With Little Time Left to Mitigate Climate Change: Insights from the Enforcement of China’s Emissions Trading Schemes

What is an ETS?

In an ETS, a cap-and-trade scheme, government sets a cap to indicate the maximum GHG emissions allowed for regulated entities/operators within a specific period. The maximum number of emissions is divided by government into allowances. Governments allocate these allowances to regulated entities either freely or through auctioning. These allowances are priced and can be traded on the ETS market between different regulated entities. At the end of a compliance cycle, the regulated entities must surrender sufficient allowances to cover their GHG emissions for that cycle. To obtain emissions data, governments usually require regulated entities to monitor and report their own emissions, which helps government save on administrative costs in collecting emissions data. Following the self-monitoring and self-reporting of GHG emissions by entities, governments often use a third-party verification mechanism to check the accuracy and truthfulness of the reported emissions data. Depending on various ETSs, regulated entities or agencies are responsible for designating and paying third-party verifiers, most of which are profit-seeking corporations.

Non-Compliance Problems in China’s ETSs

In any ETS, compliance is likely to be suboptimal. For example, not all regulated entities comply with China’s ETSs. For example, the Ministry of Ecology and Environment (MEE) reported that 178 out of 2,011 regulated entities had failed to surrender sufficient allowances in the first compliance period (2019–2020) of the national ETS. The large volume of GHG emissions covered by China’s ETSs suggests that non-compliance with these schemes could undermine global efforts to mitigate climate change. Hence, it is necessary to review and assess the enforcement regimes of China’s ETSs to ensure compliance. This is exactly what my PhD thesis focused on and I explored it from a law and economics perspective.

The Lessons from the Enforcement Regime of China’s ETSs

My PhD thesis reviewed the compliance requirements and assessed the enforcement arrangements of the seven pilot ETSs in Shenzhen, Shanghai, Beijing, Guangdong, Tianjin, Hubei and Chongqing and the one national ETS. 

These Chinese ETSs have similar general compliance requirements. All these ETSs require regulated entities to (1) self-monitor and self-report GHG emissions according to relevant official guidelines, (2) accept third-party verification of emissions, and (3) surrender sufficient allowances equal to their verified emissions within a compliance period. However, these Chinese ETSs have different detailed compliance requirements. Moreover, some of the compliance requirements in China’s ETSs are not entirely clear. For example, in the Beijing pilot ETS, the regulated entities are obligated to designate and pay verifiers. However, in the national ETS, regulatory agencies are responsible for designating and paying third-party verifiers. An article by Prof. Michael Faure and I discussed the various models for verifier designation in China’s ETSs and assessed their advantages (e.g. adequate verification expertise) and risks (e.g. uncertain verification quality).

China’s pilot and national ETSs adopt different enforcement regimes, despite sharing certain enforcement designs. For example, all of China’s ETSs mainly rely on administrative deterrence-based enforcement, i.e. setting sanctions to deter regulated entities from violating. Administrative fines are used in almost all of China’s ETSs, although the severity of these fines varies. The different designs of administrative fines lead to various deterrent effects on regulated entities. In particular, the fines set out in most pilot ETSs for reporting inaccurate emissions data are relatively low, making them appear ineffective at deterring regulated entities from committing violations. Only a few ETSs, such as the Guangdong pilot ETS, can exempt non-compliant entities that take remedial measures, e.g. surrendering sufficient allowances following correction orders, from fines. Further discussion of the enforcement regimes of China’s ETSs can be found in my article published in the IUCN Academy of Environmental Law series. 

Besides administrative enforcement, the national ETS, the Shenzhen pilot ETS and the Tianjin pilot ETS also note the potential for introducing criminal liability for entities whose non-compliance constitutes a crime. Moreover, in practice, China’s NGOs filed a civil lawsuit against an entity, requiring the entity in the national ETS to surrender sufficient allowances. This suggests that civil enforcement could also play a complementary role in enforcing China’s ETSs. Prof. Michael Faure, Prof. Niels Philipsen, and I are writing a paper discussing the potentially complementary role of civil society in enforcing China’s national ETS from an economic perspective.

Overall, from a law and economics perspective, my PhD thesis argued that the designed enforcement strategies of China’s pilot ETSs and the designed and actual enforcement strategies of China’s national ETS do not always appear effective in incentivising the regulated entities to comply. These lessons from China’s ETS enforcement regimes can inspire policymakers and agencies from other jurisdictions to assess the effectiveness of their own ETS enforcement arrangements. They can also refer to the theoretical framework for effective ETS enforcement strategies that I established in my PhD thesis when improving their own regimes.