PMR - Sixteenth Meeting of the Partnership AssemblyNew Delhi, IndiaMarch 20-23, 2017

LIU FENG Deputy DirectorDepartment of Climate ChangeNational Development and Reform Commission China

Proposal for Additional Funding Allocation: China

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I. Overview of Existing MRP Activities and Progress

II. Overview of China’s Mitigation Strategy, Nationally Determined Contribution (NDC) and Carbon Pricing Policies

III. Proposed Activities: Scope of Work and Additionality

IV. Budget, Timeline and Outputs

V. Anticipated Risks, Expected Outcomes and Monitoring and Evaluation (M&E)

Presentation Outline

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I. Overview of Existing MRP Activities and Progress

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MRP overview

Objectives of the original MRP

The CPMR project’s development objective is to enable China to design a national Emissions Trading Scheme (ETS).

Existing MRP Activities: An Overview

Implementing

agency

Department of Climate Change, National Development

and Reform Commission, PR of China (NDRC DCC)

Grant Effectiveness

and Closing Dates:

03/23/2015 - 06/30/2018

Grant Amount (USD): USD 8,000,000

Funding Mobilized

(USD):

USD 132,860,000

Funding Committed

(USD)

USD 132,860,000

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ActivityStatus

CommentsDelayed On track Delivered

Activity 1 Coverage, cap, allocation

On track The research activities are under implementation on track. The legislative process has been accelerated to support the launch of the ETS nationally within 2017. Some of the interim outputs have been delivered to directly support the initial ETS framework. The final drafts of research reports are expected in 2017 Q3.

Activity 2 LegalFramework

On track

Activity 3 MRV On track

Activity 4 Registry

On track

Activity 5 Research SOE

On track

Activity 6 Power sector

On Track

Activity 7 Support Provinces

Postponed The support to the provinces has been postponed to better focus on provinces requiring support on the initial allocation. Contract will be signed soon, project ended in June 2018

Existing MRP Activities: Status

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Existing MRP Activities: Expected Results and Status

Activity Key Output Status

Activity 1 Coverage,

cap, allocation

1. Coverage and Scope

Some conclusions and Suggestions are used in government documents.Attachment 1 and 3 of NDRC Document ( No.57,2016)

2. Cap Setting Some conclusions and Suggestions are used in government documents.1.Relevant Chapter in (No.61 Document of State Council,2016)2. Relevant Chapter in “National ETS construction Plan”(governmental internal draft consultation)

3. Allowance Allocation

Some conclusions and Suggestions are used in government documents.1. Allowance Allocation Plan for National ETS (internal draft, approved by state council) (plans to issue on 2017)2. Implementation Plan for Allowance allocation.(outline)3. General Plan for National ETS construction (internal draft) (plans to issue on 2017)4. Allocation scheme of carbon dioxide emission allowance for main emitters in national carbon emissions trading system. (internal draft)5. Guideline for the allowance allocation method in 8 sectors.

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Existing MRP Activities: Expected Results and Status

Activity Key Output Status

Activity 2 Legal

Framework

1. Administrative Rules of the Management System of the China’s National ETS

Some conclusions and Suggestions are used in government documents.Regulations on Administration of Emission Trading (governmental internal final draft)

2. Administrative Rules of Exchanges of the China’s National ETS

Carbon Emission Market Exchange Management Regulation (internal Draft)

3. Plan for the Compliance Mechanism for China’s National ETS

1. Study the experience and challenges of the compliance mechanism in China[completed]2. Propose Plan for the Compliance Mechanism for China’s National ETS (First Draft) [in process]

4 Study on the necessity and feasibility of future trading of China’s National ETS

1. Necessity of Carbon Futures Trading [completed]2. Feasibility of Carbon Futures Trading [completed]

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Existing MRP Activities: Expected Results and Status

