Here comes the authoritative interpretation! What allocation mechanisms do the latest quota total and allocation plan continue? What adjustments have been made?
In order to effectively allocate quotas in the National Carbon Emissions Trading Market (hereinafter referred to as the National Carbon Market), the Ministry of Ecology and Environment recently issued the "National Carbon Emissions Trading Power Generation Industry Quota Total and Allocation Plan for 2023 and 2024 (Draft for Comments)"(hereinafter referred to as the "Plan"), publicly soliciting opinions from the public. The "Plan" clarifies the allocation method of carbon emission quotas in the national carbon market in 2023 and 2024, which has attracted widespread attention from society.
The national carbon market has entered its third compliance cycle. Compared with the quota allocation plans of the previous two cycles, what quota allocation mechanisms does the newly released Plan continue? What adjustments have been made? What impact will these changes have on businesses? Focusing on these issues, our reporter interviewed Yan Gang, deputy director of the Environmental Planning Institute of the Ministry of Ecology and Environment, and introduced the relevant situation.
China's Environment: What mechanisms in the quota allocation plan for the second compliance cycle does the Plan continue?
Yan Gang:The "Plan" continues the overall framework of the "Implementation Plan for the Setting and Allocation of National Carbon Emissions Trading Quota Total in 2021 and 2022 (Power Generation Industry)". The continuity and stability of the system are reflected in the following five aspects.
First, all quotas are allocated free of charge. The "Plan" continues the mechanism of free allocation of all quotas in the first two performance cycles of the national carbon market, and has not yet introduced paid allocation of quotas.
The second is to continue the baseline method to allocate quotas, and there is no restriction on the absolute total amount of quotas. The "Plan" continues to adopt a baseline method to allocate quotas based on intensity control, and the method is unified nationwide and open and transparent. The quota amount of an enterprise is linked to the actual power generation and heat supply of the year. The higher the output, the larger the quota amount, and there is no absolute upper limit on the quota. The baseline method not only encourages advanced and constrains backward to the greatest extent, and promotes technological progress, but also does not directly restrict industry production and ensure safe power supply.
Third, the scope and classification method of units included in quota management remain unchanged. The "Plan" continues the unit determination standards that were included and not included in quota management in the first two performance cycles. It continues to divide units into four categories based on the two indicators of fuel type and installed capacity, and differentially sets quota benchmarks for different types of units.
Fourth, the incentive orientation of quota allocation remains unchanged. The "Plan" continues the encouragement of large-scale, energy-efficient, and low-emission units in the previous two compliance cycles, and continues to support units to blend biomass and unit heating, and actively plays a policy guidance role.
The fifth is to continue the preferential policies for performance. The "Plan" continues the gas unit quota gap exemption policy for the first two performance cycles and the enterprise 20% gap rate cap policy to promote enterprises to reduce emissions while reducing enterprises 'performance burden.
China's Environment: What important adjustments have been made to the Plan and what are the main considerations?
Yan Gang:The "Plan" fully summarizes the experience of quota allocation in the previous two compliance cycles, combines the actual operation of the development of the national carbon market, and carries out optimization and adjustment in six aspects: control scope, performance year, quota approval, correction coefficient, quota settlement and quota carry-over., further improve the accuracy of quota allocation, simplify the quota management process, improve the incentive orientation, and maintain consistency with the adjustment of accounting guidelines. The main adjustments are as follows:
The first is to allocate quotas based on power generation capacity and improve the accuracy of quota approval. The quotas for the first two cycles of the national carbon market are approved based on power supply, and the power supply is calculated twice based on parameters such as power generation and power consumption of production plants. Because the power consumption of production-related auxiliary equipment is difficult to accurately calculate and verify, the power supply is difficult to accurately measure, and the data quality is at risk. In order to ensure the authenticity, accuracy and reliability of various parameters in the quota allocation process, the "Plan" adjusts the approved quota based on power supply to the approved quota based on power generation, and the power generation data comes directly from the enterprise reading meter. It should be noted that since the power generation is on average more than 5% higher than the power supply, the benchmark value in the Plan has dropped significantly compared with the previous years. The power generation benchmark value cannot be simply directly compared with the previous power supply benchmark value.
Second, indirect emissions will no longer be included in control, reducing the workload of enterprise reporting and supervision. The first two compliance cycles of the national carbon market included carbon dioxide emissions from fuel combustion and indirect emissions from purchased and used electricity into the scope of quota control. It is estimated that the annual indirect emissions of the power generation industry are about 5 million tons, accounting for less than 0.1% of the industry's total emissions. Including indirect emissions into the scope of control has a limited role in reducing emissions, but it has increased the workload of accounting, reporting, verification and supervision. In order to simplify working procedures and focus on core issues, the Plan no longer includes indirect emissions in quota control, and enterprises should pay quotas equal to carbon dioxide emissions from fossil fuel combustion.
The third is to implement quota performance on an annual basis to improve the precision of quota management. The quotas for the first performance cycle of the national carbon market will be issued in a consolidated manner in two years, and the performance will be consolidated before December 31, 2021. The second performance cycle calculates the quota amounts in 2021 and 2022 and the quota amounts payable separately, but the performance will still be combined before December 31, 2023. In contrast, the "Plan" stipulates that quotas will be issued annually and fulfilled annually in 2023 and 2024, that is, the 2023 quota settlement will be completed before December 31, 2024, and the 2024 quota payment will be completed before December 31, 2025. The annual management model is conducive to improving the precision of quota management and better integrating it with my country's annual carbon emission management goals.
