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Governing China’s domestic carbon market Liang, Wenqin 2017

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GOVERNING CHINA’S DOMESTIC CARBON MARKET  by Wenqin Liang    A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF  Doctor of Philosophy in The Faculty of Graduate and Postdoctoral Studies (Law)  THE UNIVERSITY OF BRITISH COLUMBIA (Vancouver)  February 2017  © Wenqin Liang, 2017    	 ii Abstract In March 2011, the Chinese government unveiled a plan to establish a domestic cap-and-trade carbon market. In line with this policy, the NDRC designated five cities (Beijing, Chongqing, Shanghai, Tianjin and Shenzhen) and two provinces (Guangdong and Hubei) as pilot regions for emissions trading. Collectively accounting for 27.4% of China’s national GDP and 18.4% of its population, the seven pilot cap-and-trade markets are already in operation and are in the process of testing a potential future nationwide cap-and-trade market.  This thesis examines the Chinese government’s decision to adopt domestic cap-and-trade as the process through which to lead China towards its goal of regulating GHG emissions. It explores the challenges that lie ahead and the adjustments that would be needed for the successful governance of the nascent cap-and-trade markets. Among the complex array of issues related to developing a cap-and-trade system, this thesis focuses primarily on the regulatory and oversight regimes, and employs an analytical framework based on the “good governance” criteria of accountability, cost-effectiveness, rule of law, transparency, and participation.  The thesis proceeds as follows: The first chapter is the Introduction.  It provides background with respect to the study, a review of the literature, and defines the primary research questions and methodology. Chapter Two describes the different types of carbon markets. Chapter Three investigates the evolution of China’s climate policy and the reason China adopts domestic carbon trading. Chapter Four provides a preliminary assessment of the current implementation policies of the cap-and-trade pilots, suggesting that major improvements and developments are needed to ensure the success of governing the carbon markets. Chapter Five analyzes the critical issues and potential obstacles involved in governing China’s cap-and-trade market by drawing on lessons 	 iii from international practices as well as previous environmental regulatory experiments that have been implemented in China over the past 20 years. Chapter Six discusses the implications of governing China’s carbon market for China’s environmental protection practice. The last chapter presents some conclusions.  	 iv Preface This dissertation is original, unpublished, independent work by the author, Wenqin Liang. 	 v Table of Contents  Abstract .......................................................................................................................................... ii Preface ........................................................................................................................................... iv Table of Contents ...........................................................................................................................v List of Tables ................................................................................................................................. ix List of Abbreviations and Acronyms ............................................................................................x Glossary ....................................................................................................................................... xii Acknowledgements ......................................................................................................................xv Chapter 1 Introduction ............................................................................................................... 1 1.1 Emissions Trading .......................................................................................................... 1 1.2 China’s Decision to Adopt a Domestic Cap-and-Trade Scheme ................................... 6 1.3 Research Questions ........................................................................................................ 7 1.4 Literature Review ........................................................................................................... 8 1.5 Analytical Framework and Methodology .................................................................... 13 1.5.1 Normative Criteria for Evaluation of a Market-Based Climate Policy ................. 13 1.5.2 Notes on Methodology .......................................................................................... 20 Chapter 2 Carbon Market: Principles and Types .................................................................. 23 2.1 Cap-and-Trade System ................................................................................................. 23 2.2 Baseline-and-Credit System ......................................................................................... 26 2.3 Compliance Market & Voluntary Market .................................................................... 29 Chapter 3 China Adopts Domestic Carbon Market ............................................................... 31 3.1 Evolution of China’s Climate Change Policy .............................................................. 31 	 vi 3.1.1 Climate Cooperation as An Opportunity to Gain International Acceptance (1988 to Early 1990’s) ................................................................................................................. 32 3.1.2 Joining International Climate Regime to Get Financial and Technological Assistance (1992 to 2003) ................................................................................................. 36 3.1.3 Climate Policy as an Integrated Part of China’s Social and Economic Development Planning (2004 to present) ......................................................................... 40 3.2 Decision to Adopt Domestic Carbon Trading .............................................................. 46 3.3 Controversies over Carbon Intensity Goals ................................................................. 48 3.4 China’s Experience with Carbon Trading .................................................................... 51 3.4.1 Experience with CDM .......................................................................................... 52 3.4.2 Voluntary Markets ................................................................................................. 52 3.5 Cap-and-Trade Pilots and the Roadmap of China’s Domestic Carbon Market ........... 53 3.5.1 Mitigation Targets for Pilot Regions ..................................................................... 54 3.5.2 Roadmap to a National Cap-and-Trade Scheme ................................................... 56 Chapter 4 Governing China’s Cap-and-Trade Pilots: Current Legal and Institutional Framework… .............................................................................................................................. 58 4.1 Legal Framework ......................................................................................................... 58 4.1.1 National Law and Policy ....................................................................................... 59 4.1.2 Regulations at Local Level ................................................................................... 61 4.2 Administrative Institutions ........................................................................................... 64 4.2.1 NDRC and Local DRCs ........................................................................................ 64 4.2.2 MEP and EPBs ...................................................................................................... 66 4.2.3 Municipal/Provincial Leading Small Group on Carbon Trading Pilot ................. 67 	 vii 4.2.4 Third-Party Verification Supervision Agencies .................................................... 67 4.3 Design of the Pilot Carbon Markets ............................................................................. 68 4.3.1 Scope ..................................................................................................................... 69 4.3.2 Cap and Total Amount of Allowances .................................................................. 71 4.3.3 Allowance Allocation ............................................................................................ 75 4.3.4 Monitoring, Reporting and Verification ................................................................ 78 4.3.5 Trading Mechanism .............................................................................................. 81 4.3.6 Price Containment ................................................................................................. 83 4.3.7 Compliance Mechanism ........................................................................................ 86 4.4 A Preliminary Assessment of the Regulatory Scheme ................................................. 92 4.4.1 Incentive Mechanisms Promote Compliance ........................................................ 92 4.4.2 Fostered and Inhibited Participation ..................................................................... 94 4.4.3 Inadequate Market Oversight Rules ...................................................................... 98 4.4.4 Inadequate Allowance Allocation Methods ........................................................ 100 Chapter 5 Potential Obstacles of Effective Governance of China’s Cap-and-Trade Market……….. .......................................................................................................................... 103 5.1 Weak Information Mechanisms ................................................................................. 103 5.1.1 Shortage of Third-Party Verifiers ........................................................................ 104 5.1.2 Difficulty with Supervising Third-Party Verification ......................................... 106 5.2 Conflicts between Cap-and-Trade and Other Policies ............................................... 109 5.3 Challenges with Interagency Collaboration ............................................................... 113 5.4 Challenges with Scheme Linking: From Regional Pilots to a Nationwide Market ... 116 5.5 Challenges with Expanding the Coverage ................................................................. 120 	 viii 5.5.1 Institutional Barriers to Fully Involve Power Sector .......................................... 120 5.5.2 Participating in Cap-and-Trade is Demanding for Small Companies ................. 122 5.6 The Lack of Transparency in Decision-Making ........................................................ 124 5.6.1 The Lack of Transparency Weakens Policy Credibility ...................................... 124 5.6.2 Public Participation in Decision Making Remains Limited ............................... 128 Chapter 6 Governing China’s Carbon Market: Implications for China’s Environmental Governance Reform .................................................................................................................. 134 6.1 A More Inclusive Approach to Participation ............................................................. 134 6.2 Transparency in Policy Adjustment ........................................................................... 138 Chapter 7 Conclusion .............................................................................................................. 140 7.1 Findings ..................................................................................................................... 140 7.2 Future Research ......................................................................................................... 147 Bibliography ...............................................................................................................................150    	 ix List of Tables Table 1 Carbon Intensity Reduction Targets of Pilot Regions ...................................................... 55 Table 2 The Caps of China’s Emissions Trading Pilots in 2013 ................................................... 73 Table 3 Major Features of Shenzhen and Guangdong Emissions Trading Pilots in 2014 ............ 89 	 x List of Abbreviations and Acronyms CDM Clean Development Mechanism CMA  China Meteorological Administration CNCC Chinese National Climate Committee CNCCP China’s National Climate Change Programme CO2 carbon dioxide EIA environmental impact assessment EPB Environmental Protection Bureau EPNRCC Environmental Protection and Natural Resources Conservation Committee GEF Global Environment Facility GHG greenhouse gas  IPCC Intergovernmental Panel on Climate Change MEP Ministry of Environmental Protection 	 xi MFA Ministry of Foreign Affairs NEPA National Environmental Protection Agency NDRC National Development and Reform Commission NEC National Energy Commission SEPA State Environmental Protection Administration SERC State Electricity Regulatory Commission  SPDC State Planning and Developing Commission UNDP United Nations Development Programme UNFCCC United Nations Framework Convention on Climate Change VERs Verified Emissions Reductions 	 xii Glossary Annex I Parties  Annex I to the United Nations Framework Convention on Climate Change (UNFCCC) sets out a list of developed country Parties and economies-in-transition Parties that commit themselves under Article 4 to return their GHG emissions to 1990 levels by the year 2000.1 If they have ratified the Kyoto Protocol, they have also accepted emissions targets for the period 2008-12 as per Article 3 and Annex B of the Kyoto Protocol.  They include the 24 original OECD members, the European Union, and 14 countries with economies in transition. (Croatia, Liechtenstein, Monaco, and Slovenia joined Annex 1 at COP-3, and the Czech Republic and Slovakia replaced Czechoslovakia.) 2 Annex II Parties  The countries listed in Annex II to the United Nations Framework Convention on Climate Change (UNFCCC) have a special obligation to provide financial resources and facilitate technology transfer to developing countries. Annex II Parties include the 24 original OECD members plus the European Union.3 Carbon Dioxide A metric measure used to compare the emissions from various GHGs based upon their global warming potential, by converting amounts of other gases 																																																						1 United Nations Framework Convention on Climate Change(UNFCCC), 9 May 1992, 1771 UNTS 107, 31. ILM 849. 2 “List of Annex I Parties to the Convention”, online: UNFCCC <http://unfccc.int/parties_and_observers/parties/annex_i/items/2774.php>. 3 UNFCCC Annex II. 	 xiii Equivalent (CO2e) to the equivalent amount of carbon dioxide with the same global warming potential.4 Carbon Offsets An offset is created when a source reduces its emissions by more than it is required to, on a voluntary, permanent basis. The source can then trade that offset (the extra emissions) to new sources to allow growth or relocation, with regulators approving each trade. 5  Carbon offsets are measured in metric tons of carbon dioxide equivalent (CO2e).  Climate change The UNFCCC (Article 1, para 2) defines “climate change” as “a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods.”6 Greenhouse gas(GHG) A gas that traps heat in the atmosphere, by absorbing and immediately re-emitting radiation in wavelengths similar to those emitted by the Earth, which prevents excessive loss of terrestrial radiation and accompanying heat loss, and leads to global warming. The most important greenhouse gases are water vapor, carbon dioxide, methane, nitrous oxide, and CFCs. Others include methyl chloroform and carbon tetrachloride.7 																																																						4 OECD, Environmental Indicators for Agriculture, Vol. 3: Methods and Results, (Paris: OECD Publications, 2001) at 389-391. 5 Chris C Park & Michael Allaby, A Dictionary of Environment and Conservation (Oxford University Press, 2013). 6 UNFCCC art.1 par 2. 7 Ibid. 	 xiv Leakage Carbon leakage refers to the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other regions with laxer emission constraints. This could lead to an increase in the total emissions.8 																																																						8 Definition of Carbon Leakage, online: European Commission Climate Action, <http://ec.europa.eu/clima/policies/ets/allowances/leakage/index_en.htm>. 	 xv Acknowledgements I owe particular thanks to Professor Pitman Potter, for his constructive comments, suggestions and professional guidance. I thank Professor Ilan Vertinsky and Professor Yves Tiberghienen for enlarging my vision of science and constructively challenge me to improve the study’s design. I offer my enduring gratitude to the faculty, staff and my colleagues at UBC, who have inspired me to continue my work in this field. Special thanks to Shaojing Li and Agnieszka Stoklosa, whose encouragement has supported me throughout the years of study.  1 	Chapter 1  Introduction This chapter is an introduction. It starts by providing background information regarding the theoretic foundation of emissions trading. It then briefly introduces China’s decision to implement domestic carbon trading schemes. The chapter identifies the research question of the dissertation. After reviewing relevant literature, gaps and limitation in the existing literature are identified. At last, the analytical framework and methodology adopted by the dissertation are discussed. 1.1 Emissions Trading  There is overwhelming scientific consensus that the Earth's climate is in the process of warming and that this is in large part due to the increasing concentrations of greenhouse gases (GHGs) produced by human activities, predominantly by fossil fuel combustion. 9  With growing awareness of the risks of climate change, there develops an associated need to reduce the amount of GHGs in the atmosphere.  As momentum builds toward meaningful international, national and sub-national efforts to slow down and stabilize the pace of climate change, the international society has generated a series of policy instruments to minimize the increase of GHG emissions. 																																																						9 Scientific consensus on climate change, see John Cook et al, “Quantifying the Consensus On Anthropogenic Global Warming in The Scientific Literature” (2013) 8:2 Environ Res Lett 24024.William R L Anderegg et al, “Expert Credibility in Climate Change” (2010) 107:27 Proc Natl Acad Sci U S A 12107. Peter T Doran & Maggie Kendall Zimmerman, “Examining the Scientific Consensus on Climate Change” (2009) 90:3 Eos, Trans Am Geophys Union 22. Naomi Oreskes, “Beyond the Ivory Tower: The Scientific Consensus on Climate Change” (2004) 306:5702 Science (80- ) 1686. Statistics show that about 65 percent of the world's GHG come from burning coal, oil, and natural gas. See Ecofys, World GHG Emissions Flow Chart (2013). Based on the IPCC AR4 report and the Stern Review, to keep warming below 2°C requires dramatic cuts in carbon emissions in both developed and developing countries. Meehl et al., Chap. 10: Global Climate Projections, Sec.10.ES: Mean Temperature, in IPCC AR4 WG1 2007, online: IPCC< https://www.ipcc.ch/publications_and_data/ar4/wg1/en/ch10s10-es-1-mean-temperature.html>. Nicholas Stern, The Economics of Climate Change: The Stern Review (Cambridge University Press, 2007). 