Activity Key Output Status

Activity 3 MRV

1. Guidance on MRV Some conclusions and Suggestions are used in government documents.Attachments in NDRC Document ( No.57,2016):1. Guidance on Accounting Methods and Reporting of Greenhouse Gas Emissions for Enterprises by different industries [completed]2. Guidance on Third-party Verification of National Carbon Emission Trading Scheme [completed]

2. Regulations on MRV

1. Policy suggestion: Regulations on Reporting of Greenhouse Gas Emissions by Enterprises in National Carbon Emissions Trading Scheme [completed]2. Policy suggestion: Regulations on Administration of Third-party Verification Institutions of National Carbon Emission Trading Scheme [completed]3. Modifying of the policy suggestion [ until the regulations issued by government]

3. Design Scheme of Verification and Electronic Reporting System

partially completed

4 Capacity building About 100 man-times is completed [totally 400 man-times]

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Existing MRP Activities: Expected Results and Status

Activity Key Output Status

Activity 4 Registry

1. Plan for Modifying the Software of the National Registry

Some conclusions and Suggestions are used in the registry Attachments in NDRC Document ( No.57,2016):1. Plan for Modifying the Software of the National Registry System[progressing]2. Executive summary of the Plan [Progressing]

2. Modified and tested national registry

1. Modifying the software of national registry system, the first iteration of system software modification process[1st modifying iscompleted, processing 2nd time period between January 2016 to January 2017]2. Multiple test between registry and exchanges [progressing]

3. Updated User Manual of the National Registry

1. The User Manual is completed, after the first modifying of system2. Updating the second draft

Activity 5 Research SOE

1. Study on Issues Related to the Participation of SOEs

Research Report [completed]

2. Capacity building least 3 times of capacity building activities for SOEs [completed, organized 6 times training events]

3. Overall suggestion on CPMR

Expected to complete at the end of 2017

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Existing MRP Activities: Expected Results and Status

Activity Key Output Status

Activity 6 Power sector

Research of Power sector

1. report "The Current Status and Characteristics of the Power Enterprises” [completed]2. “Proposals on the Types of the Power Enterprises Which can Be Incorporated into the National Carbon Emissions Trading Scheme”[Final draft]3. “Proposals on the Methods and Standards of allocation methods for the Power Enterprises”. [final Draft]4. “Proposals on the Emissions Sharing Mechanisms for the Power Enterprises”[Final draft]5. “Proposals on the Risk Control and the Allowance Regulation Mechanism for the Participation of Power Enterprises in the ETS” [Final draft]

Activity 7

Provinces engage

National ETS

1. Verification of key emitters at least 45 entities for each of the six provinces

1. Select 6 provinces: Inner Mongolia, Heilongjiang, Liaoning, Shandong, Shanxi, Chongqing. 2. Status of ETS construction are different. The last verification Will be completed in March 2018.

2. Capacity Building Training at least 800 man-times for each of the 6 provinces, will be completed in Q2 2018.

3. Policy recommendation

1. First draft will be finished in Q2 20172. Final draft will be finished Q2 2018

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Main lessons learned during the first proposal implementation

Lesson 1: Legislation process serves as a basis of the ETS design and given the lengthy procedures in this regard, it is critical to initiate legislative processes as early as possible in the design stages.

Lesson 2: Historical GHG data is very important for allowance allocation, for which reason the solid MRV system is a key.

Lesson 3: Pursuing pilot programs before the national instrument design and implementation is a very useful approach, which enables the identification of issues early on. For large countries, specific areas with higher level readiness could pilot and pioneer for collecting early lessons learned (like China’s case). And for smaller countries, piloting could be done in phases to support gradual rolling out of national programs. A piloting phase could allow adjustments in policy design while building capacity and readiness.

Lesson 4: The scope of work around the ETS design is massive and having adequate financial and human resources is critical for moving the agenda forward.

Lesson 5: Given the lack of capacity or differences in capacity among various stakeholders, capacity development activities should be given a priority.