The fourth is to adjust the correction coefficient of quota allocation and highlight the encouragement orientation. Regarding the heat supply correction factor, due to the uncertainty of the heat supply ratio required to calculate the heat supply correction factor, the accounting guidelines have revised the heat supply ratio to "report only but not verify". In order to maintain consistency with the accounting guidelines and ensure the accuracy of quota calculation, the "Plan" cancels the heating quantity correction factor and realizes reasonable incentives for unit heating by adjusting the heating benchmark value. Regarding the load correction factor, the load correction factor was used in the first two cycles for conventional coal-fired units with load ratios below 85% during the statistical period, aiming to encourage units undertaking peak shaving tasks. According to statistics, the weighted average load rate of conventional coal-fired units in the national carbon market in 2023 will be around 65%. Continuing to maintain the upper limit of 85% of the load rate compensation is beyond reality and cannot highlight the low load rate of peaking units. Therefore, in order to highlight accuracy, the "Plan" renamed the original "load (output) coefficient correction coefficient" to "peak shaving correction coefficient" and adjusted the scope of application to conventional coal-fired units with load ratios below 65%.
The fifth is to increase quota carry-over regulations to enhance the vitality of market transactions. The first two cycles of the national carbon market did not clarify the use conditions and validity period of inter-temporal quotas. In actual operation, quotas can be unconditionally carried forward to the next year. The lack of carry-over restrictions and the general "bullish" expectations in the market have caused companies to "be reluctant to sell" to a certain extent, reducing the supply of market quotas and transaction activity, making it more difficult for companies with quota shortages to purchase performance quotas, which is not conducive to the stable operation of the market. The "Plan" determines the principle that the maximum amount of quotas that can be carried forward is linked to the net amount of quotas sold by enterprises by adding relevant provisions on quota carry-over. The higher the net sales volume of an enterprise, the greater its maximum carry-over volume, which will help encourage enterprises with surplus quotas to actively sell quotas and increase the vitality of market transactions. At the same time, the "Plan" also clarifies specific matters such as the use requirements, time arrangements and carry-over application procedures for quotas for each year to enhance long-term policy expectations.
Sixth, strengthen quota payment regulations and cancel the quota advance mechanism. Considering the impact of factors such as the epidemic in 2021 and 2022 and rising coal prices, the power generation industry is facing greater production and operation pressure. The second performance cycle uses a temporary quota advance policy, allowing difficult enterprises with quota gap ratios of 10% or above to advance their 2023 quotas to complete performance, and the advance amount shall not exceed 50% of the quota gap. This policy serves as a temporary measure to temporarily relieve the pressure on enterprises to perform. However, the application and recognition process for advance quotas is complex, and the pressure on quota recovery in the later period is great, which is not conducive to promoting enterprises to implement emission reduction measures. Temporary relief policies are not long-term institutional arrangements, and the quota advance mechanism has been eliminated in the Plan.
China's environment: The benchmark value is the core of the quota allocation plan and the focus of social attention. How are benchmark values designed? From a numerical perspective, the benchmark value of quota allocation in the Plan has dropped significantly compared with the second compliance cycle. Does this mean that quotas have been significantly tightened?
Yan Gang:The benchmark value for 2023 is based on the break-even (i.e., the balance value) of each type of unit in 2023, integrating industry emission reduction responsibilities and corporate performance pressure, and designed according to the industry-wide quota gap rate of 0.5%. Overall, the industry gap rate remains at a low level. The benchmark value for 2024 will drop by 0.5% from 2023, which is basically consistent with the average decline rate of carbon emission intensity of the power generation industry in the national carbon market in the past three years.
Apparently, the benchmark value of quotas in the Plan has dropped significantly compared with 2022, but this does not mean that quotas have been significantly tightened. The decline in the value is mainly affected by the following three factors.
The first is the change in calculation methods. The "Plan" is adjusted from approved quotas based on power supply to approved quotas based on power generation. Since the power generation of units is usually more than 5% higher than the power supply on average, the power generation benchmark value will inevitably decrease significantly compared with the power supply benchmark value. Changes in calculation methods are the main reason for the apparent decline in benchmark values.
The second is the change in the scope of control. The "Plan" no longer includes indirect emissions in the scope of quota control, which will lead to a decrease in the amount of quotas paid by enterprises, which will in turn lead to a downward revision of the benchmark value.
Third, the carbon emission intensity of the power generation industry has been decreasing year by year. The actual carbon emission intensity of the power generation industry in 2023 will decrease by about 0.6% compared with 2022.
China's Environment: How to improve the future national carbon market quota allocation mechanism? What suggestions do you have?
Yan Gang:The quota allocation system is the core of the carbon market institutional system. Fair, scientific and operable quota allocation methods and quota management systems are the cornerstone for ensuring the healthy and orderly operation of the carbon market and achieving policy goals. It is recommended to further improve the quota management system from the following two aspects.
The first is to establish a paid distribution system. Comprehensively consider the degree of marketization of the industry, industrial competition, market regulation needs, social affordability, etc., gradually implement an auction mechanism and establish and improve the quota primary market. A certain proportion of paid income is used to support capacity building and emission reduction technology innovation.
The second is to establish quota reserves and control mechanisms. Establish a carbon emission quota reserve adjustment pool to balance market supply and demand, enhance market stability and liquidity, and build a more effective, more active, and more internationally influential carbon market.