2 	Emissions trading, among various policy approaches, has recently begun to emerge as an increasingly popular policy tool through which to address GHG emissions abatement.10 Prior to 1970, conventional regulatory methods, which relied upon uniform technology and performance standards that were set by the regulators, were the primary strategy employed for achieving established environmental goals in North America and Europe.11 Under this approach, when pollution affected property rights, property owners would ask judges to award damages and order pollution abatement, claiming that the pollution constituted a trespass or a nuisance.12 However, as environmental problems grew more complicated, this approach to pollution control became less effective. On one hand, proving that a particular property owner had caused significant harm became difficult when many different sources contributed to an environmental problem.13 On the other hand, using uniform standards caused efficiency problems. Neoliberal critics referred to the traditional regulatory approach as “command-and-control” regulation, suggesting that it was overly prescriptive, and that the uniform “one-size-fits-all” standards approach lacked flexibility.14 As pollution control costs varied from department to department and even within the same industry, an industry-wide regulatory target could be achieved more 																																																						10 Joseph E Aldy & N Robert Stavins, “Using the Market to Address Climate Change: Insights from Theory & Experience” (2012) 141:2 Deadalus 45. 11 DM Driesen, “Alternatives to Regulation?: Market Mechanisms and the Environment” in Martin Cave, Rob Baldwin & Martin Lodge, eds, The Oxford Handbook of Regulation (Oxford University Press, 2009). 12 Ibid. 13 See Christopher H Schroeder, “Lost in the Translation: What Environmental Regulation Does that Tort Cannot Duplicate” (2002) 41 Washburn Law J 583. see, e.g. Missouri v. Illinois, 200 U.S. 496 (1906). 14 Driesen, supra note 11. 3 	cost-effectively if emissions reductions were conducted in facilities with low pollution control costs rather than in facilities with high costs.15  Over the following two decades, economists argued that policymakers would do well to take advantage of market principles in designing environmental regulations. 16 As such, the traditional practices of environmental regulation were transformed by the rise to prominence of market-based instruments such as tradable permits, offsets, and pollution taxes. 17   The theory of emissions trading and the potential benefits of market-based incentives have been well documented in the literature of economics and policy. The conceptual underpinnings for carbon trading began with Pigou, who pointed to the benefits of levying a tax on production activities that generate negative externality. 18  Forty years later, Coase noted the reciprocal nature of harmful effects and referred to trade as an efficient and effective market-based mechanism through which to regulate these effects.19  Coase’s insights were later applied specifically to environmental problems by other economists who argued that policymakers should take advantage of market principles in designing environmental regulations. For example, in the 1960’s, Allen Kneese’s work on water quality management demonstrated that market mechanisms could reduce both pollution and costs to the economy by leaving it up to each 																																																						15 Ibid. 16 See Ted Gayer & John K Horowitz, “Market-based Approaches to Environmental Regulation” (2005) 1:4 Found Trends Microeconomics 201. See also A Denny Ellerman, “Emissions Trading for Climate Policy” in Bernd Hansjürgens, ed, Climate Policy and Emissions Trading After Kyoto (Cambridge: Cambridge University Press, 2005) 78. Robert N Stavins, “Experience with Market-Based Environmental Policy Instruments” in Karl-Göran Mäler & Jeffrey Vincent, eds, Handbook of Environmental Economics (Amsterdam: Elsevier Science, 2003) 355. 17 Michael A Crew & Anthony Heyes, “Market-Based Approaches to Environmental Regulation: Editors’ Introduction” (2013) 44:1 J Regul Econ 1. 18 Cameron Hepburn, “Carbon Trading: A Review of the Kyoto Mechanisms” (2007) 32 Annu Rev Environ Resour 375. 19 Ronald Coase, “The Problem of Social Cost” (1960) 3 J Law Econ 1. 4 	polluter to find the cheapest and easiest way to comply, arguing that market-based incentives like pollution taxes would be more efficient than conventional regulation.20 J. H. Dales was one of the first to explicitly apply the idea of tradable permits.21 Dales suggested that the advantages of market principles could be gained if polluters were assigned transferable rights to their pollution, with the total number of such rights set equal to the overall emissions goal. 22 This approach to environmental regulation was originally known as “tradable permits” and is now known simply as “cap-and-trade.”  The cap-and-trade scheme for controlling pollution was pioneered in the United States to reduce the emissions of sulfur dioxide and nitrogen oxides. In the 1980s, sulfur allowance trading mechanisms were developed to address the problem of acid rain in both North America and Europe.23 In the United States, policies relied on a variety of source-specific regulations that specified limits on emission rates or mandated particular control technologies.24 The 1990 Clean Air Act Amendments established a large-scale, long-term environmental program that relied on tradable emission permits to control the electric utility emissions of sulfur dioxide (SO2).25 During this period, emissions trading began emerging as an increasingly popular policy tool 																																																						20 See Allen V Kneese & Blair T Bower, Managing Water Quality: Economics, Technology, Institutions (Routledge, 2013). Allen V Kneese & Charles L Schultze, Pollution, Prices, and Public Policy (Brookings Institution, 1975). 21 Michael Hanemann, “The Role of Emission Trading in Domestic Climate Policy” (2009) 30 Energy J 73. 22 See John Harkness Dales, Pollution, Property and Prices: an Essay in Policy-Making and Economics (University of Toronto Press, 1968). 23 Roger K Raufer & Stephen L Feldman, Acid Rain and Emissions Trading: Implementing a Market Approach to Pollution Control (Rowman & Littlefield, 1987). 24 PL Joskow & Richard Schmalensee, “The Political Economy of Market-Based Environmental Policy: The U. S. Acid Rain Program” (1998) 41:1 J law Econ 37. 25 Clean Air Act Amendments of 1990 (104 Stat. 2468, P.L. 101-549) 5 	through which to address pollution control. 26 In the mid-1990s, the Kyoto Protocol, which was fashioned after the Montreal Protocol, pursued emissions trading to address climate change.27  Currently, emissions trading is increasingly considered and used worldwide with respect to the management of environmental problems including acid rain, ground-level ozone, and climate change. Regional, national and sub-national GHG emissions trading initiatives are proliferating. A 2013 World Bank report reveals that about 40 national governments and 20 sub-national governments have either put carbon trading schemes in place or are planning one for the years ahead.28 Carbon markets are becoming the largest class of environmental or emissions trading markets in the world in terms of both volume and market value.29  In this thesis, “carbon market” is used as a generic term for any emissions trading scheme that targets carbon dioxide or the mass of other GHGs calculated in tonnes of carbon dioxide equivalent (tCO2e). 30 																																																						26 Richard G Newell, William A Pizer & Daniel Raimi, “Carbon Markets: Past, Present, and Future” (2012):December RFF Discuss Pap. Robert N Stavins, “What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading” (1998) 12:3 J Econ Perspect 69. For descriptions of the SO2 program, see A Denny Ellerman, Ex Post Evaluation of Tradable Permits : the U.S. SO₂ Cap-and-Trade program (MIT Center for Energy and Environmental Policy Research, 2003). See also D Burtraw & KL Palmer, “The Paparazzi Take a Look at a Living Legend: The SO2 Cap-And-Trade Program for Power Plants in the United States” (2003) RFF Discuss Pap, online: RFF <http://www.rff.org/RFF/Documents/RFF-DP-03-15.pdf>. 27 The 1997 Kyoto Protocol set up a system of emissions limits for a basket of six GHGs for developed countries, mechanisms for those developed countries to trade their emissions limits, and mechanisms for developed countries to offset their emissions by financing emissions reductions in developing countries. The Montreal Protocol on Substances that Deplete the Ozone Layer and its associated agreements were, to a large extent, styled after the body of law developed to control acid rain in Europe. Scott Barrett, Environment and Statecraft : The Strategy of Environmental Treaty-Making: The Strategy of Environmental Treaty-Making (Oxford University Press, 2003) at 6–12. 28 World Bank, Mapping Carbon Pricing Initiatives (Washington, D.C., 2013). 29 Newell, Pizer & Raimi, supra note 26 at 2. 30 The six major GHGs, as covered by the Kyoto Protocol, include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). Because carbon 6 	1.2 China’s Decision to Adopt a Domestic Cap-and-Trade Scheme To control China’s GHG emissions, the Chinese government decided to adopt a domestic carbon trading scheme. On October 27, 2010, the Chinese Communist Party (CCP) Central Committee announced the decision to “gradually establish a carbon emissions trading market” as a domestic solution to help meet the climate challenge. 31  To implement the policy, the National Development and Reform Commission (NDRC), China’s top economic planner, issued The Notice on Carrying Out the Work of Carbon Emissions Trading Pilot Program (hereinafter the “Notice”) in November 2011, granting approval that five municipalities (Beijing, Chongqing, Shanghai, Shenzhen and Tianjin) and two provinces (Guangdong and Hubei) carry out cap-and-trade pilot programs. 32 The seven pilot regions account for 18.4 percent of China’s population and 27.4 percent of national GDP.33 According to their designs, individual pilot schemes cover a range of industries including electricity, cement, iron and steel, chemicals and large public 																																																																																																																																																																														dioxide is the dominant gas in terms of its overall contributions to global warming, the units of trade are denominated in terms of carbon dioxide equivalents. With respect to the issue of which gases should be covered by a trading scheme, there is a nearly even split between a model limited to CO2 (e.g. the European Union Emissions Trading Scheme and the Regional Greenhouse Gas Initiative of the United States), which is easier to monitor, and a model covering CO2 plus other gases (e.g. CCX, New South Wales, and New Zealand cover all of the six GHGs listed in the Kyoto Protocol), which gives regulated entities greater flexibility for achieving emissions reductions. M Betsill & MJ Hoffmann, “The Contours of ‘Cap and Trade’: the Evolution of Emissions Trading Systems for Greenhouse Gases” (2011) 28:1 Rev Pol Res 83. See also Jane A Leggett et al, An Overview of Greenhouse Gas (GHG) Control Policies in Various Countries (2009). 31 "Gradually Establishing a Carbon Emissions Trading Market" was proposed at the CCP Central Committee's meeting on October 27 2010. This was the first time that a timetable for implementing carbon emissions trading was proposed in any policy document created by the Chinese Central Committee. Central Committee, "The CCP Central Committee's Suggestions on Formulating the Twelfth Five-Year Plan for National Economic and Social Development of the People’s Republic of China"(2011), online: NDRC <http://www.ndrc.gov.cn/125gh.pdf>. 32 National Development and Reform Commission, “Notice of General Office of The National Development and Reform Commission on Carrying out the Work of Carbon Emissions Trading Pilot Program(国家发展改革委办公厅关于开展碳排放权交易试点工作的通知)”, (2011), online: Natl Dev Reform Comm <http://www.sdpc.gov.cn/zcfb/zcfbtz/2011tz/t20120113_456506.htm>. 33 Jason Scott“, China’s Emissions Trading May Spur Global Accord”(2012), online: Bloomberg <http://www.bloomberg.com/news/2012-10-11/china-s-emissions-trading-may-spur-global-accord-report-says.html>. 7 	buildings. The pilots are expected to cover 864 million tonnes of carbon dioxide by 2015 — around 7% of China’s total emissions.34 1.3 Research Questions This thesis captures an image of China’s most important initiative with respect to GHG emissions control—the cap-and-trade pilot program. As such, it provides a thorough analysis of the regulatory and oversight framework of China’s newly founded carbon trading pilots in its attempt to answer the following question: What are the potential obstacles and opportunities that stem from the current regulatory policies that govern China’s domestic carbon market? The initiation and development of domestic carbon emission trading in China is of great interest to many, primarily due to China’s indispensable role in determining the success of global climate mitigation efforts. China has experienced a rapid growing rate for over three decades. Its growth has produced an impressive increase in the standard of living for the Chinese people. However, the growth model that relies on coal power and heavy industries has led to intensified GHG emissions. China currently ranks as world’s largest emitter of greenhouse gases, and its projected future emissions are even more worrisome.35 A 2015 study indicates that China’s GHG emissions will probably peak in 2025.36 According to the study, around 2025, it would be reasonable to expect a peak emissions level for China of around 12.5–14 billion tonnes of carbon dioxide 																																																						34 Jane Qiu, “China Gets Tough on Carbon” (2013) 498:7453 Nature 145. 35 See Maximilian Auffhammer & Richard T. Carson, “Forecasting the Path of China's CO2 Emissions Using Province Level Information”(2008) 55 J. Envtl. Econ. & Mgmt. 229. 36 Fergus Green & Nicholas Stern, China’s “New Normal” Structural Change, Better Growth, and Peak Emissions (London, 2015). 8 	equivalent.37 Whether or not the international goal of limiting global warming to no more than 2°C is going to be achieved depends in significant part on China’s ability to curb its emissions at a rapid rate. Under such circumstances, the success or failure of China’s carbon trading experiment will inevitably have significant impact on global climate mitigation efforts, especially when there occurs a downturn in the global carbon market, with prices in major existing carbon markets reaching a historic low. 38  The world’s largest energy user and GHG emitter is planning to put a price on carbon at the national level. China’s domestic carbon market is still in its infancy and there are opportunities to seize and challenges to meet. Identifying the institutional barriers help us create effective regulation and oversight, thus allowing us to develop the optimal regulatory mechanisms that will allow the domestic carbon market to get off to a good start.  1.4 Literature Review Early literature in political science associated government with traditional form of hierarchical regulation. The ability to “make law (legislation), implement law (execution) and interpret law (adjudication)” was regarded as the “core functions” of government.39 During the past several decades, the traditionally delineated and centralized role of government became less clear. The traditional conceptualization of the public sector has come under increasing strain. Strange 																																																						37 Ibid. 38 Prices in the EU ETS remained in the depressed range of about US$5-9 (€4-7) in 2013-2014, contrasting with US$18 (€13) in 2011. Kyoto credit prices also reached their historic lows in 2013 and 2014, with CERs worth just US$0.51 (€0.37). World Bank, State and Trends of Carbon Pricing (Washington DC, 2014). See also Blas Luis Pérez Henríquez, Environmental Commodities Markets and Emissions Trading: Towards a Low Carbon Future (RFF Press, 2013) at 216. 39 See for example Andrew Heywood, Key Concepts in Politics (Basingstoke: Palgrave Macmillan, 2000) at 19. 9 	argues that the authority of all states is diminished as a result of changes in technology and finance and of the integration of national economies into a global world economy.40 Scharpf indicates that in supranational organizations such as the European Union, economic integration confronts national systems of regulation.41 The limits of bureaucratic government resulted in innovations that moved beyond the formal structure of government and included other non-government actors. The evolution of the state government has led some to argue that "governance without government" is becoming the dominant pattern of management for advanced industrial democracy. 42 Rhodes suggests that governance “signifies a change in the meaning of government, referring to a process of governing; or a changed condition of ordered rule; or the new method by which society is governed.”43 His theory relates governance to self-organizing networks characterized by interdependence between organizations, their continuing interactions, trust, as well as significant degrees of autonomy from the state.44  At present, there is no consensus regarding which set of phenomena can properly be grouped under the title of “governance.”45 The World Bank played a major role in popularizing the term “governance” as “the manner in which management power is exercised in the management of a country’s economic and social resources for development.”46 With respect to the relationship 																																																						40 Susan Strange, The Retreat of the State: The Diffusion of Power in the World Economy (Cambridge University Press, 1996). 41 Fritz W Scharpf, “Introduction: the Problem-Solving Capacity of Multi-Level Governance” (1997) 4:4 J Eur Public Policy 520. 42 R A W Rhodes, Understanding Governance : Policy Networks, Governance, Reflexivity, and Accountability (Open University Press, 1997). 43 Ibid. 44 R A W Rhodes, “The New Governance: Governing without Government” (1996) 44:4 Polit Stud 652. 45 Kees Van Kersbergen & Frans Van Waarden, “‘Governance’ as a Bridge between Disciplines: Cross-Disciplinary Inspiration Regarding Shifts in Governance and Problems of Governability, Accountability and Legitimacy” (2004) 43:2 European Journal of Political Research 156. 46 World Bank, Governance and Development (Washington, DC: World Bank, 1992). 10 	between “government” and “governance,” I share the view of Kersbergen and Waarden that government and governance are not at opposite ends of the spectrum.47  Domestic environmental governance, for example, involves non-governmental entities such as corporations, private certification agencies, advocacy organizations and the actions taken by these non-governmental entities. It also involves traditional government functions including standard setting, implementation, monitoring, enforcement, and adjudication. 48  Local-level, bottom-up, participatory approaches will finally be congruent with national top-down regulatory strategies.49  Early scholarship on China’s cap-and-trade pilot program has focused mainly on the technical aspects of the system design, including stringency of the emissions target (cap), principles of monitoring, reporting and verification (MRV),50 method of allowance allocation,51 and price containment.52 Domestic research projects on China’s carbon market have engaged high profile Chinese scholars, many of whom are economists.53 This has largely been influenced by China’s political agenda. The causes of climate change, namely GHG emissions from fossil fuels and land use, are inherently linked to economic development in the Chinese context.54 As the world’s largest developing country with a huge population and resource shortages, the Chinese 																																																						47 Kersbergen & Waarden, supra note 45. 