Lesson 6: Mobilization of enterprises is very important issues and should be factored in the schedule

Existing PMR-supported Activities: Lessons Learned

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Demonstration Enterprise Program - Supporting Launch of China’s National ETS

Objectives: (1) analyze potential synergies/interactions betweenexisting sectoral policies and the ETS, (2) analyze compatibilitybetween energy reporting and benchmarking approaches andallowance allocation methodologies, and (3) finalize the design ofthe ETS allocation methodologies with respect to existing sectoralapproaches.

Funding allocation: $120,000

Deliverables: 8 sectoral assessments and a synthesis report to bedelivered in June 2017.

Policy Analysis Work Program Activities: An Overview

The Pre-Allocation Process

•Top-level design of the national ETS:

-Legal frameworks and legislations

-Allocations

-Registry

-MRV

Allocation methodologies (8 sectors and sub-sectors)

Industries/Enterprises

Allocation methodologies refined&

Allocation technical guidelines

Preliminary data reporting

Allowances

Trial allocation Pre-allocation

Data reporting and verification Feedback

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II. Overview of Mitigation Strategy, Nationally Determined Contribution (NDC) and Carbon Pricing

Policies

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Overview of the overall mitigation strategy

China has taken significant and demonstrable steps in recent years to reduce its GHG emissions, including energy efficiency and renewable energy targets within its national planning targets and through its international climate change commitments.

Other important policy developments

Key policies and measures in energy conservation and emission reduction in the 12th and 13th five-year plan

Main features of the NDC, including stated emission reductions objectives and targets

China’s NDC includes targets to reduce CO2 emissions per unit of GDP by 40-45% by 2020, and by 60-65% by 2030 from 2005 baseline levels, and to achieve the peaking of carbon dioxide emissions around 2030 and making best efforts to peak early.

Overview of Climate Change Mitigation Strategy

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Planned/existing carbon pricing instrument(s)

The planned carbon pricing instrument in China is the national ETS.

The role of carbon pricing instruments in achieving mitigation ambition

In the first stage of the national market, from 2017 to 2020, it is expected that the ETS will cover the largest emitters of the country (estimated to be 7,000 to 9,000 enterprises), accounting for 40 to 50 percent of nation-wide emissions, from institutional research.

Overview of Country’s Carbon Pricing Policy

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Legislative basis and institutional arrangements for planned/existing carbon pricing instrument(s)

Existing: “Carbon Emission Right Exchange Management Regulation”, promulgated by the NDRC in 2014

Planning: “Regulations on National Emissions Trading (for approving) ”

Political support and commitment for planned/existing carbon pricing instrument(s)

National 12th Five-Year Plan

National 12th Five-Year Work Plan for Controlling GHG emissions

National 13th Five Year Plan

National 13th Five-Year Work Plan for Controlling GHG emissions

National Plan for Climate Change 2014-2020

Overview of Country’s Carbon Pricing Policy

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III. Proposed Activities: Scope of Work and Additionality

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Objectives and outline of the proposed activities and related deliverable(s)

Activity 1 Studies on Sectoral Benchmarking- Objective: To propose policy recommendations on sectoral

benchmarking and default values

Activity 2 Studies on Carbon Market Finance Management System

- Objectives: To support informing policy development for a regulatory environment that enables market liquidity and trading.

Activity 3 Trainings, consultation and dissemination workshops and project management

- Objectives： To support Activity 1 and 2.

Additional Funding Proposal: An Overview

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Activity 1: The CPMR study has supported the design of the general allocation methodology of the national ETS that will use the sectoral benchmarking approach for most of the sectors where data is available. This activity will support the next steps of operationalizing the methodologies by conducting deep-dives into each sector to refine, calibrate and enhance the data used to establish benchmarks. Ultimately the sectoral benchmarks will be updated to enhance effectiveness of allocations.

Activity 2: The on-going CPMR Project focuses on supporting the formulation of the ETS frameworks. Moving into its implementation phase, it is important that the carbon finance market develops so that it can play a role in the national ETS scheme, such that the system is not only a compliance system but that trading can occur. This activity provides support to prepare the readiness of the financial market to effectively participate in the ETS at the earliest possible stage.

