China, People's Republic of: Advancing Shanghai Carbon Market through Emissions Trading Scheme

Sovereign Project | 46054-001

Summary

The TA will support the Shanghai Environment and Energy Exchangein (i) assessing the impacts of an emission trading system (ETS) on the Shanghai economy and key sectors, (ii) recommending sector-specific benchmarking methods and other system design elements of the ETS, and (iii) identifying future innovative and tradable carbon finance products that can potentially be linked to the Shanghai ETS to ensure its sustainability and enhance the further development of the Shanghai carbon market.

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Project Name Advancing Shanghai Carbon Market through Emissions Trading Scheme
Project Number 46054-001
Country China, People's Republic of
Project Status Closed
Project Type / Modality of Assistance Technical Assistance
Source of Funding / Amount
TA 8178-PRC: Advancing Shanghai Carbon Market through Emissions Trading Scheme
Technical Assistance Special Fund US$ 427,692.00
Climate Change Fund US$ 72,308.00
Strategic Agendas Environmentally sustainable growth
Inclusive economic growth
Drivers of Change Governance and capacity development
Partnerships
Sector / Subsector Energy - Energy efficiency and conservation
Finance - Trade finance
Gender Equity and Mainstreaming
Description The TA will support the Shanghai Environment and Energy Exchangein (i) assessing the impacts of an emission trading system (ETS) on the Shanghai economy and key sectors, (ii) recommending sector-specific benchmarking methods and other system design elements of the ETS, and (iii) identifying future innovative and tradable carbon finance products that can potentially be linked to the Shanghai ETS to ensure its sustainability and enhance the further development of the Shanghai carbon market.
Project Rationale and Linkage to Country/Regional Strategy

Climate change caused by rising greenhouse gas (GHG) emissions has emerged as a major threat to sustainable development. Asia and the Pacific was the region most affected by climate change-induced natural disasters during 2000-2009, accounting for 85% of global fatalities associated with natural disasters. The negative impacts of climate change are widely expected to fall disproportionately on the vulnerable and on poor communities. Climate change has become one of the main drivers of massive migration and displacement in the region. Hence, mitigating climate change is an urgent task to support environmentally sustainable growth in the region.

The PRC is a significant contributor to climate change, responsible for more than 20% of global emissions in 2011 compared with less than 11% in 1990. This rapid rise in GHG emissions is the result of energy-intensive growth. Recognizing the threat posed by rapidly increasing GHG emissions, the PRC reduced its energy intensity by 19.1% during 2006-2010. The government also announced the reduction of its carbon intensity by 40%-45% in 2020 compared with 2005. The Twelfth Five-Year Plan (2011-2015) set a target to reduce carbon intensity by 17% and energy intensity by a further 16%. While administrative measures achieved significant results during the Eleventh Five-Year Plan (2006-2010), these need to be complemented by more market-oriented approaches to provide economic incentives for emission reductions. One such approach is an ETS to enable the trading of emission reductions between enterprises that have obligations for emission reduction. Compared with other GHG emission control measures, ETSs offer greater flexibility to determine the price of carbon by using market measures. They allow targeted installations to meet their carbon reduction obligations by purchasing cost-effective carbon reduction from other installations. Many jurisdictions have implemented or plan to implement ETSs. Among these jurisdictions, the European Union ETS is widely recognized as the first and biggest international scheme, covering some 11,000 power stations and industrial plants in 30 countries.

The Government of the PRC recognized the benefits of an ETS, which it considers a cost-effective way to balance economic growth and climate change challenges. Given the complexities and uncertain economic impacts of ETS, the government proposed piloting cap-and-trade system for carbon dioxide (CO2) emissions in selected economic sectors and regions before introducing a nationwide ETS. The National Development and Reform Commission requested five cities with high carbon intensities-Beijing, Chongqing, Shanghai, Shenzhen, and Tianjin-along with the provinces of Guangdong and Hubei to set emissions control targets and submit proposals on pilot ETSs.