48 MP Vandenbergh, “Private Environmental Governance” (2013) Cornell L Rev 129. 49 W Neil Adger et al, “Governance for Sustainability: Towards a ‘Thick’ Analysis of Environmental Decisionmaking” (2003) 35:6 Environ Plan 1095. 50 Xiaoling Qin et al, “Study on Greenhouse Gases Emissions Inventory in Shenzhen City” (2012) 25:12 Res Environ Sci. 51 Tongji University & UNEP, Carbon Emissions Trading Mechanism and Development Strategy for Shanghai (上海市碳排放交易机制及发展战略研究) (2012). 52 See for example, Jianlei Mo et al, “Carbon Price Stabilization Mechanism and Its Implication for China(碳市场价格稳定机制探索及对中国碳市场建设的建议),” (2013) 9:5 Progressus Inquisitiones de Mutatione Climatis.  53 See, for example, the list of panelists at the Symposium on Theoretical Advances and Empirical Lessons of ETS, online: Science Net <http://news.sciencenet.cn/htmlnews/2013/10/284328.shtm>.  54 Joanna I Lewis, “China’s Strategic Priorities in International Climate Change Negotiations” (2007) Wash Q 155. 11 	government derives much of its legitimacy through its ability to eliminate poverty and improve the living standards of its people. 55 Economic growth, as the only way through which to raise living standards, bolster employment, and extract China from backwardness, has been put at the top of the Party’s political agenda for decades. The CCP has been very cautious about mitigation commitments for fear that they would impede the country’s economic growth. Analysis regarding regulation and oversight with respect to China’s carbon market has been focused on introducing international experience. 56  Policy advice has been provided. 57  Zhang et al., for example, provide advices such as strengthening national laws surrounding carbon trading and penalties for failure to comply with environmental laws. 58 Early reports on empirical studies with respect to China’s domestic carbon markets were very brief. 59 Guoyi Han et al are some of the early researchers to investigate the groundwork for implementing the pilots and suggested that there would be tremendous challenges ahead.60 They provide a rough account of the “current development” of the Guangdong emissions market from as early as 2012. 61  An ECOFY report provides an overview of the allowance allocation 																																																						55 "World Bank Says China Is Poverty Reduction Model," (2003) online: Xinhua <http://www.china.org.cn/english/2003/Feb/56694.htm>. 56 Zhiping Li, On Carbon Market Oversight Scheme (碳交易市场的监管机制研究) (2012) 14 Journal of Jiangsu University. 57 Policy advices were sketchy, including to define the legal rights and responsibility of market participants(完善碳排放权交易的法律职责), to improve market entry mechanism and market behavior regulation(完善市场准入与市场运行制度), to improve the dispute resolution scheme(完善碳排放权交易过程中责任与纠纷处理的法律制度体系) . See e.g. Yangyao Yu & Gaoxiang Pan, “Basic Problems to be sovled with China’s Carbon Trading(中国开展碳交易亟须解决的基本问题)” (2009):6 Orient Law. Lingli Zheng, “Construction of Legal System on Low-Carbon Economy(低碳经济下碳交易法律体系的构建)” (2011):1 J East China Univ Polit Sci Law.  58 Da Zhang et al, “Emissions trading in China: Progress and Prospects” (2014) 75 Energy Policy 9. 59 For example, the SIPA Capstone Team’s report on the Emerging Emissions Trading Schemes (ETS) in China, online: SIPA <https://sipa.columbia.edu/sites/default/files/AY13_RNKCapital_FinalReport.pdf>. 60 Guoyi Han et al, China’s Carbon Emission Trading: An Overview of Current Development (Stockholm, 2012). 61 Ibid. 12 	approaches in five of the carbon trading pilots.62 Ying Shen’s works describe some of the major design features of the Beijing, Shanghai and Guangdong pilots.63 Zhang et al. (2015) conducted an overall assessment of China's seven carbon trading pilots.64 There are also studies that focus on individual pilots. For example, Jiang et al.’s report on major design features of the Shenzhen pilot65 and Wu et al.’s work on the major design features of the Shanghai pilot.66 Empirical studies on single aspect of the regulatory framework include A Survey of the MRV Systems for China’s ETS Pilots.67 The survey compares the MRV systems of each pilot and it also identifies the technical challenges involved in developing the MRV systems.  Different from a traditional commodity market, the cap-and-trade market exists specifically to address a goal—to control GHG emissions. Cap-and-trade systems are unique in that the commodity being traded (allowances) only exists once an emissions cap has been set. Once enacted, the first step in a cap-and-trade system is for the government to place a limit on the total allowable emissions for the various forms of carbon energy. The limited supply of emissions allowances is determined by the government and is set to decrease over time. So, in essence, both demand and supply are created by the government. This is consistent with the literature on the sociology of markets, which emphasizes that markets require authoritative rules and that 																																																						62 Wu Qian, Maarten Neelis & Carlos Casanova, Chinese Emission Trading Schemes: Initial Assessment on Allocation (2014). 63 Ying Shen, “Moving Steadily or Great Leap Forward; The Emerging Carbon Market in China” (2013) 18 Deakin Law Rev. 64 Zhongxiang Zhang, “Carbon Emissions Trading in China: the Evolution from Pilots to a Nationwide Scheme” (2015) 15:sup1 Clim Policy S104. 65 Jingjing Jiang et al, “Innovative Carbon Allowance Allocation Policy for the Shenzhen Emission Trading Scheme in China” (2015) 8:1 Sustainability 3. 66 Libo Wu, Haoqi Qian & Jin Li, “Advancing the Experiment to Reality: Perspectives on Shanghai Pilot Carbon Emissions Trading Scheme” (2014) 75 Energy Policy 22. 67 Sino Carbon Innovation and Investment, A Survey of the MRV Systems for China’s ETS Pilots (2014). 13 	market actors typically look to states to provide these rules.68 However, there is little consensus on the appropriate political jurisdiction for setting cap-and-trade policies. 69 There is ongoing debate about whether national or subnational governments ought to be responsible for governing cap-and-trade.70 Market ideologists tend to overburden and idealize market solutions, whereas critical voices analyze specific problems prematurely, concluding that markets per se can never provide a positive contribution. 71 1.5 Analytical Framework and Methodology This section discusses the analytical framework and methodology adopted by the dissertation. 1.5.1 Normative Criteria for Evaluation of a Market-Based Climate Policy  As indicated, the main focus of this study involves regulatory policies of governing China’s cap-and-trade market. My discussion is based on the following evaluative criteria in assessing the performance of good governance: accountability, cost-effectiveness, rule of law, transparency and participation.72 																																																						68 Fligstein, N., & Sweet, A. S. (2002). Constructing politics and markets: An institutionalist account of European integration. American Journal of Sociology, 107(5), 1206–1243. 69 Betsill & Hoffmann, supra note 30. 70 Ibid. 71 Markus Lederer, “Market Making via Regulation: The Role of the State in Carbon Markets” (2012) 6:4 Regul Gov 524. 72 Discussions on criteria of good governance, see Veerle van Doeveren, “Rethinking Good Governance” (2011) 13:4 Public Integr 301. 14 	1.5.1.1 Accountability Accountability is a widely accepted requirement of good governance.73  In a narrow sense, accountability implies that all the managers in the public sector are “held responsible for carrying out a defined set of duties or tasks, and for conforming with rules and standards applicable to their posts.”74 In a broader sense, accountability means that an organization or institution is accountable to those who will be affected by its decisions or actions. The thesis adopts the broader definition that “not only governmental institutions but also the private sector and civil society organizations must be accountable to the public and to their institutional stakeholders.” 75 Accountability has the elements of answerability, which involves the obligation to offer information and explanations of one’s conduct. 76  Accountability also contains elements of enforceability, which refers to the realization of that obligation and implementing sanctions in the case of nonfulfillment.77 1.5.1.2 Cost-Effectiveness  Cost-effectiveness, as a principle of good governance, means that the scheme delivers quality outcomes efficiently and represents good value for money. 78  Meeting the criteria of cost-effectiveness is of fundamental importance for a market-based policy. In the case of the cap-and-trade market, costs typically refer to the monetary estimate of what meeting targeted emission 																																																						73 Ibid. 74 OECD, “OECD Glossary of Statistical Terms - Accountability (in management theory) Definition”, (2002), online: OECD <http://stats.oecd.org/glossary/detail.asp?ID=4757>. 75 United Nations, “What is Good Governance”, online: UNESCAP <http://www.unescap.org/sites/default/files/good-governance.pdf>. 76 Andreas Schedler, Larry Diamond & Marc F Plattner, eds, The Self-restraining State: Power and Accountability in New Democracies (Lynne Rienner Publishers, 1999). 77 Ibid. 78 Emily O’Reilly, “Guide to Principles of Good Governance”, (2009), online: Ombudsman Assoc <http://www.ombudsmanassociation.org/docs/BIOAGovernanceGuideOct09.pdf>. 15 	reduction would require for both the regulator and the regulated parties. A cap-and-trade market is efficient if it succeeds in minimizing the costs. For private companies in China, cost is a major concern guiding decisions in their participation in the carbon market. Companies are worried that they would be disadvantaged by cost increases as a result of GHG reduction requirements. On the other hand, local government’s interests usually involve their gains from the profitability of local industries.79  In other words, both companies and local governments would welcome a carbon trading scheme that they would perceive as rewarding companies for reducing CO2 emissions.  The requirement of cost-effectiveness underpins a normative tendency toward comprehensive coverage of the carbon market and minimal barriers to trading opportunities across space, time, and mitigation activity.80 1.5.1.3 Rule of Law The concept of “rule of law” has been highly contested, with ongoing disputes and disagreements over both the ideas that relates to it, and content.81 Descriptions of the tools and elements with respect to rule of law usually either involve a “thick” (or substantive) or “thin” (or formal) definition.82  Representatives of the thin theory emphasize the formal or instrumental 																																																						79 Yigang Wang, China's Pathway towards Carbon Emissions Trading Scheme: International Experience and China’s Practices (Economy & Management Publishing House, 2011), at 320. 80 Newell, Pizer & Raimi, supra note 26. 81 See Brian Z Tamanaha, On the Rule of Law: History, Politics, Theory (Cambridge University Press, 2004). See also Margaret Jane Radin, “Reconsidering the Rule of Law” (1989) 69 Bost Univ Law Rev. 82 Tamanaha, ibid. Randall Peerenboom, “Human Rights and Rule of Law: What’s the Relationship?” (2005):36 Georg J Int Law 809.  16 	aspects of rule of law.83 These principles typically include: laws should be prospective, open, relatively clear, consistent, stable and certain;84 laws should be publicized and easily accessible; there should be procedural rules for law-making; laws should be enforced fairly and impartially.85  The “thick” definitions of the rule of law include reference to rights and values such as dignity, fairness, justice, democracy, or human rights, framing the rule of law within the broader human development discourse. 86 Stanley Lubman portrays the systemic and ideological limitations of Communist Party rule as a cage that confines the bird of Chinese legal reform. 87  He credits China with significant achievements in legislation and institution building yet suggests that the law in China remains confined within the cage of party hegemony.88 The absence of a unifying concept of law and the considerable fragmentation of legal and political authority inhibits the emergence of a rule of law system.89 Lubman concludes that China has not succeeded in building a legal system.  Peerenboom places emphasis on China’s particular, political and economic context which shape the rule of law discourse in China and cautions against the application of unidimensional standards unconnected to Chinese tradition and contemporary reality.90 Chinese leaders have been endorsing “Socialist Rule of Law with Chinese Characteristics” defined by, according to Peerenboom, “an increasingly market-based economy but one in which public ownership still 																																																						83 Joseph Raz, The Authority of Law  Essays on Law and Morality (Oxford University Press, 2009). 84 Randall Peerenboom, “A Government of Laws: Democracy, Rule of Law and Administrative Law Reform in the PRC” (2003) 12:34 J Contemp China 45. See also Raz, supra note 83. 85 Randall Peerenboom, China’s Long March Toward Rule of Law (Cambridge University Press, 2002). 86 Tamanaha, supra note 81. 87 Stanley B Lubman, Bird in a Cage Legal Reform in China after Mao (Stanford University Press, 1999). 88 Ibid. 89 Ibid. 90 Peerenboom, supra note 85. 17 	plays a some-what larger role than in other market economies; a nondemocratic system in which the Party plays a leading role; and an interpretation of rights that emphasizes stability, collective rights over individual rights, and subsistence as the basic right rather than civil and political rights.”91 Peerenboom takes an optimistic view of the legal development in China. He observes the increasing importance of law within the daily life of Chinese people and the increased reliance on law and legal procedures in the exercise of governance. 92 Peerenboom argues that empirical evidence suggests that the Chinese legal system is moving towards a thin version of rule of law.93 Minzner argues that Chinese authorities have little intention of building up legal institutions as a truly independent check on party power. The changes associated with the high-profile legal reforms launched over the past years were aimed at “fashioning the Chinese judiciary into a more institutionalized tool of party governance.”94  Pils also points out the government has always been committed to power concentration and insisted in Party supremacy over law. 95 This thesis applies the thin conception of the rule of law. For the full protection of stakeholders in the carbon market, regulatory policies should have appropriate mechanisms in place through which to render the carbon markets fair, honest and orderly. In the cap-and-trade regime, it is required that the cap, allocation, and coverage are set by law. In addition, there should be an 																																																						91 Ibid. 92 Randall Peerenboom, “Fly High the Banner of Socialist Rule of Law with Chinese Characteristics! What Does the 4th Plenum Decision Mean for Legal Reforms in China?” (2015) 7:1 Hague J Rule Law 49. 93 Peerenboom, supra note 85. 94 Carl Minzner, “Laying Down the Law at the Communist Party Plenum”, (2014), online: East Asia Forum <http://www.eastasiaforum.org/2014/09/01/laying-down-the-law-at-the-communist-party-plenum/>. 95 Eva Pils, “China, the Rule of Law, and the Question of Obedience: A Comment on Professor Peerenboom” (2015) 7:1 Hague J Rule Law 83. 18 	appropriate market oversight framework in place through which to secure fair and efficient trading conditions for all market participants. All participants (e.g. administrative institutions, private firms, verification agencies, and individuals) should be governed by law, through the regulation of trading practices, prohibitions against fraudulent and manipulative conduct, and established standards for market intermediaries, etc. Rules should be clear regarding the rights and responsibilities of all participants, and should strive to reduce the risks with respect to overlapping responsibility and duplication among governing bodies. Laws should be made by authorized institutions and deemed to be valid. All the rules should be publicized and accessible. Moreover, the legal framework should be enforced by an impartial regulatory body. 1.5.1.4 Transparency Transparency is a core element of good governance.96 The OECD proffers the definition of transparency as: “transparency refers to an environment in which the objectives of policy, its legal, institutional, and economic framework, policy decisions and their rationale, data and information related to monetary and financial policies, and the terms of agencies’ accountability, are provided to the public in a comprehensible, accessible, and timely manner.” 97  Cost-effectiveness, for example, cannot be achieved without transparency requirements. A cap-and-trade system’s ability to direct emission reduction efforts toward the least costly means of meeting an emissions target depends on the quality of information about market conditions that is reflected in the allowance price, which depends, in part, on the quality and frequency of 																																																						96 Alastair Roberts, “Dashed Expectations: Governmental Adaptation to Transparency Rules,” in Christopher Hood & David Heald, Transparency: The Key to Better Governance? Proceedings of the British Academy no. 135. 2006 (Oxford: Oxford University Press). Doeveren, supra note 72. 97 OECD, “OECD Glossary of Statistical Terms - Transparency Definition”, (2002), online: OECD <http://stats.oecd.org/glossary/detail.asp?ID=4474>. 19 	emissions reporting. The term “transparency” in the carbon market context requires (1) information available to market participants regarding market activity (e.g. price, volume, and types of instruments trading); (2) information available to government regulators to facilitate effective monitoring, oversight and enforcement; and (3) information available to the general public. 1.5.1.5 Participation The principles of good governance have a particularly strong focus on including all stakeholders and a concern for equity.98 Good governance requires that all stakeholders have the opportunity to participate during the formulation of development strategies that directly affected communities.99 The element of equity and inclusiveness aims to respect individual rights and interests and requires all groups have opportunities to improve or maintain their well being.100 The governments enhance equity and legitimacy among stakeholders through participatory decision-making processes, in which the local community, experts, governments and other stakeholders are regarded as equal partners.101 The participation of a greater array of nonstate actors would enable more effective and equitable allocation of resources, costs and benefits, and improved access to a diversity of knowledge and expertise. 102 																																																						98 Brooke P Shields, Susan A Moore & Paul FJ Eagles, “Indicators for Assessing Good Governance of Protected Areas: Insights from Park Managers in Western Australia” (2016) 22:1 Parks 37. 99 International Fund for Agricultural Development, Good Governance: an Overview (1999). 100 UNDP, A Guide to UNDP Democratic Governance Practice (News York, 2010). 101 D N Y Mah & P Hills, “An International Review of Local Governance for Climate Change: Implications for Hong Kong” (2016) 21:1 Local Environ 39. 102 Karin Backstrand, Jamil Khan & Annica Kronsell, eds, Environmental Politics and Deliberative Democracy: Examining the Promise of New Modes of Governance (Northampton: Edward Elgar Publishing, 2010). 