China, People's Republic of: Developing Tianjin Emission Trading System

Sovereign Project | 45038-001


The proposed CDTA will support the establishment of TETS, including the necessary regulations and trading infrastructure at TCX. The TA would also provide strategic advice on some of the key issues that needs to be addressed during the design phase of TETS.

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Project Name Developing Tianjin Emission Trading System
Project Number 45038-001
Country China, People's Republic of
Project Status Closed
Project Type / Modality of Assistance Technical Assistance
Source of Funding / Amount
TA 7956-PRC: Developing Tianjin Emission Trading System
Climate Change Fund US$ 550,000.00
Technical Assistance Special Fund US$ 200,000.00
Strategic Agendas Environmentally sustainable growth
Inclusive economic growth
Drivers of Change Governance and capacity development
Sector / Subsector

Energy - Energy efficiency and conservation

Gender Equity and Mainstreaming No gender elements
Description The proposed CDTA will support the establishment of TETS, including the necessary regulations and trading infrastructure at TCX. The TA would also provide strategic advice on some of the key issues that needs to be addressed during the design phase of TETS.
Project Rationale and Linkage to Country/Regional Strategy

During the Eleventh Five-Year Plan, 2006 2010, the PRC achieved a reduction of about 19.1% in the energy intensity of its economy. Since it relies heavily on coal, the energy intensity reduction in the PRC proportionately reduced carbon emissions. The energy intensity reduction recorded in the eleventh plan was accompanied by an increase in the share of non-fossil fuel sources of energy (i.e., renewable and nuclear) and low-carbon fossil fuel (i.e., natural gas). This energy intensity reduction was achieved primarily through a set of administrative measures that included (i) targeted energy efficiency improvement in the country's largest energy-intensive industries, (ii) incentives for energy efficiency improvements for bulk users, and (iii) phasing out of obsolete and inefficient industrial capacity.

The PRC has committed to reduce its carbon intensity by 40% 45% in 2020 compared with 2005 and to increase the share of non-fossil fuel in the primary energy supply to 15% by 2020. In line with this, the Twelfth Five-Year Plan, 2011 2015 has set targets for reduction in energy intensity (16%) and carbon intensity (17%) by 2015 compared with 2010 and to increase the non-fossil contribution in primary energy supply to 11.8% by 2015 compared with 7.8% in 2009. In addition the twelfth plan set specific targets to improve the urban air quality through emission reduction as some of the urban areas of the PRC are suffering from poor air quality.

While administrative measures achieved substantial energy efficiency savings during the eleventh plan, these measures need to be complemented by more market-oriented approaches to provide economic incentives for emission reduction. One such approach is to enable the trading of emission reductions between enterprises that have obligations for emission reduction. This would provide incentives for emission reduction to be achieved in economic sectors that have the least cost for emission reduction. The government has proposed to pilot test cap-and-trade of carbon dioxide emissions in selected industry sectors and regions during the twelfth plan by establishing provincial emission trading systems (ETSs). The carbon dioxide trading can also provide co-benefits such as reduction in local pollutants. This would improve the urban air quality and will result in indirect socioeconomic benefits in terms of reduction in respiratory diseases.

The emission trading markets have evolved since 2005 in many developed countries with mixed results. The evolving emission trading markets can be broadly classified into cap-and-trade and baseline and credit markets. Both of these market structures transform emission savings into a tradable commodity. When the market participants voluntarily set a cap on their emissions, it is referred to as a voluntary cap-and-trade market, and when a regulator sets a cap on emission from certain economic sectors, it is referred to as a mandatory cap-and-trade market. A cap-and-trade-based market is usually referred to as ETS; the European ETS is the best known mandatory cap-and-trade market.