Shanghai is one of the PRC's largest cities. It has a gross domestic product (GDP) of CNY1.92 trillion-about 4% of the national GDP-and a per capita GDP of CNY82,560 in 2011. Shanghai emitted about 188 million tons of CO2 and major sources are thermal power sector (37%), industry (30%), and transport (20%). The SEEE estimates that the total CO2 emissions will increase to 330 million tons in 2020 based on expected GDP growth. The Shanghai Municipal Government (SMG) recognized the importance of reducing carbon intensity and has set the 12th plan targets for reducing carbon intensity by 19% and energy intensity by 18% by 2015. The SMG considers the ETS a crucial market-based approach to achieve these targets. The SMG aims to build on its success in establishing the SEEE, which now handles about 70% of environmental commodities transactions in the PRC. An ETS is a natural fit for Shanghai's highly diversified industry and fully developed commercial sector, which provide the core competencies needed to plan, implement, and operate such a complex scheme.

The pilot Shanghai ETS will be an extension of the existing SEEE. The SMG envisages Shanghai as the future leader in the carbon market with a comprehensive market platform for environment and energy transactions both nationally and internationally.

The TA is aligned with ADB's support for market-driven emissions reduction, cost-effective carbon finance, and carbon market development in developing member countries. The TA is a logical next step following ADB's support to the Ministry of Environmental Protection to assist in the establishment of a national sulfur dioxide emissions trading system in the PRC. It also complements ongoing ADB support for green finance development in Beijing and the development of an ETS in Tianjin. The TA will incorporate lessons learned from two other ongoing TAs in Beijing and Tianjin that are in early stage implementation through close and effective communications with SEEE. These three related interventions in Beijing, Tianjin, and Shanghai target vital yet different elements of the ETS. ADB support is needed in parallel as the three cities have major concentrations of emissions and different emissions mixes. Successful and early ETS application in these major PRC cities is crucial to accelerate a nationwide ETS implementation, which will lead to a more environmentally sustainable development in the PRC.

The TA is closely aligned with ADB's Strategy 2020, which identifies climate change mitigation through energy efficiency improvement and mitigation of GHG emissions as a core area of operation. The PRC's country partnership strategy, 2011-2015, promotes environmental sustainability as one of the two pillars of ADB assistance to the PRC. Improving energy intensity by using energy more efficiently and reducing carbon intensity have been identified as key interventions in this regard. Innovation and knowledge products to support policy reforms in order to establish an enabling environment for private sector development and clean energy investment are consistent with the PRC's country partnership strategy. Piloting an ETS in one of the major cities of the PRC-the world's largest GHG emitter-will contribute significantly to global public goods by mitigating climate change.

Impact A more environmentally sustainable development in Shanghai
Project Outcome
Description of Outcome An established carbon trading platform in Shanghai
Progress Toward Outcome The consultants have commenced services and inception workshop completed in June 2013. Continuous dialogues are being maintained to ensure desired outputs will be delivered since an issue on data accessibility has been raised during the inception workshop.
Implementation Progress
Description of Project Outputs

Comprehensive assessment of Shanghai ETS impacts on targeted sectors and city economy

A policy brief on sector-specific benchmarking methods for the Shanghai pilot ETS

Policy recommendations on carbon finance products and market development

Policy notes on the Shanghai pilot ETS and the current and future Shanghai carbon market

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

The technical assistance (TA) was approved on 2 October 2012 and became effective on 29 October 2012 with Shanghai Municipal Finance Bureau as the executing agency and Shanghai Environment and Energy Exchange (SEEE) as the implementing agency. Sinocarbon Innovation & Investment Co. Ltd. (SCII), the selected consulting firm was engaged on 25 February 2013.