20 	In governing China’s domestic carbon market, participation should be an essential element in securing commitment and support for projects and enhancing the quality of their implementation. The governing structures should be flexible enough to offer stakeholders the opportunity to improve the design and implementation of the projects. Public participation needs to be informed and organized.103 1.5.2 Notes on Methodology This thesis treats intention and goals as important components of policy. 104   It seeks to understand the logic of China’s climate policies by analyzing the policymakers’ perceptions of the problems and the intention of particular policies. It investigates materials including the published official statement, legal documents, conference speeches delivered by government officials and published interviews with people who are closely related to the policymaking body. As Chinese policymakers becoming more open to advice and willing to base decisions on it, think tanks also become a window through which to follow climate policymaking. 105 Considering that policies may be based on logic rooted in past intentions, to understand China’s current climate policy, materials investigated are not limited to the recent ones that directly address climate issues.106 																																																						103 John M Bryson et al, “Designing Public Participation Processes” (2013) 73:1 Public Adm Rev 23. 104 There is a wide range of definitions of public policy, but most emphasize purposes, intention goals and means. William N Dunn, Public Policy Analysis: An Introduction (Eaglewood Cliffs: Prentice Hall, 1981) at 31. 105 Gorild Heggelund, “China’s Climate Change Policy: Domestic and International Developments” (2007) 31 Asian Perspect, at 155. Gang Chen, China’s Climate Policy (Routledge, 2012). Juan Du, “China to Establish Climate Change Think Tank”, (2011), online: China Dly <http://www.chinadaily.com.cn/bizchina/2011-11/22/content_14138737.htm>. 106 Leslie Alexander Pal, Public Policy Analysis: An Introduction, 2d ed (Scarborough: Nelson Canada, 1992) at 28–34. 21 	The seven cap-and-trade pilot regions (the cities of Beijing, Chongqing, Shanghai, Shenzhen, Tianjin, and provinces of Guangdong and Hubei) have just begun introducing implementation measures to their respective carbon trading schemes. The thesis aims to provide an early appraisal of the regulatory aspect of the issues associated with governing the nascent markets. To provide a critical account of the legislation and policy domain of the pilot program, I choose the cases of Shenzhen and Guangdong as the focus. The reasons are twofold. Firstly, both pilot schemes started relatively early and more information is publicly available.107 The second reason is the apparent differences in development status and industry structure between these two pilot regions. At present, Shenzhen has the least emission per unit GDP in China and represents a relative developed city in China whose development is driven by hi-tech, advanced manufacturing and service industry. 108  Guangdong, on the other hand, represents a major manufacturing province and big energy consumer.109 Besides discussions on Shenzhen and Guangdong, some unique features of individual regional pilots are also identified. The thesis draws on empirical literatures (which is limited since China’s domestic carbon markets has not been launched for long), official reports, and domestic and foreign newspapers’ coverage of the cases in order to investigate how the cap-and-trade pilots have worked in reality. 																																																						107 The first of seven pilot carbon emission trading schemes for China was launched in the city of Shenzhen, China on June 18 2013. The Guangdong carbon trading market was launched in December 19, 2013. Relevant information is available on websites: China Emissions Exchange (Shenzhen)<http://www.cerx.cn>, People’s Government of Shenzhen < www.sz.gov.cn>, China Emissions Exchange (Guangzhou)<http://www.cnemission.com>, People’s Government of Guangdong <http://www.gd.gov.cn>, China Climate Change Info-Net<http://www.ccchina.gov.cn>, etc. 108 Zhanglan Wu, Jie Tang & Dong Wang, “Low Carbon Urban Transitioning in Shenzhen: A Multi-Level Environmental Governance Perspective” (2016) 8:8 Sustainability 720. 109 Global CCS Institute & Guangzhou Institute of Energy Conversion, CCUS Development Roadmap Study for Guangdong Province, China (2013). 22 	The discussions of the potential challenges that stem from the regulatory and oversight mechanisms of China’s domestic cap-and-trade market are built upon experiences from existing regulatory schemes. China is a latecomer to domestic carbon trading. It has the advantage to learn from existing cap-and-trade schemes such as the EU ETS and the emissions trading schemes in North America. The thesis also investigates a series of regulatory experiments that have important policy implications and at the same time reflect the transition in China’s environmental governance, such as (1) China’s SO2 cap-and-trade program, which marks China’s first emissions trading experiment; (2) the Green Gross Domestic Product (GDP) Accounting Experiment, which takes environmental costs into account of calculations of GDP; and (3) the environmental impact assessment (EIA) system, which attaches great importance to public participation in environmental governance.  23 	Chapter 2  Carbon Market: Principles and Types To lay a foundation for the discussion of the design and regulatory elements of China’s carbon market, the chapter explains different types of carbon markets. Carbon trading systems can be categorized into two major variations: a cap-and-trade system, and a baseline-and-credit system. In practice, cap-and-trade systems often allow for a certain number of offsets to come from emissions reductions from baseline-and-credit systems. 2.1 Cap-and-Trade System In a typical “cap-and-trade” system, a central authority (usually a governmental body) sets a limit or “cap” that specifies the maximum quantity of emissions authorized from sources included in the program in a given compliance period.110 The cap is allocated for free or sold to individual sources of pollution, such as firms, in the form of emissions allowances, which represent the right of the firms to emit a specific volume of the specified pollutant. The total number of allowances equals the level of the cap and allowances are usually allocated in advance of a compliance period. To be in compliance, each emission source must surrender allowances equal to its actual emissions. The number of tradable allowances is fixed, in effect limiting the amount of emissions that can be made in any compliance period. It is hoped that over time, with the lowering of the cap (meaning fewer allowances are available), the total amount of GHG emissions will decline. In theory, the finite supply creates a scarcity and drives the demand and price for allowances. The market mechanisms allow permits to be traded throughout the economy to reach their 																																																						110 Robert N Stavins, A Meaningful U.S. Cap-and-Trade System to Address Climate Change, 82 (2008). 24 	highest value uses. 111  Producers and consumers with better information about their own production costs and abatement costs preferences work out the most cost-effective way to reduce emissions. In this way, the targets are most likely to be achieved at lower cost to the economy and community. In addition, an emissions trading system also increases the incentive for firms to invest in the development of low-emissions technologies. If fewer allowances are issued than firms need, allowances are valuable and trade with a positive price. Firms that need to increase their volume of emissions must buy (“trade”) permits from other emission sources or market participants who require fewer permits. If they find ways to reduce their pollution, often through technological innovation, then they can profit by trading extra allowances with others that may not have made such innovations to reduce their emissions. In this way, the price provides firms with an incentive to reduce their emissions when this is cheaper than purchasing allowances. Moreover, as the cap or limit on emissions gets smaller over time, the incentive to reduce pollution increases. Because a lower number of total allowances make them a more limited commodity, which in turn makes them more expensive. While purchasing allowances becomes more expensive over time, investments in technology to reduce pollution tend to become more affordable over time—making them a more attractive option in the long run. Currently there are several cap-and-trade emissions trading schemes operating across the world. They differ in size, scopes and designs.112 The European Union's Emission Trading System (EU 																																																						111 Productivity Commission, What Role for Policies to Supplement an Emissions Trading Scheme? (2008). 112 For a list of ETSs in operation, see Slobodan Perdan & Adisa Azapagic, “Carbon Trading: Current Schemes and Future Developments” (2011) 39:10 Energy Policy 6040.. 25 	ETS) and Regional Greenhouse Gas Initiative (RGGI) are two major examples of cap-and-trade system. 113 European Union’s Emissions Trading Scheme  The EU ETS is the world’s first multinational GHG cap-and-trade program and is also by far the largest. 114 Established by the European Parliament and the European Council’s Directive, the EU ETS was designed to aid the European Union in achieving its Kyoto Protocol commitment to reduce GHG emissions by 8 percent below 1990 levels by 2012.115 The EU ETS is a classic cap-and-trade system in that there is an absolute limit on covered emissions and the rights to emit those emissions are conveyed by tradable permits, called European Union Allowances (EUAs). The EU ETS currently covers emissions of carbon dioxide, nitrous oxide and perfluorocarbons and spans over more than 11,000 power stations and industrial plants in 31 countries (including 28 EU member countries plus Iceland, Liechtenstein and Norway), as well as airlines, and is responsible for around 45 percent of all GHG emissions in the European Union.116     																																																						113 Betsill & Hoffmann, supra note 30. 114 A D Ellerman & B K Buchner, “The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results” (2007) 1:1 Rev Environ Econ Policy 66-87. 115 European Commission, Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003. 116 European Commission, “The EU Emissions Trading System Factsheet”, (2013), online: Eur Comm <http://ec.europa.eu/clima/publications/docs/factsheet_ets_2013_en.pdf>. 26 	Regional Greenhouse Gas Initiative The RGGI is a multi-state cap-and-trade program to stabilize and reduce CO2 emissions from the electric power sector in the Northeast United States and Eastern Canada regions.117 Established in 2005, RGGI is currently composed of nine individual, state-level CO2 cap-and-trade schemes that allow allowance trading between one another. 118 The RGGI states put a cap on CO2 emissions of fossil fuel powered electric generators that run at a capacity of at least 25 megawatts.119 By 2020, the RGGI CO2 cap is projected to contribute to a 45 percent reduction from 2005 levels in the region’s annual power-sector CO2 emissions.120  2.2 Baseline-and-Credit System An alternative type of carbon market is the baseline-and-credit system. Under a baseline-and-credit scheme, firms are rewarded for reducing carbon pollution below a “baseline.” Baselines are generally set at the project level. Depending on project, baselines can be set using historical or projected data, using absolute or intensity baselines (i.e. carbon emission per unit of production).121  A source that has emitted below its baseline receives “credits” equal to the difference. Credits are transferable and can be traded. A source that has emitted in excess of its 																																																						117 Regional Greenhouse Gas Initiative, Memorandum of Understanding (2005). 118 States have joined and withdrawn from RGGI over the years. States currently participating in RGGI include: Connecticut, Delaware, Massachusetts, Maryland, Maine, New Hampshire, New York, Rhode Island and Vermont.  Program Overview, online: RGGI <http://www.rggi.org/design/overview>. 119 Ibid. Regional Greenhouse Gas Initiative, Second Amendment to Memorandum of Understanding (2007). 120 Jason Brown, “RGGI States Propose Lowering Regional CO 2 Emissions Cap 45 %, Implementing a More Flexible Cost-Control Mechanism”, (2013), online: RGGI <http://www.rggi.org/docs/PressReleases/PR130207_ModelRule.pdf>. 121 Eva Lövbrand & Johannes Stripple, “Disrupting the Public–Private Distinction: Excavating the Government of Carbon Markets Post-Copenhagen” (2012) 30:4 Environ Plan C Gov Policy 658. 27 	baseline is required to purchase and surrender enough credits to the regulator shortly after the end of the compliance period to account for their emissions above this baseline.  Unlike the cap-and-trade system, the baseline-and-credit approach does not entail a strict aggregate emissions cap. It brings about emission reductions by awarding tradable credits for certified reductions rather than achieving emission reductions by creating a limited number of emission credits.122 The ability to generate credits from emissions reductions relative to baseline and the pressure to avoid having to buy permits for emissions in excess of the baseline provide incentives for regulated emitters to find lower emission production processes. Greenhouse Gas Reduction Scheme The Greenhouse Gas Reduction Scheme (GGAS) was a baseline-and-credit scheme established in January 2003 in New South Wales, Australia. 123  The Australian Capital Territory then introduced GGAS in 2005 with successive one-year compliance periods.124 The baseline was intensity-based. The initial penalty baseline was set at 8.65 tonnes per capita, which reduced to 7.27 tonnes in 2007 and was set to remain at this level until 2021.125 The scheme was terminated 																																																						122 David Freestone & Charlotte Streck, eds, Legal Aspects of Carbon Trading: Kyoto, Copenhagen and Beyond (Oxford University Press, 2009). 123 Independent Pricing and Regulatory Tribunal, Compliance and Operation of the NSW Greenhouse Gas Abatement Scheme during 2005 Report to Minister (2006). 124 Ibid. 125 Ibid. 28 	in 2012 when the Australian Federal government started to implement a national carbon pricing mechanism.126 Clean Development Mechanism The Clean Development Mechanism (CDM) is established under the United Nations Framework Convention on Climate Change (UNFCCC) Kyoto Protocol to assist developed countries (Annex I Parties) to meet their Kyoto targets at a lower cost. The CDM is a baseline-and-credit scheme used to credit emissions-reducing projects in host countries. The Emissions-reducing projects undertaken in developing countries (non-Annex I) generate offset credits—Certified Emission Reductions (CER) for each tonne of CO2e they abate. The CDM allows Annex I countries to partly meet their Kyoto targets by financing carbon emission reductions projects in developing countries. The CDM has operated since the beginning of 2005. It requires the application of a baseline and monitoring methodology in order to determine the amount of CERs generated by a mitigation project.127 Methodologies for setting baselines for particular projects are approved by the CDM Executive Board.128  It is noteworthy that nearly all currently established cap-and-trade programs allow for a limited use of offsets and have an associated offset program, allowing for a certain number of offsets to come from emissions reductions that are generated by projects that are not covered under the cap 																																																						126 The carbon pricing scheme in Australia was introduced by the Gillard Labor Government in 2011 as the Clean Energy Act 2011 which came into effect on 1 July 2012. It was in operation until it was repealed on 17 July 2014, and backdated to 1 July 2014. 127 UNFCCC, CDM Methodology Booklet (UNFCCC, 2015). 128 Conference of the Parties to the UNFCCC, Modalities and procedures of the CDM: Role of the Executive Board (Decision 17/CP.7) 29 	(e.g. from baseline- and-credit systems). 129  For example, since the vote of the “Linking Directive” in 2004, the EU-ETS allows for CDM credits (CERs) to be used interchangeably with their allowances (EUAs).130 Member states set the limit on what percentage of CERs are allowed into their system. The RGGI also allows offsets (limited to 3.3 percent of a covered entity’s reported emissions) to help companies meet their compliance obligations, which means some of the GHG emissions reduction will be achieved outside the electricity sector.131 2.3 Compliance Market & Voluntary Market  There is another way to categorize carbon markets: compliance (or mandatory) and voluntary. The compliance market is regulated by mandatory national, regional or international carbon reduction regimes. Cap-and-trade systems exist almost exclusively in the compliance market.132 The cap-and-trade programs established by the Kyoto Protocol, the EU ETS and the RGGI are examples of compliance carbon markets. Baseline-and-credit systems exist both in the compliance and in the voluntary market. The GGAS, for example, is a mandatory baseline-and-credit scheme, as a government typically initiates the process of establishing the baseline-and-credit scheme by passing a law that puts restrictions in that jurisdiction on the ability to emit GHGs.  																																																						129 Anja Kollmuss, Helge Zink & Clifford Polycarp, Making Sense of the Voluntary Carbon Market: A Comparison of Carbon Offset Standards (2008). 130 European Commission, Directive 2004/101/EC of The European Parliament and of The Council (2004). It is noteworthy that in 2011, the EU Commission Regulation (No 550/2011) determines to restrict the use of international credits from projects involving industrial gases. See European Commission, Commission Regulation (EU) No. 550/2011 (2011). 131 Regional Greenhouse Gas Initiative, supra note 116. 132 Kollmuss, Zink & Polycarp, supra note 129. 30 	The voluntary carbon markets function outside, but in parallel of, the compliance market. Businesses, governments, NGOs and individuals develop, purchase and use offsets for reasons other than regulatory compliance, e.g. voluntary carbon reduction targets and “carbon neutral” initiatives. In most cases, companies look to voluntarily offset the emissions generated during their business activities in order to show social responsibility. Instead of undergoing the national approval from the project participants and the registration and verification process from the UNFCCC, the calculation and the certification of the emission reduction are implemented in accordance with industry-created standards. The Gold Standard, for example, is a rigorous certification standard for creating high-quality emission-reducing projects under the CDM.133 In practice, the voluntary market is especially attractive to small projects because projects can be implemented with lower transaction costs than compliance market projects (e.g. the UN certification process might be too expensive for small projects). 134 Compared to the compliance market, trading volumes in the voluntary market are significantly smaller.135 While demand is created only by voluntary wish, demand in the voluntary market is much lower than in a compliance market.  																																																						133 World Wide Fund, “The Gold Standard”, online: WWF <http://wwf.panda.org/what_we_do/how_we_work/businesses/climate/offsetting/gold_standard/>. 