The baseline and credit and cap-and-trade markets can be linked through offset mechanisms. In offsetting, credits generated through baseline and credit markets, in economic sectors or regions not covered in the cap-and-trade market, are used to offset emissions within the capped regions. The cap-and-trade market regulators usually stipulate the type and quantity of offsets that can be used in lieu of emission allowances. The European ETS (i.e., cap-and-trade market) accepts the certified emission reductions under the Clean Development Mechanism (i.e., baseline and credit market) as an offset subject to certain limitations.

Given the complexities and potential economic impacts of emission trading, the government has decided to pilot test cap-and-trade-based emission trading at the provincial level. This would enable useful lessons to be learned on the challenges of designing a national ETS in a rapidly growing developing economy, as international experience, with respect to emission trading, is limited to more mature moderately growing economies.

Tianjin had been designated a low-carbon city by the government, and has been invited by the National Development and Reform Commission to submit proposals for establishing a pilot ETS (other cities and provinces that were identified for pilot testing ETS are Beijing and Shanghai, Chongqing municipalities, Guangdong and Hubei provinces). TMG has approved the overall plan for establishing the Tianjin emission trading market and formally submitted the proposal to establish a pilot cap-and-trade-based TETS in August 2011. It was proposed that the (i) feasibility study for emission trading would be approved by the National Development and Reform Commission before the end of 2011, (ii) pre-conditions for emission trading would be established by the end of 2012, and (iii) TETS would commence operations in 2013. This would enable the government authorities to gather useful lessons from the TETS to be incorporated in the national ETS, which is expected to be established in 2015.

As a first step toward establishing a carbon market in Tianjin, TMG, in collaboration with Petro China, established the Tianjin Climate Exchange (TCX) in 2008. TCX has undertaken several pioneering initiatives and research studies on carbon markets. These include (i) structuring carbon neutrality products, (ii) attempting to establish a voluntary emission trading mechanism among several industrial establishments, (iii) establishing an electronic trading platform for major pollutants (sulfur dioxide), and (iv) conceptualizing the reduction of energy intensity in civil building sector using market-based approaches.

TMG, in consultation with the government, will have to decide several key strategic issues prior to establishing the TETS. These include the following:

(i)Whether the emission trading system would be based on intensity-based targets or absolute targets? Although the intensity-based target is consistent with the stated pledge of the PRC for emission reduction, the monitoring and verification requirements are more complex for intensity-based ETS.

(ii)How the emission trading system interacts with other administrative policies aimed at reducing carbon and energy intensity? These include energy conservation performance targets for key enterprises, phasing out of obsolete technologies and industrial capacities, and fiscal incentives and penalties for inefficient industries. The ETS should be designed to complement these policies.

(iii)Sector scope of the emission trading system.

(iv)Determination of the emission target.

(v)Price control mechanisms.

(vi)Allocation methodology of allowances. The emission allocation methodology needs to be determined at the outset. Free allocation wins the support of market participants, but it may result in windfall profits, while the auctioning of allowances would provide a more market-oriented allocation of allowances.

(vii)Offsets and linkages with other markets, including voluntary markets.

Impact A national cap-and-trade-based ETS in the PRC is established to contribute to emission reduction
Project Outcome
Description of Outcome TETS is successfully pilot tested to provide useful lessons for the establishment of a national ETS
Progress Toward Outcome The Tianjin Municipal government has approved the basic framework for Tianjin ETS in March 2013. The key economic sectors to be included in the Tianjin ETS have been identified based on the econometric modeling undertaken under the TA. The emission caps to be imposed on the covered sectors and the emission allocation method to participating entities have been finalized and awaiting approval of the higher authorities. The Tianjin ETS was launched in Q4 2013 and will provide useful lessons to the design of national ETS for PRC.
Implementation Progress
Description of Project Outputs

Strategic policy advice on the overall design of TETS is provided

Detailed design of TETS, including the trading rules and regulatory systems is prepared

The trading platform and registry for the TETS is commissioned

Status of Implementation Progress (Outputs, Activities, and Issues)

1.The TA consultants have provided strategic advice and policy recommendations on the overall design of Tianjin ETS which has contributed to the finalization of basic framework of Tianjin ETS in March 2013.