The inception workshop was held at the SEEE facility on 18 April 2013 with 24 participants from ADB, SEEE, SCII, and carbon market experts. A representative from SEEE chaired the inception workshop. SEEE presented the overview of Shanghai pilot emissions trading scheme (ETS) development and the role of SEEE in Shanghai ETS design. SCII presented the (i) project's overview, which includes research objectives and goals, implementation plan for project tasks and outputs; (ii) overview of the Shanghai and other ETS development in pilot cities and provinces; (iii) details of Shanghai ETS development and its challenges; (iii) detailed research approaches and methodologies; and (iv) project team members. Carbon market experts from Fudan University also made a presentation on the PRC's finance market, which can serve as useful background information on how a new emerging carbon market can be designed and operated in the near future.

The interim workshop was held at Holiday Inn Shanghai Pudong, Shanghai, PRC on 10- 11 December 2013. The workshop was organized as a joint workshop between TA 8178-PRC and RETA 8223. A total of 60 participants and resource persons attended the workshop, including Shanghai Development and Reform Commission; Shanghai Finance Bureau (SFB), Shanghai Environment and Energy Exchange (SEEE), national and local government officials and technical experts from the PRC, Thailand and Viet Nam; international organizations and academic institutions such as United Nations Framework Convention on Climate Change, Oxford University, London School of Economics and Political Science, Tsinghua University; and also representatives from private sector. At the workship, the information on the progress on Shanghai pilot ETS was shared among participants. Shanghai pilot ETS covers 16 sectors with 191 enterprises, whose emissions are more than 20,000 carbon dioxide ton equivalent (CO2 teq) for energy intensive industry and 10,000 CO2 teq for non-industry sector. The cap is set based on energy intensity and the allocation method is determined mostly based on grand-fathering with reference of 3 year average data reported for 2009-2012. Yet, the use of benchmarking is limited: Only power sector's emission allowance is allocated for each installation using the benchmarking method. The general guideline and sectoral methodologies for monitoring, reporting and verification (MRV) were developed. During the pilot period, the targeted enterprises are required to get their emission report verified by a third party. Shanghai pilot ETS trading was launched on 26 November 2013. The trading of Shanghai Emissions Allowances (SHEAs) and/or Chinese Certified Emissions Reduction (CCER) are carried out in the spot market either in open outcry (for small transaction) or negotiated transaction (for large orders). The accumulated volume of transaction since the launch of the Shanghai ETS is about 12,500 tons of CO2. Currently, the trading activities are slow and less active, which is common for "price for carbon" in a "limited market." As for the progress of TA 8178, the following key outputs were presented, which would contribute to the Shanghai pilot ETS design: (i) A computable general equilibrium model was constructed to evaluate plausible impact of Shanghai pilot ETS on targeting sectors and overall economy using different scenarios. Yet, limited data availability and unknown variables would affect the outcome of modeling. (ii) Using sectoral emission data and established assumption, possible benchmark levels for selected sectors and products including iron and steel, power & heat, refineries, aviation, chemical sectors in Shanghai were presented in comparison with European cases. The need of more detail data was raised as an issue. In addition, ex-post adjustment for benchmarking was recommended as a necessity to ensure the suitable benchmark in Shanghai. (iii) Several policy measures were recommended to oversee the carbon trading market under different scenarios. These measures could include adjustment of emission permits under- and/or over-supply in the market, initial allocation, proximity to the compliance deadline, penalty size and enforceability, permit banking and the time horizon. Difficulty of using only spot market is discussed and the need of future was strongly recommended to ensure market liquidity. The workshop concluded with positive feedbacks from a range of participants, including other ETS pilot representatives in the PRC.