134 Christina Seeberg-Elverfeldt, Carbon Finance Possibilities for Agriculture, Forestry and Other Land Use Projects in a Smallholder Context (Rome, 2010) at 9. 135 Kollmuss, Zink & Polycarp, supra note 128. 31 	Chapter 3  China Adopts Domestic Carbon Market The Chinese government’s decision to adopt domestic cap-and-trade cannot be understood apart from the evolution of China’s climate change policy. This chapter investigates the evolvement of the Chinese leaderships’ attitude toward climate change problem and climate policy. For the past 25 years, China’s position on climate change effort has evolved—from a passive (or even defensive) participant in international climate forums to an involved stakeholder. As the Chinese leaders start to consider tackling climate change in line with the country’s development priorities, policymakers begin to integrate mitigation targets into China’s development plan. Lessons from the implementation of previous command-and-control regulatory policy urge the Chinese leaders to consider market-based instrument that may ensure continued energy and carbon intensity reduction in a less costly way. In October 2010, the Central Committee proposed the decision and a timetable of implementing carbon emissions trading. One year later, the NDRC officially approved seven regions—Beijing, Chongqing, Shanghai, Shenzhen, Tianjin, Guangdong and Hubei, as carbon trading pilots. 3.1 Evolution of China’s Climate Change Policy Public policies are proposed solutions to some perceived problems.136 In this sense, the content and goals of China’s climate change policies (including its international negotiation position and its domestic climate policy) heavily depend on the “climate change problem” that the Chinese policymakers define. Therefore, the evolution of China’s climate change policy presents the shift 																																																						136 Pal, supra note 106 at 7. 32 	of the central leadership’s perception of the “climate change problem” or “mitigation problem” that China is facing.   3.1.1 Climate Cooperation as An Opportunity to Gain International Acceptance (1988 to Early 1990’s) As early as 1988, the Intergovernmental Panel on Climate Change (IPCC), established by the United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO), had started to review and assess the state of existing knowledge about climate change. 137  The establishment of the International Negotiating Committee for a Framework Convention on Climate Change (INC) under the auspices of the United Nations General Assembly in 1990 marks the start of the international negotiations on global cooperative endeavors tackling climate change.138 The INC was open to all Member States of the United Nations and its specialized agencies. In an enormous negotiation effort which involved more than 140 States, the UNFCCC was open for signature at the United Nations Conference on Environment and Development (UNCED) in Rio de Janeiro in June 1992, and thereafter at UN Headquarters in New York in June 1993 and eventually entered into force on 21 March 1994.   During this period, China tried to appear as an active participant at all stages of negotiations. The Chinese government sent delegations to all the sessions of IPCC and IPCC Working Group since the establishment of the IPCC in 1988.139 At the time in China, however, scientific research 																																																						137 IPCC, “IPCC Organization Description”, online: IPCC <https://www.ipcc.ch/organization/organization.shtml>. 138 United Nations, Resolution 45/212 of 21 December 1990. 139 See meeting documentations of IPCC sessions & IPCC WGS sessions, online: IPCC <http://www.ipcc.ch/meeting_documentation/meeting_documentation_ipcc_sessions_and_ipcc_wgs_sessions.shtml#.UjdhSMZ6pEM>. 33 	regarding climate change barely started. Mr. Luo Jibin, head of Chinese delegation sent to the IPCC sessions, indicated in his memoir that at the time climate change was such a new idea to him and other government officials and no department in the Chinese government was able to provide any information regarding the actual annual GHG emission China had been producing each year.140   The Chinese decision makers, having very preliminary understanding of the issue of climate change, perceived climate change largely as an international meteorological crisis. 141  This perception was reflected in the organizational structure and staff composition of the country’s climate policymaking institution.  In 1988, a temporary organ—the National Climate Commission (Guojia Qihou Weiyuanhui) was set up under the auspices of the China Meteorological Administration(CMA), responsible for international cooperation in “climate research, meteorological prediction and services.”142 Zou Jingmeng (then director of CMA) was designated as the director. Two years later, the temporary organ was upgraded into a national policy coordination organ—the National Coordination Group for Climate Change (Guojia Qihou Bianhua Xietiao Xiaozu), with its office set in the CMA.143 																																																						140See Jibin Luo, “Memoirs: Negotiating and Signing of the UNFCCC” (2007) 1 China Meteorol.  141 “Remarks by Song Jian - State Councilor, Director of the State Science and Technology Commission at the Inaugurual Conference of the National Climate Commission(国务委员、国家科委主任宋健在国家气候委员会成立大会上的讲话)” in China Meteorological Administration, China Meteorological Yearbook 1988 (中国气象年鉴 1988) (China Meteorological Press, 1988).  142 “The Inaugural Conference of the National Climate Commission(国家气候委员会成立大会)” in ibid at 237. “On the Approval of the Establishment of the National Climate Commission (关于同意成立国家气候委员会的复函)” in ibid at 246. 143 Jing Zou, “National Leading Committee on Climate Change” (2008) 2 World Environ 46. 34 	The policy coordination group was mainly responsible for making negotiation strategies for Chinese delegation to the UN climate conferences.  The central leadership’s perception of climate change was also reflected in the staff composition of the Chinese delegations to the IPCC and UNFCCC sessions in the 1988-1992 period. Principle delegates of China’s first delegations to the IPCC—Zou Jingmeng and Luo Jibin were director and deputy director of the CMA.144 The Chinese representatives to the UNFCCC consist of staffs from the Ministry of Foreign Affairs (MFA), State Scientific and Technological Commission (SSTC), CMA and State Environmental Protection Administration (SEPA), none from economic department.145 Chinese government’s attitude towards international climate cooperation was rather a passive one from 1988 to the early 1990’s. Its seemingly active involvement was largely driven by the central leadership’ willingness to improve China’s diplomatic relations with other countries in the immediate aftermath of Tiananmen crackdown in 1989. 146  The Jiang Zemin leadership recognized the importance of gaining China’s international acceptance as a great power could diminish the lingering effects of the post-Tiananmen Isolation.147 Active involvement in global environmental efforts was regarded a good way to be seen as a respected member of the 																																																						144 See list of participants, meeting documentations of IPCC sessions & IPCC WGS sessions, online: IPCC <http://www.ipcc.ch/meeting_documentation/meeting_documentation_ipcc_sessions_and_ipcc_wgs_sessions.shtml#.UjdhSMZ6pEM>. 145 See List of Participants, online: UNFCCC <http://unfccc.int/resource/docs/a/inf01.pdf>, <http://unfccc.int/resource/docs/a/misc22r01.pdf>, < http://unfccc.int/resource/docs/a/inf14.pdf>. 146 Yuka Kobayashi, “Navigating Between ‘Luxury’ and ‘Survival’ Emissions : tensions in China’s multilateral and bilateral climate change diplomacy” in Paul G Harris, ed, Global Warming and East Asia: The Domestic and International Politics of Climate Change (London: Routledge, 2004) 86. 147 Joseph Fewsmith, China Since Tiananmen: The Politics of Transition (New York: Cambridge University Press, 2001) at 202. 35 	international community.148  It was a time China worked vigorously to expand its relations with foreign countries, or as Elizabeth Economy and Michel Oksenberg put it—to “join the world”, by becoming integrated into international regimes.149  As Chinese decision makers largely viewed climate change as a foreign policy issue, climate policymaking during this time did not have much to do with China’s domestic political process. Although there might be different views among the various bureaucratic actors involved in formulating China’s position in the international climate negotiations, the Chinese delegation presents a unified front to the outside world since the start of the negotiation.150 Facing the intensified external pressure to reduce GHG emissions, China refused to accept any form of abatement commitments because mitigation competed with national priority of economic growth.151 Its stance was justified by arguments based on low per capita emissions, historical responsibility of the developed countries and the lack of required technology and financial resources to reduce emissions.152 This position has been consistent throughout the negotiations during the period. This was a time China’s willingness to cooperate in global GHG control was heavily doubted by western scholars and media. Words used in describing China’s attitude 																																																						148 Rosemary Foot, “China’s Foreign Policy in the post-1989 Era” in Robert Benewick & Paul Wingrove, eds, China in the 1990s (Vancouver: University of British Columbia Press, 1999). 149 Elizabeth Economy & Michel Oksenberg, eds, China Joins the World: Progress and Prospects (New York: Council on Foreign Relations, 1999). 150 Paul G Harris, ed, Global Warming and East Asia: The Domestic and International Politics of Climate Change (London: Routledge, 2003) at 51. 151 Heggelund, supra note 105. 152 Abram Chayes & Charlotte J Kim, “China and the United Nations Framework Convention on Climate Change” in Michael B McElroy, Chris P Nielsen & Peter Lydon, eds, Energizing China: Reconciling Environmental Protection and Economic Growth (Cambridge, MA: Harvard University Press, 1998) 719 at 504. 36 	towards climate cooperation include “conservative”, “defensive”, “uncooperative”, “unconstructive”, “recalcitrant”, etc.153 3.1.2 Joining International Climate Regime to Get Financial and Technological Assistance (1992 to 2003)  Attention to climate change had increased among Chinese leadership, but climate change did not surpass economic development as a policy priority. China's climate strategy from 1992 to 2003 mainly centered on its involvement in the international regimes that provide technology transfer, grants and loans targeting specific aspects of climate change, e.g. development of clean technology. China’s national policy on climate change was, in this regard, affected by the policy of international assistance. China’s involvement in the Global Environment Facility (GEF) and CDM are two prominent examples. 3.1.2.1 China’s involvement in the Global Environment Facility (GEF)  At the 1992 United Nations Conference on Environment and Development (or "Earth Summit") in Rio de Janeiro, Brazil, a non-binding, voluntarily implemented action plan—Agenda 21 was established. Adopted by 178 countries, Agenda 21 provide guidelines to deal with the problems of poverty, hunger, resource consumption and the deterioration of ecosystems.154 Nations that have pledged to take part in Agenda 21 are monitored by the International Commission on Sustainable Development, and are encouraged to promote Agenda 21 at the local and regional 																																																						153 See for example Elizabeth Economy, “Chinese Policy-Making and Global Climate Change: two-front diplomacy and the international community” in Miranda A Schreurs & Elizabeth Economy, eds, The Internationalization of Environmental Protection(Cambridge: Cambridge University Press, 1997) 19. See also Kobayashi, supra note 146 at 102. 154 United Nations, “Agenda 21”, (1992), online: Sustain Dev Knowl Platf <https://sustainabledevelopment.un.org/outcomedocuments/agenda21>. 37 	levels within their own countries.155 In 1994, the Chinese Government published China’s Agenda 21—White Paper on China’s Population, Environment, and Development in the 21st Century.156  The China’s Agenda 21 expresses China’s willingness to “bring GHG emissions under control” and “reduce the growth rate of carbon dioxide emissions”.157 Emphasis is placed on scientific research regarding (a) the impact of GHGs aggregation on global and regional climate, (b) the calculation of China’s GHG emissions, (c) measures to reduce GHG emissions.158 It is also indicated in the China’s Agenda 21 that China will actively seek international technical assistance and investment in order to improve energy efficiency to reduce GHG emissions.159 Established in 1991, the Global Environment Facility (GEF) is a partnership for international cooperation where 183 countries work together with international institutions, civil society organizations and the private sector, to address global environmental issues while supporting national sustainable development initiatives.160 The GEF works by providing grants for projects related to biodiversity, climate change, international waters, land degradation, the ozone layer, and persistent organic pollutants. In 1994, the GEF became the financial mechanism for the UNFCCC to alleviate financial constraints that make it difficult to initiate action from governmental institutions to tackle global climate change.161  																																																						155 United Nations, United Nations Conference on Environment & Development Agenda 21 (Rio de Janerio, 1992). 156 State Council, China’s Agenda 21—White Paper on China’s Population, Environment, and Development in the 21st Century (Beijing: China Environmental Science Press, 1994). 157 China’s Agenda 21, art. 18.31. 158 China’s Agenda 21, art. 18.33. 159 China’s Agenda 21, art. 18.37, 18.38. 160 See official introduction “What is GEF”, online: GEF <http://www.thegef.org/gef/whatisgef>. 161 The relationship between the Conference of Parties (COP) to the UNFCCC and the GEF Council was agreed in a memorandum of understanding contained in decision 12/CP.2 and decision 12/CP.3.  COP decision 12/CP.2, online: 38 	Realizing that the GEF may become a major source of funding for the national environmental scheme, China had been actively involved since the beginning of the establishment of the GEF in November 1990.162 The GEF attracted a great deal of attention from government agencies and organizations such as the Academy of Sciences, State Science and Technology Commission, Ministry of Energy and the Ministry of Finance. The National Environmental Protection Agency (NEPA), which was in charge of project proposal preparation, was so dedicated and efficient that China was among the first to submit the project proposals.163 From 1992 to 2002, the GEF had granted 1,200 million USD to China, 70% of which was for climate change mitigation.164 3.1.2.2 China’s Involvement in the CDM The Kyoto Protocol provides three mechanisms that intend to help countries control their emissions through flexible arrangements. The Joint Implementation (JI) mechanism enables industrialized (Annex I) countries to transfer to, or acquire from, another industrialized (Annex I) country, emission reduction units (ERUs) generated by climate-friendly projects.165 The Clean Development Mechanism (CDM) allows Annex I countries to finance projects that reduce emissions in developing countries that are Kyoto parties but have not made commitments to reduce their GHG emissions.166 Lastly, Annex I countries can trade Assigned Amount Units 																																																																																																																																																																														UNFCCC < http://unfccc.int/resource/docs/cop2/15a01.pdf#page=55>. COP decision 12/CP.3, online: UNFCCC <http://unfccc.int/resource/docs/cop3/07a01.pdf#page=43>. 162 Lin Gan, “Global Environmental Policy in Social Contexts: The Case of China” (1992) 5:4 Knowl Policy 30. 163 Ibid. 164 Hongyuan Yu, Global Warming and China’s Environmental Diplomacy (Nova Publishers, 2008) at 84–86. 165 Kyoto Protocol, at art. 6, ¶ 1. 166 Ibid. at art. 12, ¶ 3. 39 	(AAUs) among themselves. 167  The “flexible mechanisms”, however, was one of the most contentious issues at the 1997 Kyoto Summit. In December 1997, the Kyoto Summit brought together more than 2,200 delegates from the 158 parties to the UNFCCC and 6 observer states to negotiate the issues unresolved from the preparation meetings.168 China’s official negotiation position towards the flexibility mechanisms and climate policy in general was extremely cautious. China had been concerned that the “flexibility” built into the agreement might allow industrialized countries to avoid taking domestic actions to meet their obligations.169  But as negotiations went on, China’s position changed. At the COP 7 in 2001, the Marrakech Accords supplemented the Kyoto Protocol by identifying in detail the modalities and procedures by which the flexible mechanisms would operate.170 China, at the time, was planning the expansion of the electricity generating capacity to alleviate the demand surplus.171 The Chinese decision makers realized that the CDM could bring the opportunities to attract foreign investment to the energy sector. The CDM was launched 																																																						167 Ibid. at art. 17. AAU is a Kyoto Protocol unit equal to 1 tonne of CO2 equivalent. AAUs are allocated to Annex I parties at the beginning of each commitment period based on each party’s targets set out in Annex B of the Protocol. Each Annex I Party issues AAUs up to the level of its assigned amount, established pursuant to Article 3, paragraphs 7 and 8, of the Kyoto Protocol. Assigned amount units may be exchanged through emissions trading. 168 UNFCCC, FCCC/CP/1997/INF.5, 9 December 1997. 169 Michael T Hatch, “Chinese Politics, Energy Policy, and the International Climate Change” in Paul G Harris, ed, Global Warming and East Asia: The Domestic and International Politics of Climate Change(London: Routledge, 2003) 43 at 54. 170 See Kyoto Protocol (describing the effect of the Marrakech Accords on the Kyoto Protocol). 171 Allen Blackman & Xun Wu, “Foreign Direct Investment in China’s Power Sector: trends, benefits and barriers” (1999) 27:12 Energy Policy 695. 40 	shortly after the adoption of the Marrakech Accords. 172  China quickly developed an apparatus for identifying, approving, and implementing CDM projects.173  3.1.3 Climate Policy as an Integrated Part of China’s Social and Economic Development Planning (2004 to present) The perceived benefits of addressing climate change increases, as the Chinese leaders start to consider mitigation actions in line with the country’s development priorities. 3.1.3.1 Addressing Climate Change Facilitates the Transition toward A Green and Low Carbon Economy  In the last three decades, China’s economic achievement has been spectacular, but the lag between pollution control and economic growth had become more pronounced over time. The rapid deterioration of the nation’s environment and depletion of its natural resources are threatening the health of its people and the very potential for sustained growth of the economy. In December 2004, the Central Economic Work Conference (Zhongyang Jingji Gongzuo Huiyi), an annual year-end meeting that sets major economic policies for the coming year, called for strong measures to put an end to the development mode that was energy-intensive, highly polluting and inefficient.174  The then president and CCP general secretary Hu Jintao, at the conference, promoted a new approach to development called the “Scientific Development 																																																						172 Though the Kyoto Protocol was negotiated in 1997, it did not enter into force until February 16, 2005, when the required number of countries finally ratified it. UNFCCC, Status of Ratification, online: UNFCCC <http://unfccc.int/Kyoto_protocol/ background/status_of_ratification/items/2613.php>; see also Kyoto Protocol, at art. 25, ¶ 1. 