As noted, the biggest reductions in emissions from power production came from the reduction in the demand for electricity by other companies as they made efforts to meet their own emissions caps.

How can the analysis of power sector mitigation of Beijing ETS Inform a National ETS design?

Although a national ETS cannot simply extrapolate the Beijing ETS program, a relevant analysis of Beijing ETS can inform decisionmaking for a national ETS program.

First, a national ETS should seriously consider following Beijing’s practice of including indirect emissions associated with electricity consumption in the emission allowance allocation for companies, given the fact that a large portion of the reductions in Beijing ETS was attributed to a reduction in electricity demand.

Second, if the national ETS caps direct emissions from electricity production, the cap should be stringent in order to be effective and other issues must be considered.

Third, if the national ETS covers both direct emissions from electricity production and indirect emissions from electricity consumption, double counting may become an issue. Unlike Beijing, China as a whole does not import significant electricity, therefore cannot adopt Beijing ETS’s GHG accounting arrangement to solve the issue. The national ETS design will need to address this issue, possibly by tracking and distinguishing allowances allocated to electricity producers and consumers.

How to smartly limit the use of carbon offsets in ETS?

Beijing ETS allows companies to use China Certified Emission Reductions (CCERs), as well as emission reductions that are generated by energy conservation and forestry carbon sink projects and approved by relevant authorities to meet compliance obligations (all these emission reductions can be called “carbon offsets”). In Beijing ETS, the use of carbon offsets cannot exceed 5 percent of a company’s total emission allowances, and at least 50 percent of the carbon offsets must be originated by projects within Beijing. In theory, allowed carbon offsets could amount to 3.41 MtCO2, 3.38 MtCO2, and 3.31 MtCO2 from 2013 to 2015 respectively, which is more than the estimated reductions resulting from Beijing ETS during the same period. If most of the allowed carbon offsets had been used, there would have been more supply than demand, which would have had a significant impact on allowance price.

Given the continued limited supply of Beijing-originated offsets, carbon offsets have had no observable impact on the allowance price in the 2014 compliance cycle so far.

The limited supply of carbon offsets was the result of authorities’ caution in approving certified credits and of the lengthy process of generating carbon offsets. Although controlling the approval of offsets allows the government flexibility in managing offsets supply and the emission allowance price, such an approach lacks the transparency and certainty that market participants seek. In the long term, it is important to make sure the allowed carbon offsets do not exceed estimated reductions in the same period. To do so, the government needs to conduct ex-ante GHG emission reduction assessments, and consider the results when setting the limits of using carbon offsets.

Policy Recommendations This study demonstrated that the Policy Standard can provide a feasible, practical, and meaningful framework to assess the greenhouse gas impact of climate and energy policies in China. The Tracking Framework can help track policy implementation in China. Based on the conclusions of this paper and the experience of applying the two tools, we offer four policy recommendations.

  • Conduct an ex-ante assessment for major energy and climate policies in a systematic manner
  • Address other existing and planned policies, and nonpolicy drivers in impact assessment
  • Improve the tracking of major climate and energy policies’ implementation to increase transparency
  • Conduct ex-post impact assessment for major climate and energy policies

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