The final workshop, entitled, Workshop on China Carbon Market: From Pilots to National Emissions Trading Scheme (ETS) , was held in Beijing on 19 December 2014 with over 120 participants, including representatives from the National Development Reform Commission (NDRC), Beijing Development Reform Commission, Shanghai Finance Bureau, Shanghai Environment and Energy Exchange, United Nations Development Programme, United Kingdom Embassy in the PRC, London School of Economics, Tsinghua University, and other pilot emissions trading schemes in the PRC. The project outputs of ETS economic impact analysis, allocation methods for benchmarking, and carbon finance products for Shanghai pilot ETS were presented and experiences from other pilot ETSs were shared. Reflecting the Government of PRC's announcement on upcoming national ETS, NDRC provided high-level vision on ETS policy and framework in the PRC. The workshop concluded with positive feedback on the project outputs and heated discussion on the steps toward a national ETS. The draft final TA report was submitted prior to the final workshop and finalized after incorporating comments from the EA, and IA, and other ETS experts.

Geographical Location
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design ADB has received a project concept paper submitted by SFB and Shanghai DRC. A reconnaissance mission was fielded to firm up the scope, implementation arrangements, consultants input and the design and monitoring framework of the proposed TA. It was extensively discussed with the SEEE.
During Project Implementation

At the interim workshop, around 40 external stakeholders from China and from abroad were invited to share information and provide feedback on the TA 8179. They includes national and local government officials and technical experts on ETS from the PRC, Thailand and Viet Nam; representatives from international organizations and academic institutions such as United Nations Framework Convention on Climate Change, Oxford University, London School of Economics and Political Science, Tsinghua University; and also representatives from private sector.

At the final TA workship, over 120 participants were attended, including representatives from the National Development Reform Commission (NDRC), Beijing Development Reform Commission, Shanghai Finance Bureau, Shanghai Environment and Energy Exchange, United Nations Development Programme, United Kingdom Embassy in the PRC, London School of Economics, Tsinghua University, and other pilot emissions trading schemes in the PRC. A wide range of stakeholders showed up and provided feedbacks and inputs for project outputs and next possible steps towards the development of ETS in the PRC.

Business Opportunities
Consulting Services

The TA will be carried out by a consulting firm (three international consultants for 12 person-months, and six national consultants for 30.5 person-months) with expertise in ETS, carbon finance, economic modeling, and energy and environmental policies. The consulting firm will be engaged using the quality- and cost-based selection method (with a quality-cost ratio of 80:20) in accordance with ADB's Guidelines on the Use of Consultants (2010, as amended from time to time). The firm will be required to submit a simplified technical proposal covering all aspects of the terms of reference.

The experts required to undertake the activities of the TA include (i) an economic modeling expert (international, 3.0 person-months); (ii) an energy economist (national, 3.0 person-months); (iii) an emission trading system benchmarking expert (international, 4.0 person-months); (iv) an emission trading system benchmarking specialist (national, 6.0 person-months); (v) a carbon market expert (international, 5.0 person-months); (vi) three carbon finance researchers (national, 6.5 person-months each); and (vii) an energy and environment policy researcher (national, 2.0 person-months).

Responsible ADB Officer Na Won Kim
Responsible ADB Department East Asia Department
Responsible ADB Division Energy Division, EARD
Executing Agencies
Shanghai Municipal Finance BureauJi Xinhua, Representative of International Divisionjixinhua@gmail.comRm 1806, 800 Zhaojiabang Rd, Shanghai, 200030, People's Republic of China
Timetable
Concept Clearance 30 Jun 2012
Fact Finding 04 Sep 2012 to 06 Sep 2012
MRM -
Approval 02 Oct 2012
Last Review Mission -
Last PDS Update 25 Mar 2015

TA 8178-PRC

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
02 Oct 2012 29 Oct 2012 29 Oct 2012 31 Jan 2014 30 Dec 2014 -
Financing Plan/TA Utilization Cumulative Disbursements
ADB Cofinancing Counterpart Total Date Amount
Gov Beneficiaries Project Sponsor Others
500,000.00 0.00 0.00 0.00 0.00 0.00 500,000.00 02 Oct 2012 442,299.48

Safeguard Documents

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Evaluation Documents

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