173 Heggelund, supra note 105. 174 “China Sets Energy, Resources Saving as One of Key Economic Targets”, People's Daily (December 6, 2004). 41 	Concept”(Kexue Fazhan Guan).175 The “Scientific Development Concept,” which first appeared in Hu’s speech during his September 2003 inspection trip to Jiangxi Province, since then became a central ideological, economic, and institutional tenet and a guiding principle for the overall economic and social development in China. The fulfillment of the new development strategy demands the implementation of a comprehensive and coordinated development policies that correct imbalances in key areas. Hu hereby proposed the “five balances” (Wuge Tongchou):  [T]he “five balances”--balancing urban and rural development, balancing regional development, balancing the economic and social development, balancing the harmonious development of human and nature, and balancing domestic development and opening up to the outside world; accelerate the building of a conservation-minded society in an effort to solve the contradictions of energy resources; get hold of favorable opportunities to push on reforms; protect and achieve the interests of the masses by adhering to putting people first. 176 The new approach to development presents a shift from the old economic growth mode (i.e. the economic growth that relied on high consumption of energy and raw materials, causing severe pollution) to a more efficient and green economy. The new development policy aligns with goals of climate change policy because the strategic nature of GHG emissions reduction goes hand in hand with cutting fossil energy use. The 12th Five-Year Plan adopted by the Chinese government 																																																						175 “Hu Jintao and Wen Jiabao Deliver Important Remarks at the Central Economic Work Conference(中央经济工作会议召开 胡锦涛温家宝作重要讲话)”, Xinhua (December 5, 2004). 176 Ibid. 42 	in March 2011 devoted considerable attention to energy and climate change.177 In 2014, the State Council published the Action Plan on Energy Development Strategy (2014-2020).178  The Plan aims to reduce China’s high energy consumption per unit GDP ratio through a set of measures and mandatory targets including a cap on annual primary energy consumption (4.8bn tonnes of the standard coal equivalent) until 2020.179 Additionally, the share of non-fossil fuels in the total primary energy mix is to rise from 9.8 percent in 2013 to 15 percent by 2020.180 GHG emissions reduction (Jianpai) is placed great emphasis in the Plan.181 3.1.3.2 Mitigate the Adverse Impact of Climate Change  China is a country with vulnerable regional biosphere and complicated climate conditions and the impacts of climate change can be obvious in certain areas of the country.182 The 2014 assessment report of the IPCC reveals how climate change is affecting various aspects of life in China: Shanghai is facing high risk of floods; current warming is causing maize yield reduction in north China and rice yield reduction in eastern China; decreasing precipitation has led to more severe water scarcity in northern China, etc. 183   																																																						177 A full version of the 12th Five-Year Plan (in Chinese), available online: China < http://www.china.com.cn/policy/txt/2011-03/16/content_22156007.htm>. 178 General Office of the State Council, “Notice of Issuing the Action Plan on Energy Development Strategy(国务院办公厅关于印发能源发展战略行动计划(2014-2020 年)的通知)”, (2014), online: Gov <http://www.gov.cn/zhengce/content/2014-11/19/content_9222.htm>. 179 Ibid. 180 Ibid. 181 Ibid. 182 It is predicted that as a result of climate change, China will face various challenges including melting glacier, especially in Tibet Plateau and Tianshan Mountain, see Ning Zeng et al, “Climate Change—the Chinese Challenge” (2008) 319:5864 Science 730. Agricultural production may decrease as much as 10% by 2030, see Pablo Bustelo, China and Climate Change: Responsible Action? (2007). Number of droughts, storms, floods and natural disasters will increasing caused by extreme climate; rising sea level that will affect as many as 67 million people, Heggelund, supra note 105, at 167.  183 IPCC, Fifth Assessment Report, online: IPCC <http://www.ipcc.ch/report/ar5/>. 43 	The Chinese government released its third National Assessment Report on Climate Change in Novembers 2015. This report is a three-year joint effort by a team of over 500 scholars and experts from MOST, CMA, Chinese Academy of Sciences (CAS), Chinese Academy of Engineering (CAE), etc. According to the report, the annual average temperature of China has increased by 0.9~1.5°C over the past century, which outpaces the average global temperature rise.184 The report reveals that China is increasingly vulnerable to the effects of climate change, especially the impact from rising sea levels and the changing of rain and snow patterns.185 Chinese government leaders recognized the threat of climate change and the needs to coordinate national efforts to tackle climate change.186  Zheng Guoguang, chief of the CMA, was frank and straightforward on the “huge impact” that climate change would have on the country in his 2015 World Meteorological Day speech. 187  Zheng pointed out that the rate of temperature rise in China had already been higher than the global average for the past century.188 He also warned that more droughts, rainstorms, and higher temperatures would threaten river flows and harvests, as well as major infrastructure projects such as the Qinghai-Tibet railway and the Three Gorges Dam.189 																																																						184 The Third National Assessment Report on Climate Change(第三次气候变化国家评估报告) (Science Press, 2015). 185 Ibid. 186 Danny Marks, “China’s Climate Change Policy Process: Improved but Still Weak and Fragmented” (2010) 19:67 J Contemp China 971, online: <http://www.academia.edu/2047226/Chinas_Climate_Change_Policy_Process_Improved_but_Still_Weak_and_Fragmented> at 972. 187 Hui Lin, “Zheng Guoguang, Chief of China Meteorological Administration Warns about Climate Change(中国气象局局长郑国光:我国气候已发生显著变化)”, Xinhua (22 March 2015). 188 Ibid. 189 Ibid. 44 	3.1.3.3 Political Stability Elizabeth Economy once noted that the threat the environmental problem poses to the continuation of the Chinese economic growth and to public health, social stability, and even the country’s international reputation, taken together, could be a catalyst for broad-based demands for political change hence undermines the authority of the Communist Party.190 The Party leaders are concerned about the impact that climate change and environmental deterioration would have on the political stability. China’s economic boom has accelerated the devastation of its land and resources. The air quality of many of its major cities fails to meet international health standards.191 Environmental protests are increasing in frequency in both rural and urban areas.192  In the past decade, the number of “environmental mass incidents”(Huanjing Quntixing Shijian) and petitions(xinfang) regarding environmental issues,193 has been increasing at an alarming rate of 30% every year.194 The Chinese top leadership views the unrest as a threat to the party’s legitimacy.  As the perceived benefits of climate policy increase, climate change is garnering more attention from the top leadership. Energy and climate goals are integrated into China’s social and economic development planning, and are made mandatory in municipalities. One of the most 																																																						190 See Elizabeth C Economy, “The Great Leap Backward? The Costs of China’s Environmental Crisis” (2007) 86:5 Foreign Aff 38. Elizabeth Economy notes that in 2006, the Chinese government reported 1,000 environmental protests per week, and in May 2007 there were major protests involving 7,000 to 20,000 marchers against a proposed petrochemical facility in Xiamen. 191 Mun S Ho & Chris P Nielsen, Clearing the Air: Health and Economic Damages of Air Pollution in China (MIT, 2007). 192 Ma Tianjie, Environmental Mass Incidents in Rural China: Examining Large-Scale Unrest in Dongyang, Zhejiang (2009). 193 The CCP regime provides citizens with the means for expressing discontents through petitions (Xinfang) which are delivered to designated local, regional or national agencies.Carl F Minzner, “Xinfang: An Alternative to Formal Chinese Legal Institutions” (2006) 42 Stanford J Int Law 103. 194 Ping Zhang & Zuchan Yang, “An Analysis of the Characteristics of the Environmental Mass Incidents in China in the Past Decade(近十年来我国环境群体性事件的特征简析)” (2015) 15:2 J China Univ Geosci (Social Sci Ed) 53. 45 	high profile targets of China’s 11th Five-Year Plan (2006-2010) is to reduce energy intensity by 20 percent.195  In June 2007, the National Leading Small Group on Climate Change, Energy Saving and Emissions Reduction (Guojia Yingdui Qihou Bianhua Ji Jieneng Jianpai Gongzuo Lingdao Xiaozu) chaired by the then Premier Wen Jiabao was established as an upgrade of the 1998-established National Coordination Small Group on Climate Change.196 Small groups—whether “leading small groups”(lingdao xiaozu) or “coordination small groups” (xietiao xiaozu) are mechanisms that used in the Chinese party apparatus and government hierarchy down to the township level through which to coordinate implementation of policies.197  These organs, which are sometimes ad hoc and sometimes formal and permanent, have always been an important part of the elite decision-making system in China. 198  The small groups reconcile bureaucratic conflicts among subordinate agencies and seek to ensure that once the elite makes a decision its intent was followed throughout the policy implementation process.199  The National Leading Small Group on Climate Change, Energy Saving and Emissions Reduction, involving representatives from 20 government agencies, was set to develop China’s national climate action 																																																						195 Stephanie Ohshita & Lynn Price, Target Allocation for China ’ s Provinces : Energy Intensity in the 12th Five-Year Plan (2011). 196 State Council, “Notice of the State Council on Establishment of the National Leading Small Group on Climate Change, Energy Saving and Emissions Reduction(国务院关于成立国家应对气候变化及节能减排工作领导小组的通知)”, (2007), online: Government <http://www.gov.cn/zwgk/2007-06/18/content_652460.htm>. 197 Alice Miller, “More Already on the Central Committee’s Leading Small Groups” (2014):44 China Leadersh Monit.  198 David Shambaugh, “The Dynamics of Elite Politics during the Jiang Era” (2001) 45 China J 101. Guan Qingfeng, “What is the Composition and Function of a State Council “Lingdao Xiaozu”?(国务院“领导小组”由哪些人构成,如何运行), 2013, online: People <http://theory.people.com.cn/n/2013/0710/c40531-22143226.html>. 199 David M Lampton, The Making of Chinese Foreign and Security Policy in the Era of Reform, 1978-2000 (Stanford University Press, 2001) at 13. 46 	plans.200 Its major tasks include setting targets for energy consumption reduction, developing adaptation strategies and facilitating international cooperation.201  3.2 Decision to Adopt Domestic Carbon Trading A feature of the climate change policy in China is that they are largely decided by a government agency that is more interested in energy (i.e. the NDRC), and has thus framed the issue from that point of view.202 China has taken various measures to optimize its industrial structure (switching the economic structure toward less energy-intensive sectors and the tertiary sector), to invest in renewable energy, and to improve energy efficiency.203 Among the many policy instruments, most have been implemented in a top-down or central planning manner. 204  The NDRC formulated the China’s National Climate Change Programme (CNCCP) in 2007. The CNCCP covered five issues: GHG mitigation; adaptation; climate change science and technology; public climate change awareness; administration and institution development.205 The targets include reducing energy consumption per unit GDP by 20% between 2006 and 2010, increasing the share of renewable energy to 10% by 2010, stabilizing the 2005 nitrous oxide emission level, increasing the 2001 forest coverage rate by 20%, and increasing the carbon sink by 50 Mt over the 2005 level by 2010.206  In the 11th Five-Year Plan (2006-2010), the central 																																																						200 NDRC, China’s National Climate Change Programme; 2008. Beijing. 201 NDRC, China’s National Climate Change Programme; 2007. Beijing. 202 “Main Functions of the NDRC”, online: NDRC <http://en.ndrc.gov.cn/mfndrc/>. 203 Improving local environmental quality, energy conservation, and carbon mitigation are included in the 10th and 11th five-Year Plan. 204 Leggett et al, supra note 30. See also Jing Cao, Reconciling Economic Growth and Carbon Mitigation: Challenges and Policy Options in China (2010). 205 NDRC, “China’s National Climate Change Programme”, (2007), online: NDRC <http://en.ndrc.gov.cn/newsrelease/200706/P020070604561191006823.pdf>. 206 Ibid. 47 	government set a national target for carbon intensity reduction by 20% from the 2005 level by the end of 2010. Provincial targets were set after rapid assessment and negotiation. Most of the provincial targets were set close to the national target of 20% reduction in intensity over the 11th five-year period.207  Though some of the energy-saving and emission reduction targets were met, by the end of the five-year period, the top-down enforcement had led to mixed results.208 While some provinces over-fulfilled their emissions reduction quota, other provinces struggled and scrambled to meet their energy-intensity goals. Several provinces, including Zhejiang, Jiangsu, Guangxi, Hebei and Shanxi, started power rationing since July of 2010. City government of Changzhou (in Jiangsu province) issued an administrative order requiring industrial firms in the city to suspend operation for five days after every nine days of operation.209 As a result of the energy-control measures, local output of some industrial products dropped immediately. The cement prices, for example, soared to record high. According to China Cement Net, prices of cement in Zhejiang province surged five times between July and August.210 In the last months of 2010, some local authorities took extreme short-term measures to meet the targets in final dash. Hebei's Handan city, started blackouts not only on dozens of steel and coking plants in the city, but also on schools and residential areas.211 Some other places in Hebei have also introduced 																																																						207 Ohshita & Price, supra note 195. 208 Jing Cui, “Deputy Director of NDRC: Emission Reduction Targets of the 11th Five-Year-Plan are met ahead of time(国家发改委副主任:我国‘十一五’减排目标提前完成)”, (2010), online: Xinhua <http://news.xinhuanet.com/fortune/2010-11/30/c_13628755.htm>. 209 Huiyun Xu et al, “Final Dash for Mitigation Goals,Power Rationing Throughout the Country(减排百日冲刺,各地纷现强制性限电)”, China Bus News (7 September 2010). 210 Yiyu Liu, “Cement Prices Hit Record Levels”, China Dly (1 December 2010). 211 Zhongxu Yang, Tao Sun & Yu Zhu, “Mitigation:Behind the ‘Theatre of the Absurd’(减排荒诞剧的背后)”, Cajing(财经) (September 2010). 48 	similar power rationing. In Anping county, for example, power rationing was even imposed on hospitals and traffic lights, causing public chaos.212  The mitigation campaign during the 11th Five-Year Plan has shown that heavy reliance on administrative and political measures could be costly. Lessons from the 11th Five-Year Plan period urges the Chinese leaders to consider market-based instrument that may ensure continued energy and carbon intensity reduction in a less costly way.213  3.3 Controversies over Carbon Intensity Goals In November 2009, the State Council announced that China would commit to reduce CO2 emissions per unit of GDP by 40-45 percent of 2005 levels by 2020.214 To implement the policy, the State Council set forth energy intensity (energy consumption per unit of GDP) targets for the 12th Five-Year Plan (2011-2015). According to the 12th Five-Year Plan, energy intensity will be reduced by 16% and carbon intensity will be reduced by 17% below 2010 levels by the end of 2015.215  There is controversy over whether China’s emission cap should be absolute or intensity-based. Proponents for an absolute cap claim that an absolute carbon cap has the advantage of making 																																																						212 Huiyun Xu et al, supra note 209. 213 Hu Tao, a senior research fellow at the Environment and Economy Policy Research Center for the Ministry of Environment, indicated that “the current situation is calling for the adoption of an emissions trading scheme to replace current policy instruments. Erde Wang, “Pollutant Emissions Trading Deferred in 11th Five Year Plan(排污权交易‘十一五’缓行)”, 21the Century Her (7 September 2010). 214 General Office of the State Council of the People's Republic of China, “State Council Executive Meeting Sets Greenhouse Gas Emissions Target (国务院常务会研究决定我国控制温室气体排放目标)”,(2009), online: Government <http://www.gov.cn/ldhd/2009-11/26/content_1474016.htm>. 215 State Council, “Notice of the State Council on Issuing the Comprehensive Work Plan for Energy Conservation and Emissions Reduction during the 12th Five-Year Plan Period (国务院关于印发‘十二五’节能减排综合性工作方案的通知)”, (2011), online: Government <http://www.gov.cn/zwgk/2011-09/07/content_1941731.htm>. 49 	emission reductions predictable, and that intensity-based targets would reduce the environmental certainty by linking the absolute impacts closely with the speed of the economic growth.216 They are concerned that with carbon output unrestrained, China’s carbon emissions will still be growing in real terms. 217  For proponents of an intensity target, in light of China’s national circumstances and economic development stage, the upward trend of energy consumption and GHG emissions of China is not able to change fundamentally in short term.218 It is argued that carbon cap in China, either absolute or intensity-based, will have to still allow for emissions growth early on to accommodate development needs. 219  For the Chinese government authorities, a carbon intensity cap is more appropriate, because it is seen as more compatible with the needs for continued GDP growth.220  																																																						216 Li Tian, “Cap or Intensity (‘碳总量’还是‘碳强度’)”, Shanghai Secur News (2013), online: Xinhua <http://news.xinhuanet.com/energy/2013-06/21/c_124888010.htm>. 217According to IEA data, China’s emission intensity fell to 2.33 kgCO2/USD (constant 2000 U.S. dollar) in 2009, as compared to 4.97 kgCO2/USD in 1990, with a 53% decrease. In terms of absolute emissions, however, China’s emissions have increased dramatically over the past three decades. IEA, “People’s Republic of China: Indicators for 2011”, online: IEA <http://www.iea.org/statistics/statisticssearch/report/?&country=CHINA&year=2011&product=Indicators>. More statistics and analysis on carbon intensity trend in China in the past three decades, see Xiaowei Xuan, “Prospectus of Energy Conservation in the 12th Five-Year Plan Period(十二五时期节能形势展望)” in Response of Industry to Low-Carbon Transformtion: Conference Papers, Issue 1(第一期低碳转型的产业化应对研讨会会刊) (Shanxi: China Low Carbon Economy Promotion Association, 2011). 