Additional Funding Proposal: Additionality of Proposed Activities

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Institutional arrangements: Proposal development (key agencies involved)

Led by the NDRC with support from the WB team

In consultation with stakeholders:

Agencies for Sectoral Benchmarking: Industrial Associations, Universities, research institutes, and SOEs.

Agencies for Finance Management: Central Bank, China Banking Regulatory Commission, China Securities Regulatory Commission, Exchanges, Financial Consulting Companies, SOEs, and NGOs

Institutional arrangements: Proposed activities implementation

Executed by DCC NDRC, with research support from universities, research institute, and industrial associations.

Additional Funding Proposal: Institutional Arrangements

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Demonstration of political support for proposed activities

Allowance Allocation Plan for National ETS (internal draft, approved by state council) (plans to issue on 2017)

General Plan for National ETS construction (internal draft) (plans to issue on 2017)

Additional Funding Proposal: Institutional Arrangements

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Activities to complement existing MRP of China.

To strengthen and complement the implementation of the China’s MRP

Additional Funding Proposal: Eligibility Criteria

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IV. Budget, Timeline and Outputs

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Additional Funding Proposal: Timeline and BudgetActivity Output(s) Time

required for completion

Estimated

completion date

Budget allocation (PMR)

Budget allocation from other sources (if applicable)

Activity 1 - Survey report of sectoral benchmarking- The data model-Policy suggestion on Sectoral benchmarking - Policy suggestion on the improvement of sectoral allowance allocation methodologies and MRVs

24 months June

2019

1,600,0

00- 200,000 from

government

- 700,000

(from German, Norway,

and other countries; also

from State owned

enterprises and industry

Association)

Activity 2 -Study report on carbon market finance

management system

- Research report on carbon financial product

management

- Policy suggestion on mechanism of carbon

emission right auction of national ETS

- Policy suggestion on critical elements on

carbon price of national ETS

- Policy suggestion on financing mode of

mortgage on carbon allowance in the initial

stage of national ETS

24 months June

2019

300,000 150,000 from

government

Activity 3 Trainings, consultation and dissemination workshops, and project management

12 months June

2019

100,000 At least 4 major workshops (100 persons) supplemented by numerous technical focused workshops

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V. Anticipated Risks, Expected Outcomes and Monitoring and Evaluation (M&E)

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Potential risks to implementation or successful completion of outcomes:

The key technical risk identified is the risk of data quality. There has been a three-year implementation of GHG reporting by enterprises, however there was no stringent compliance mechanism in place. On the other hand, allowance allocation requires high level quality of data. There are also capacity gaps among the enterprises and provinces.

Risks of political barriers and institutional coordination is low to moderate. Successful identification of accurate sectoral benchmarking and developing the initial regulatory environment for carbon market financing require cross sectoral/agencies coordination. And the top-level commitment and overall leadership will be critical.

Strategy for risk mitigation:

Activity 1 is intended to address the data quality risk through formation bottom-up research working groups consisting of technical members of the framework design as well as the participation from industrial association and provinces.

Political commitment remains to be high. The Department of Climate Change will engage stakeholders identified in through step-phase consultation and coordination workshop supported by the project.

Additional Funding Proposal: Identified Challenges and Risk Mitigation Strategy

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Proposed M&E arrangements: The CPMR PMO will continue to monitor and report the progress of the indicators.

Additional Funding Proposal: Overview of M&E Arrangements

Indicator Name Baseline 2017 2018 2019End

Target

Data

Collection

Proposal on

sectoral

benchmarking

Initial

methods

First

draft

report

Final

draft

report

Final

reportReport PMO

Proposal on carbon

market finance

supervision and

management

system

N/A

First

draft

report

Final

draft

report

Final

reportReport PMO

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FOR MORE INFORMATION, PLEASE CONTACT:

LIUFENG@NDRC.GOV.CN

LIUWB@CCCHINA.GOV.CN

DHUANG1@WORLDBANK.ORG

Thank You for Your Attention