2.The consultants have provided recommendations on the detailed design of Tianjin ETS including the sector coverage, cap setting, allowance allocation and MRV protocols. These recommendations are being incorporated to the detail design of Tianjin ETS. The final approval of the Tianjin ETS including the participant list, overall emission cap , emission allowance allocation and MRV protocols are awaiting approval from then national government and the local authorities.

3.The technical specifications for trading platform and registry have been finalized. The contract for developing the trading platform and registry has been awarded.

Geographical Location
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design The proposed CDTA is included as Institutional Innovations of PRC's Emissions Trade Market in the memorandum of understanding between ADB and the Government of PRC for country program for 2011 2013. A reconnaissance mission has been fielded in January 2011 to define the broad scope of the CDTA. There have been several missions in March 2011 and in July 2011 to finalize the scope of the TA, taking into account the recent development in the establishment of emission trading in PRC. During the fact finding mission in October 2011, the scope of the TA and the implementing arrangements have been finalized in consultation with relevant agencies of Tianjin Municipal goverment.
During Project Implementation Tripartite meetings among ADB, the executing and implementing agencies, and the consultants will be held at the commencement and conclusion of each output to provide guidance to the consultants and to review their reports. Workshops and seminars will be conducted to collect comments on consultants reports and disseminate the main findings of the TA. The relevant stakeholders including likely partcipants of Tianjin ETS, muncipal govrnment and central government officials as well as academia have been consulted through consultation workshops to obtain their views on the proposed market design.
Business Opportunities
Consulting Services The TA will be carried out by a team of international (6 person-months) and national consultants (18 person-months) having extensive knowledge and expertise in (i) energy economics and industrial policy, especially policies pertaining to low-carbon development in the PRC; (ii) the design and regulation of ETSs in other parts of the world; and (iii) developing technical specifications for ETSs and emission allowance registries. The consultants will be engaged by ADB in accordance with the Guidelines on the Use of Consultants (2010, as amended from time to time) using the quality- and cost-based selection method (with a quality cost ratio of 80:20). The consulting firm will be required to submit a simplified technical proposal covering all aspects of the terms of reference.
Procurement All procurement will be carried out using the shopping method in accordance with ADB's Procurement Guidelines (2010, as amended from time to time) by the implementing agency. All equipment, including the software and hardware systems purchased under the TA, will be turned over to the implementing agency after TA completion. A software design company for the development of the trading platform and registry, based on the technical specification prepared by the consulting firm, will be recruited through fixed budget selection by ADB as (i) the detailed technical specification for the software system and the inputs required would have been finalized by the TA consultants, and (ii) the budget is fixed and cannot be exceeded. The selection criteria will include the ability to provide continuing service for software maintenance and upgrades beyond the time frame covered in the initial contract and local presence in the PRC.
Responsible ADB Officer Pradeep Perera
Responsible ADB Department East Asia Department
Responsible ADB Division Energy Division, EARD
Executing Agencies
Tianjin Finance Bureau
Foreign Economy Division
No. 4 Qufu Road, Heping District
Tianjin, People's Rep of China
Concept Clearance 21 Oct 2011
Fact Finding 23 Oct 2011 to 29 Oct 2011
Approval 09 Dec 2011
Last Review Mission -
Last PDS Update 30 Sep 2014

TA 7956-PRC

Approval Signing Date Effectivity Date Closing
Original Revised Actual
09 Dec 2011 13 Jan 2012 13 Jan 2012 31 Dec 2013 - -
Financing Plan/TA Utilization Cumulative Disbursements
ADB Cofinancing Counterpart Total Date Amount
Gov Beneficiaries Project Sponsor Others
750,000.00 0.00 0.00 0.00 0.00 0.00 750,000.00 09 Dec 2011 724,629.66

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