218 Chuanguo Zhang & Yan Lin, “Panel Estimation for Urbanization, Energy Consumption and CO2 Emissions: A regional analysis in China” (2012) 49 Energy Policy 488. Qin Zhu & Xizhe Peng, “The Impacts of Population Change on Carbon Emissions in China During 1978-2008” (2012) 36 Environ Impact Assess Rev 1. Zhujun Jiang & Boqiang Lin, “China’s Energy Demand and Its Characteristics in the Industrialization and Urbanization Process” (2012) 49 Energy Policy 608. 219 Han et al, supra note 60. 220 At the Conference of the Parties to the UNFCCC held in Copenhagen in December 2009, Premier Wen Jiabao indicated that China is not ready to accept a carbon cap, stating that “it's difficult for China to take quantified emission reduction quotas at the Copenhagen conference, because this country is still at an early stage of development.” See Wen Jiabao, “Interview with Lionel Barber”, (2009), online: Financ Times <http://www.ft.com/intl/cms/s/0/795d2bca-f0fe-11dd-8790-0000779fd2ac.html#axzz2X4nKrUhQ>. Pan Jiahua, head of the Institute for Urban and Environmental Studies at the Chinese Academy of Social Sciences, also prefers to be more conservative about the pace of change in China. See Nan Xu, “Carbon Emissions Cap does Little to Help Climate Change”, (2013), online: China Dialogue <https://www.chinadialogue.net/blog/6056-Carbon-emissions-cap-does-little-to-help-climate-change/en>. Su Wei, “China hasn't reached the stage where we can reduce overall 50 	By nature of a cap-and-trade scheme, the supply of emission allowances is fixed, while the demand for them (as a function of expected CO2 emissions) is flexible. The supply of emission allowances can be influenced by energy prices, weather conditions, economic cycles and other drivers.221 Therefore, setting a realistic cap for an emissions trading scheme is far from easy. A cap too stringent could result in exploding carbon prices; a cap too lenient would negate the value of emission allowances as incentives to low carbon investment. The current collapse of prices in the EU ETS, for example, is to a large extent due to a mismatch between projected and actual emission developments over time.222 Europe’s sluggish economy combined with a boom in renewable and energy efficient technology has created a huge surplus of carbon credits in the emissions market.223 The fact that China is undergoing economic and social transition makes it even trickier to estimate the exact moment at which China’s emissions will peak and start to decline.224  The Copenhagen Conference, known formally as the Fifteenth Session of the Conference of the Parties to the UNFCCC (COP 15) and the Fifth Session of the Meeting of the Parties to the Kyoto Protocol (CMP 5), was held in December 2009. After two years of intense negotiations launched with the 2007 Bali Action Plan, negotiations were dangerously close to deadlock. The 																																																																																																																																																																														emissions, but we can reduce energy intensity and carbon intensity.” online: The Guardian <http://www.theguardian.com/world/2009/apr/19/china-environment-kyoto>. 221 Julien Chevallier, “Carbon Price Drivers: An Updated Literature Review” (2011) 4:4 Int J Appl Logist. 222 Fiona Harvey & Adam Vaughan, “MEPs Reject Key Reform of Emissions Trading Scheme”, 2013, online: Guardian <http://www.guardian.co.uk/environment/2013/apr/16/meps-reject-reform-emissions-trading>. 223 Sara Stefanini, “Climate Targets Suffer as Carbon Price Slumps”, (2016). 224 Matt McGrath, “China’s Experts Divided over Carbon Emissions Peak”, (2014), online: BBC News <http://www.bbc.com/news/science-environment-27538716>. China is transitioning to a greener, more inclusive, more consumer and service based, and less credit-driven economy. See Longmei Zhang, Rebalancing in China—Progress and Prospects (2016). 51 	world leaders could not reach a consensus on the basic terms of the Copenhagen Accord.225 Key elements of the Copenhagen Accord include an goal of limiting global temperature increase to 2 degrees Celsius; a process for countries to enter their specific mitigation targets by January 31, 2010; broad terms for the reporting and verification of countries’ mitigation actions, a collective commitment by developed countries for $30 billion in “new and additional” resources in 2010-2012 to help developing countries reduce emissions.226 The disagreements between the two delegations got heated. The U.S. delegation to the conference made clear that the U.S. had no plans to increase his offer to cut U.S. GHG emissions by 17 percent by 2020.227 China, at the same time, was not willing to accept international monitoring of its plans to slow the growth of GHG emissions.228 At the time, China’s share of global emissions had soared to 26 percent and per capita emissions were higher than the global average thus China faced great international pressure to take on concrete emission reduction target. Some analysts view China’s commitment to lower its carbon intensity by 40-45 percent as a strategic move in the intentional climate bargaining game. 229  3.4 China’s Experience with Carbon Trading Before the launching of the domestic carbon trading pilots, entities in China have been participating in carbon trading primarily in two ways: First, as sellers in international carbon market through Clean 																																																						225 Nicholas A Robinson, “The Sands of Time: Reflections on the Copenhagen Climate Negotiations” (2010) 27:2 Pace Environ Law Rev. 226 Elliot Diringer, Summary: Copenhagen Climate Summit (2009). 227 Edward Felker, “U.S., China Deadlock in Copenhagen”, Washington Times (December 17, 2009). 228 Ibid. 229 Eberhard Rhein, “China and USA hold the Key to Climate Change”, (2010), online: <https://rhein.blogactiv.eu/2010/04/14/china-and-usa-hold-the-key-to-climate-change/>. 52 	Development Mechanism (CDM) projects; second, through participation in voluntary emissions trading.  3.4.1 Experience with CDM China’s main exposure to the carbon market has been through the CDM. As noted in previous section, China’s position on CDM has been evolving. CDM was met with skepticism by China when it was proposed in 1997 because it was viewed as an instrument for developed countries to run away from their responsibility to mitigate GHG emissions. But in the later years the CDM was received with a much more positive attitude. A national system for identification, approval and implementation of CDM projects was quickly set up and the government made constant efforts to ease domestic procedures for future CDM projects. After the seventh session of the Conference of the Parties (COP7) in October 2001, the government’s attitude towards the flexible mechanisms had since become more pragmatic with greater focus on maximizing the benefits that brings about by CDM. 230  CDM, as an offsetting scheme, usually serves as a “supplemental” instrument to domestic GHG mitigation actions. In the CDM projects that China hosted, the buyers are almost exclusively from outside of China.231  3.4.2 Voluntary Markets Cities such as Beijing, Shanghai and Tianjin, started testing voluntary carbon trading in 2008 when the infrastructure for carbon trading was virtually nonexistent in China. To ensure the 																																																						230 Wei Lin et al, Efficient Implementation of CDM in China (Lysaker, 2004). 231 Han et al, supra note 60. 53 	quality of the offsets (which may vary considerably if there is no common standard), the China Beijing Environmental Exchange (CBEEX) and BlueNext launched the “Panda Standard” in September 2009. 232  However, Chinese firms do not have strong motivations to purchase emissions reduction credits.233 Only a handful of deals were made as symbolic of corporate responsibility.234 The volume and value of credits traded on the voluntary markets are so little that the emissions trading exchanges have not been providing much carbon trading services. 235 Most of the times, the exchanges organize climate forums and educational events to promote climate change awareness. 236 3.5 Cap-and-Trade Pilots and the Roadmap of China’s Domestic Carbon Market At the CCP Central Committee's meeting on October 27 2010, “gradually establishing a carbon emissions trading market” was proposed as a domestic measure to tackle climate change and meet China’s international pledges. 237  It was the first time that a timetable of implementing carbon emissions trading was proposed in any policy documents issued by the Central Committee. One year later in November 2011, the NDRC officially approved seven pilot projects—five municipalities (Beijing, Chongqing, Shanghai, Shenzhen and Tianjin) and two 																																																						232 The Panda Standard focuses on agricultural and forestry carbon projects and aims to serve as a domestic tool to help China achieve its GHG reduction commitments while facilitating the transfer of wealth from rich eastern regions to western rural China. 233 Yitian Huang, “Policy Experimentation and the Emergence of Domestic Voluntary Carbon Trading in China” (2013) 30:1 East Asia 67. 234 Xiaowei Xuan, “Xuan Xiaowei on the Present and Future of China’s Emissions Trading Market (宣晓伟谈中国碳交易市场的现状和未来)”, (2012), online: Dev Res Cent State Counc Inf Netw <http://edu.drcnet.com.cn/DRCNET.Channel.Web/gylt/20120730/index.aspx>. 235 Han et al, supra note 60. 236 For a list of the annual events in Beijing Environment Exchange, see “Annual Events of Beijing Environment Exchange”, online: Beijing Environ Exch <http://www.cbeex.com.cn/article/gywm/dsj/>. 237 Central Committee, "The CCP Central Committee's Suggestions on Formulating the Twelfth Five-Year Plan for National Economic and Social Development of the People’s Republic of China"(2011), online: NDRC <http://www.ndrc.gov.cn/125gh.pdf>. 54 	provinces (Guangdong and Hubei) — to carry out pilot programs of emissions trading. 238 As of June 2014, all seven pilot markets have started operation.239 The seven pilot regions account for 18 percent of China’s population and 28 percent of its national GDP.240 Individual pilot scheme covers a range of industries including electricity, cement, iron and steel, chemicals and large public buildings. The pilots are expected to cover 864 million tonnes of carbon dioxide by 2015—around 7% of China’s total emissions.241 3.5.1 Mitigation Targets for Pilot Regions The seven pilot regions vary in economic development level, industrial structure as well as population. Pilot sites were selected to reflect these diversities so as to provide experiences for the future nationwide carbon market.242  To define the goals and key tasks of the pilot cap-and-trade program during the 12th Five-Year Plan period, the State Council published the Work Plan for Controlling Greenhouse Gas Emissions (the “Work Plan”) in September 2011. The Work Plan set a national target to reduce energy intensity by 17 percent by 2015 from 2010 levels. 243 With the national target set, the State Council allocates targets to each pilot region according to their economic and energy use 																																																						238 National Development and Reform Commission, supra note 32. 239 Yang Yi, “China Launches All Pilot Carbon Trading Schemes”, Xinhua (June 19, 2014). 240 Jason Scott“, China’s Emissions Trading May Spur Global Accord”(2012), online: Bloomberg <http://www.bloomberg.com/news/2012-10-11/china-s-emissions-trading-may-spur-global-accord-report-says.html>. 241 Qiu, supra note 34. 242 Shaozhou Qi & Si Cheng, Annual Review of Low-Carbon Development in China 2015 (2015). 243 State Council, “Notice of the State Council on Issuing the Work Plan for Controlling Greenhouse Gas Emissions during the 12th Five-Year Plan Period (国务院关于印发‘十二五’控制温室气体排放工作方案的通知)”, (2011), online: State Counc <http://www.gov.cn/zwgk/2012-01/13/content_2043645.htm>. 55 	conditions.244 The following table shows the energy intensity reduction targets of the seven pilot regions.   Pilot Region Carbon Intensity Target (%) Beijing 18 Tianjin 19 Shanghai 19 Chongqing 17 Shenzhen245 21 Hubei 17 Guangdong 19.5 Table 1 Carbon Intensity Reduction Targets of Pilot Regions246  The important role of the pilot scheme was acknowledged at the press conference for issuing "China's Climate Change Policies and Actions (2011)" (also known as the “Climate Change White Paper”). Xie Zhenhua, the NDRC deputy director, made a statement at the conference on December 22, 2011, indicating that China aims to introduce a national cap in the 13th Five-Year 																																																						244 Ibid. 245 Guangdong provincial government allocates the energy intensity target for Shenzhen. People’s Government of Guangdong, “Notice of Guangdong People’s Government on Issuing the Implementation Plan for Greenhouse Gas Emission Control during the 12th Five-Year Plan Period (广东省人民政府关于印发‘十二五’控制温室气体排放工作实施方案的通知)”, (2012), online: People’s Gov Guangdong Prov <http://zwgk.gd.gov.cn/006939748/201208/t20120828_341198.html>. 246 State Council, supra note 243. 56 	Plan that runs from 2016 to 2020, and that the pilot scheme is intended to inform future policy making regarding carbon market.247  3.5.2 Roadmap to a National Cap-and-Trade Scheme Carbon trading is set to play an important part in China’s climate change policy. According to the Climate Change White Paper, “establishing a carbon emissions trading market step by step” is highlighted as one of the eleven “Policies and Actions”. In July 2012, Development & Research Center of the State Council Information Network released a roadmap for China’s Cap-and-Trade market. Xuan Xiaowei, senior researcher from the Development Research Center (a think-tank affiliated with China's State Council), introduced the roadmap in an interview in 2012. Xuan presented the “ultimate objective” of China’s domestic carbon market as to “establish a national compliance market that covers the whole economic body, with primary and secondary market, and that links with global market” so as to “give full play to the market mechanism in optimizing the allocation of resources, and realize the objective of controlling GHG emissions at minimum cost.” 248 He indicated that China’s carbon market is currently at a “preliminary exploration stage” and there is a long way to go before the full launch of a nationwide carbon market.249 According to the roadmap introduced by Xuan, there are three main phases of development for China’s cap-and-trade carbon market. 250 At stage I (from 2016 to 2020), regional pilot programs 																																																						247 State Council Information Office, “Press Conference for the White Paper on China’s Climate Change Policies and Actions”, (2011), online: China <http://www.china.com.cn/zhibo/2011-11/22/content_23967482.htm?show=t>. 248 Xiaowei Xuan, "Xuan Xiaowei on the Present and Future of China's Emissions Trading Market" (宣晓伟谈中国碳交易市场的现状和未来), (2012), online: Development & Research Center of State Council Information Network <http://edu.drcnet.com.cn/DRCNET.Channel.Web/gylt/20120730/index.aspx>. 249 Ibid. 250 Ibid. 57 	will be developed, paving the way for a nationwide carbon market. At stage II (from 2021 to 2030), Chinese people can expect a nationwide compliance market that has comprehensive coverage and embraces both primary and secondary markets. An absolute carbon cap (not just per unit of output) should have been set at this stage. At stage III (begins in 2031), linkages will be forged through international and domestic policies, and China’s domestic market will be merged into global carbon market.251  																																																						251 Ibid. 58 	Chapter 4  Governing China’s Cap-and-Trade Pilots: Current Legal and Institutional Framework After Shenzhen launched its pilot carbon market on June 18 2013, the other pilot cap-and-trade schemes went online successively. In June 2014, China’s seventh and final planned pilot carbon market was launched in Chongqing.252  This chapter provides an overview of the key designs of the pilot markets. Guangdong and Shenzhen are chosen as the focus. Analysis and comparison of the key elements of the cap-and-trade regulatory schemes show differences in coverage, total allowance, allowance allocation, MRV mechanism, price containment and compliance mechanism across the regional pilots. A preliminary assessment of the regulatory and oversight framework of the current pilot schemes is made at the end of the chapter. 4.1 Legal Framework  In China, law serves as an expression of state policy and instrument for its enforcement.253 China’s legal institutions function largely according to the Party’s policy priorities.254 Legal reform in China has constituted as much a technical response as a political response.255 The CNCCP is China’s first comprehensive policy initiative to address climate change. It focuses on reducing China’s energy consumption intensity through key strategies including encouraging the use of renewable energy, improving energy efficiency, and promoting clean technology. 256 																																																						252 Kathy Chen & David Stanway, “China’s Chongqing Launches Pilot Carbon Market”, Reuters (June 19, 2014). 253 Pitman B Potter, Law, Policy, and Practice on China’s Periphery: Selective Adaptation and Institutional Capacity (New York: Routledge, 2010). 254 Pitman B Potter, “Legal Reform in China: Institutions, Culture, and Selective Adaptation” (2004) 29:Spring Law Soc Inq 465.  255 Stephanie Balme, “The Judicialisation of Politics and the Politicisation of the Judiciary in China (1978-2005)” (2005) 5:1 Glob Jurist Front. 256 National Development and Reform Commission, supra note 32.  59 	Following the release of the CNCCP, the Office of the National Energy Leading Small Group released the draft version of a long-awaited energy law in December 2007, calling for more environment-friendly energy policies and a more market-based pricing mechanism.257 In the context of tackling climate change and reducing energy intensity in China, the role of the law is to support the implementation of policy through the provision of specific instruments and procedures to govern the behavior of energy producers and consumers.258 The current legal framework that regulates China’s cap-and-trade pilots consist of higher-level laws that serve as the base, and the specific and lower-level regulations that contain administrative rules and other technical standards and implementation rules. 4.1.1 National Law and Policy Most national constitutions do not address climate change.259 In some countries that implement carbon trading market, fundamental laws are enacted to address key questions, such as the legal nature of carbon trading market and the traded quota, etc. Examples include Directive 2003/87/EC of the European Union and the California Global Warming Solutions Act of 2006 (AB/32) of the United States. Up to now, there is no national legislation (passed by National People’s Congress) specially dealing with carbon trading.260 																																																						257 Huang Shan, “Draft Energy Law Seeks Public Opinions”, (2007), online: China <http://www.china.org.cn/english/government/234357.htm>. 258 Donald N Zillman, Beyond the Carbon Economy: Energy Law in Transition (Oxford, New York: Oxford University Press, 2008). 259 Ibid. 260 It is reported that the draft of the Climate Change Response Law has completed in August 2014. The drafting process started in January 2010, with the NDRC leading the effort and legal experts from the Chinese Academy of Sciences (CAS), the Chinese Academy of Social Sciences (CASS) and the China University of Politics and Law 60 	Currently in China, air pollution as covered by the Law on the Prevention and Control of Atmospheric Pollution (LPCAP) is restricted to emissions of toxic substances that do harm to human health. 261 Carbon emissions trading as a distinct system regulating emissions of carbon dioxide is not yet recognized by the national legislation.262 The LPCAP and the 2008 Law on Prevention and Control of Water Pollution (LPCWP) have general provisions regarding pollution permit.263 The LPCWP, for example, requires entities directly or indirectly discharging industrial and medical waste and entities operating facilities to treat urban sewage to obtain pollution discharge permits.264 Wider initiatives, such as the amendment to Environmental Protection Law passed in 2014, encapsulate China’s existing regulations on information disclosure and public participation, promoting increased transparency by requiring companies to disclose pollution data and holding government agencies responsible for disseminating information publicly.265 The departmental regulation Measures for Operation and Management of Clean Development Mechanism Project, jointly issued by NDRC, MOST, Ministry of Foreign Affairs and Ministry of Finance in August 2011, deals specifically with CDM. 266 NDRC plays a key role in China's domestic and international climate policy. In June 2007, NDRC issued China's first policy statement on climate, the “China’s National Climate Change 																																																																																																																																																																														(CUPL) contributing. Shumao Huang, “China’s New Climate Change Law May Hamper Emission Cuts”, (2014), online: China Dialogue <https://www.chinadialogue.net/blog/7202-China-s-new-climate-change-law-may-hamper-emission-cuts/en>. 261 Law of the People's Republic of China on the Prevention and Control of Atmospheric Pollution, 2000. 262 Ibid. 263 Law of the People’s Republic of China on Prevention and Control of Water Pollution, 2008. 264 Ibid. at art. 20. 265 “Amendment to Environment Protection Law(draft)”, (2012), online: Natl People’s Congr <http://www.npc.gov.cn/npc/xinwen/lfgz/flca/2012-08/31/content_1735713.htm>. 266 NDRC, “Measures for Operation and Management of Clean Development Mechanism Project in China”, (2011). The 2005 version was abolished.  61 	Program” (CNCCP). As the first official statement on climate change, the CNCCP covers a broad range of issues: endeavors China has taken, the challenges China is facing, policy principles and objectives, proposed mitigation measures, and China’s basic positions on climate change in the international arena.267  Despite its breadth, the CNCCP largely defines China's climate policy through the lens of energy—energy efficiency, conservation, technology, and renewables. To support the CNCCP, the Work Plan for Controlling Greenhouse Gas Emissions during the 12th Five-Year Plan specified the tasks and detailed measures for GHG emissions control.268 From 2013 to 2015, the NDRC enacted a series of GHG Accounting and Reporting Guidelines for different industries.269 December 2014, The NDRC released the Interim Regulations on Carbon Emissions Trading.270 This interim regulation outlines basic guidelines for designing a national carbon trading system but does not include technical specificities.271 4.1.2 Regulations at Local Level Research and drafting of the locally tailored implementation plans started since the central government announced the plan to establish the cap-and-trade pilot program. Up to now, each pilot region has formulated preliminary plan and rules in support of its respective carbon market. 																																																						267 NDRC, “China’s National Climate Change Programme”, (2007). 268 State Council, supra note 243. 269 NDRC, “Notice of the General Office of NDRC on Issuing GHG Accounting and Reporting Guidelines for the 1st Batch of 10 Industries(国家发展改革委办公厅关于印发首批 10 个行业企业温室气体排放核算方法与报告指南(试行)的通知)”, (2013), online: Gov PRC <http://www.gov.cn/zwgk/2013-11/04/content_2520743.htm>.NDRC, “Notice of the General Office of NDRC on Issuing GHG Accounting and Reporting Guidelines for the 2nd Batch of 4 Industries(国家发展改革委办公厅关于印发第二批 4 个行业企业 温室气体排放核算方法与报告指南(试行)的通知”, (2014), online: NDRC <http://www.sdpc.gov.cn/gzdt/201502/t20150209_663600.html>. NDRC, “Notice of the General Office of NDRC on Issuing GHG Accounting and Reporting Guidelines for the 3rd Batch of 10 Industries(国家发展改革委办公厅关于印发第三批 10 个行业企业温室气体核算方法与报告指南(试行)的通知)”, (2015), online: NDRC <http://www.ndrc.gov.cn/gzdt/201511/t20151111_758288.html>. 270 NDRC, “Interim Regulations on Carbon Emissions Trading(碳排放权交易管理暂行办法)”, (2014). 271 Ibid. 62 	The laws and regulations enacted for those pilot markets are in various forms.  For example, the carbon trading systems of Shenzhen and Beijing are backed by laws enacted by the municipal People’s Congress.272 Pilot schemes in Shanghai, Guangdong, Tianjin, Hubei and Chongqing are backed by government regulations. Shenzhen October 30, 2012, the Standing Committee of the 5th Shenzhen People's Congress issued the Provisions on Carbon Emissions Management of the Shenzhen Special Economic Zone (hereinafter the “Provisions”) .273 This piece of municipal legislation to commit Shenzhen to reduce its GHG emissions is the first of the kind in China. The Provisions states the mission of formulating a regulatory framework for pilot emissions trading in Shenzhen, and expresses the philosophy that companies and individuals should be included into the pilot scope.274 After more than nine months into operation, the Shenzhen government released the Interim Regulations on Carbon Emissions Trading in Shenzhen on March 19, 2014.275 The Interim Regulations provides preliminary rules defining competent authorities and their responsibilities, cap setting, allowance allocation, information MRV, the registry, oversight of carbon trading, as well as legal liabilities.276  																																																						272 The Provisions on Carbon Emissions Management of the Shenzhen Special Economic Zone (深圳经济特区碳排放管理若干规定) was enacted by the Standing Committee of the 5th Shenzhen People's Congress. 273 Shenzhen Government, “Provisions on Carbon Emissions Management of the Shenzhen Special Economic Zone (深圳经济特区碳排放管理若干规定)”, (2013). 274 Ibid. 275 Shenzhen Government, “Interim Regulations on Carbon Emissions Trading in Shenzhen(深圳市碳排放权交易管理暂行办法)”, (2014). 276 Ibid. 63 	Guangdong In August 2012, the provincial government of Guangdong released the 12th Five-Year Work Plan for Energy Conservation and Controlling GHG Emissions which commits the province to adopting adjustments on industrial and energy structure, undertaking energy conservation, improving energy efficiency, and to effectively mitigate GHG emissions.277 On September 11 2012, Guangdong issued the Implementation Plan for the Carbon Emissions Trading Pilot in Guangdong Province (for Trial Implementation). 278  The Implementation Plan clarifies the principles, objectives, overall arrangements, main tasks and supporting measures of Guangdong carbon emissions trading pilot program. 279  Carbon intensity targets are distributed among cities within the province. 280  The Guangdong Provincial Development and Reform Commission (Guangdong DRC) issued the Working Plan on the Initial Allocation of Carbon Emission Allowances in Guangdong Province on November 25 2013. 281  This document identifies a list of regulated companies and new entrants.282 In the Interim Regulations on Carbon Emissions Trading in Guangdong Province, which came into force in March 2014, more detailed arrangements are included. 283  The 																																																						277 People’s Government of Guangdong, “12th Five-Year Work Plan for Energy Conservation and Controlling GHG Emissions of Guangdong Province(广东省‘十二五’节能减排综合性工作方案)”, (2012). 278 People’s Government of Guangdong, “Implementation Plan for the Carbon Emissions Trading Pilot in Guangdong Province (for Trial Implementation)(广东省碳排放权交易试点工作实施方案(试行))”, (2012). 279 Ibid. 280 Ibid. 281 Guangdong DRC, “Work Plan on the Initial Allocation of Carbon Emission Allowances in Guangdong Province (for Trial Implementation)(广东省碳排放权配额首次分配及工作方案(试行))”, (2013). 282 Ibid. 283 People’s Government of Guangdong, “Interim Regulations on Carbon Emissions Trading in Guangdong Province(广东省碳排放管理试行办法)”, (2014). 64 	Guangzhou Exchange compiled the Trading Rules of Guangzhou Carbon Emissions Trading Center and the Interim Regulations on Membership to ensure orderly market.284 4.2 Administrative Institutions This section introduces the administrative institutions of the pilot carbon markets under current regulatory framework. 4.2.1 NDRC and Local DRCs Under the State Council, there are a number of major institutions implementing China’s environmental, energy and climate policies: the NDRC, the National Energy Commission (NEC), the Ministry of Environmental Protection (MEP), the State Electricity Regulatory Commission (SERC), and the National Leading Small Group on Climate Change, Energy Saving and Emissions Reduction. 285  The NEC is an agency established in 2010 to coordinate the overall energy policies. The NEC is currently headed by Premier Li Keqiang, with Vice-Premier Zhang Gaoli as the deputy and Xiao Jie—Deputy Secretary General of the State Council—one of the commissioners.286 SERC is responsible for administration and regulation of the electricity and power industry.287  																																																						284 China Emissions Exchange, “Interim Regulations on Membership (广州碳排放权交易所(中心)会员管理暂行办法)”, (2013). 285 Stephen Tsang & Ans Kolk, “The Evolution of Chinese Policies and Governance Structures on Environment, Energy and Climate” (2010) 20:3 Environ Policy Gov 180. 286 State Council, “State Council Shuffles Leadership of National Energy Commission”, (2016), online: China Gov <http://english.gov.cn/policies/latest_releases/2016/06/24/content_281475378900506.htm>. 287 State Electricity Regulatory Commission, “About the State Electricity Regulatory Commission(电监会简介)”, online: China Gov <http://www.gov.cn/banshi/2005-09/20/content_65076.htm>. 65 	The NDRC is one of China's most powerful government agencies. 288  Within its broad jurisdictions, NDRC is in charge of central economic planning, macro-economic policy, and policies regarding the nation's energy and natural resources.289  The NDRC’s Department of Climate Change, established in 2008, is responsible for formulating China’s climate change policies. The pilot cap-and-trade markets allow credits generated by China’s Certified Emission Reduction (CCER) program to offset carbon emissions. 290  The NDRC is in charge of the approval of CCER projects and issuance of credits. At the municipal/provincial levels, Economic Commissions, Environmental Protection Bureaus (EPBs), Development and Reform Commissions (DRCs), and Construction Bureaus are involved in implementing energy intensity reduction policies. 291  DRCs are the key units responsible for formulating and implementing policies with respect to carbon trading. The Shenzhen municipal DRC, for example, is in charge of managing the Shenzhen GHG Information Management System, reviewing the emissions report and verification reports, supervising verification agencies and managing the blacklist of inadequate verification agencies. The Guangdong provincial DRC makes implementation plans for allowance allocation, and defines the principles, methods and procedures.292 The Implementation Plan for the Carbon Emissions Trading Pilot requires that emission companies report emissions of the previous year, have that report verified by a third-																																																						288 Heggelund, supra note 105. 289 Economy, supra note 153. 290 The NDRC has approved 177 eligible methodologies for its domestic offset program, of which 173 come from existing CDM methodologies. The four non-CDM methodologies aim to reduce emissions from forestry and land use and were developed by domestic think tanks. 291 Genia Kostka et al, “Local Energy Efficiency Policy Implementation in China: Bridging the Gap between National Priorities and Local Interests” (2012) 211:61 China Q 765. 292 Guangdong DRC, supra note 341-343. 66 	party agency, and submit to the DRC.293 The Guangdong provincial DRC also crosscheck with actual emissions of the previous year and inform the regulated company of the result. The provincial DRC is responsible for recording and managing the information of third-party certification agencies. Very importantly, the DRCs coordinate with the other municipal/provincial authorities to ensure smooth operation of the pilot program. For example, in Guangdong, the list of regulated companies is determined by the provincial DRC with consultants from other relevant provincial departments.   4.2.2 MEP and EPBs The Ministry of Environmental Protection (MEP), formed in 2008 to replace the former State Environmental Protection Administration (SEPA), aims at prevent and control environmental pollution, protect nature and ecology, supervise nuclear safety, ensure public health and environmental safety. The MEP, however, has very limited influence on climate policymaking compared with the NDRC. The MEP does play a critical role in, for example, building the environmental information network to improve digital environmental monitoring and management of statistics.294 The MEP has issued series of technical guidelines and management rules for developing the continuous emission monitoring systems (CEMS).295These Technical Specifications and Orders provide guide and standards for CEMS installation, certification, operation, maintenance, supervision, data reporting, and auditing.  																																																						293 People’s Government of Guangdong, supra note 283. 294 For example, the MEP enacts the “Environmental Technical Manual on Information Capacity Building”(环境信息能力建设技术指南),(2010), online: MEP <http://www.mep.gov.cn/gkml/hbb/bgth/201101/W020110107563450297411.pdf>. 295 For example, Ministry of Environmental Protection, Specifications for Continuous Emissions Monitoring of Flue Gas Emitted from Stationary Sources(固定污染源烟气排放连续监测技术规范) (2007). 67 	4.2.3 Municipal/Provincial Leading Small Group on Carbon Trading Pilot Special leading small groups are established at municipal or provincial levels to guide and coordinate the implementation of policies with respect to pilot carbon trading.  The Shenzhen Leading Small Group on Carbon Trading Pilot was set up by the Shenzhen municipal government on May 30 2012 to facilitate the implementation of the pilot program. 296 According to the Official Gazette, deputy mayor Chen Yingchun chairs the leading small group.297 Members of the leading small group include principals of Shenzhen Municipal Development and Reform Commission, Commission of Economy and Information, Commission of Commerce, Finance Bureau, Urban Construction and Communications Commission, Human Resource and Social Security Bureau, State-owned Assets Supervision and Administration Commission, Statistics Bureau, Tourism Administration, Transport and Port Authority, Bureau of Quality and Technical Supervision, Legislative Affairs Office, and Office of Financial Service, Shenzhen Customs, and governors of multiple districts.298 The office of the leading small group is set in Shenzhen DRC. 299 4.2.4 Third-Party Verification Supervision Agencies All carbon trading pilots in China require third-party verification of emissions reported by the emitters. The purpose of using private auditors is to ensure the accuracy and the scientific integrity of the emissions data, hence to enhance the achievement of the regulatory objectives of 																																																						296 Shenzhen Government, “Establishing the Leading Small Group for Carbon Emissions Trading Pilot in Shenzhen(成立深圳市碳排放权交易试点工作领导小组)”, (2012), online: Shenzhen Gov Online <http://www.sz.gov.cn/zfgb/2012_1/gb799/201208/t20120807_1959801.htm>. 297 Ibid. 298 Ibid. 299 Ibid. 68 	reducing GHG emission intensity.300 To regulate third-party verification, the Shenzhen Market Supervision Administration (Shenzhen MSA) and Shenzhen Housing and Construction Bureau (Shenzhen HCB) are in charge of the accreditation of verifiers. The Shenzhen MSA provides protocol and guidelines for quantification, reporting and verification of GHG emissions of organizations. 301  It authorizes verification activities for incumbent industrial companies and supervise the verification agencies and their verifiers. The Shenzhen HCB supervises and monitors the verification agencies and their verifiers for GHG emissions from buildings. 302  The Shenzhen DRC reviews the verification reports from third-party verification agencies, penalizes unlawful conducts, and advises the Shenzhen MSA to take the names of verification agencies that conduct unlawful acts off the accreditation list. In Beijing and Hubei, it is the responsibility of DRC to organize training sessions for the verifiers to get acquainted with MRV guidelines and relevant procedures.303  4.3 Design of the Pilot Carbon Markets  Major components of a cap-and-trade system include the cap, allowances allocation mechanism, GHG accounting and verification system, trading infrastructure such as registries and exchanges, 																																																						300 Lesley K McAllister, “Regulation by Third-Party Verification” (2012) 53:1 Bost Coll Law Rev. 301 Shenzhen Market Supervision Administration, Specification with Guidance for Quantification and Reporting of the Organization’s Greenhouse Gas Emissions(组织的温室气体排放量化和报告规范及指南) (2012). Shenzhen Market Supervision Administration, Specification with Guidance for Verification of the Organization’s Greenhouse Gas Emissions(组织的温室气体排放核查规范及指南) (2012).  302 Shenzhen Housing and Construction Bureau, “Notice On Releasing the Specification with Guideline for Quantification and Reporting of Building Greenhouse Gas Emission and Specification with Guidance for Verification of Building Greenhouse Gas Emission(关于《建筑物温室气体排放的量化和报告规范及指南》(试行)和《建筑物温室气体排放的核查规范及指南》”, (2013). 303 Sino Carbon Innovation and Investment, supra note 67. 69 	and an accountability system in case of non-compliance.304 Designing and operating a cap-and-trade program involves a complex array of issues: setting the cap, defining the magnitude of the sources, allocating emission allowances, collecting and verifying emission data, etc.  4.3.1 Scope A critical element of a cap-and-trade program is its scope, meaning the set of gases, emission sources, sectors of the economy to be included in the program. 305  Among the seven pilot markets, Chongqing is the only one that covers all six Kyoto gases, and the other pilots only deal with carbon dioxide emissions.306 All the pilot schemes account for direct and indirect emissions.307 As to sector coverage, all pilot programs identify heavy energy consumption and high emission sectors to be covered by the cap-and-trade scheme. Based on the economic structure, emission reduction potentials and industrial management system of the province/municipality, Beijing, Shanghai and Shenzhen include service sectors and large public buildings that generate indirect 																																																						304 United States Environmental Protection Agency Office of Air and Radiation, Tools of the Trade: A Guide to Designing and Operating a Cap and Trade Program for Pollution Control (2003). 305 Pew Center on Global Climate Change, Scope of a Greenhouse Gas Cap-and-Trade Program (2008). 306 Chongqing Municipal People’s Government, “Interim Regulations on Carbon Emissions Trading in Chongqing (重庆市碳排放权交易管理暂行办法)”, (2014), online: Chongqing Munic People’s Gov <http://www.cq.gov.cn/wztt/pic/2014/1298033.shtml>. Chongqing Development and Reform Commission, “Interim Regulations on Voluntary Emissions Trading (温室气体自愿减排交易管理暂行办法)”, (2012), online: Chongqing DRC <http://www.cqdpc.gov.cn/article-1-20521.aspx>. 307 According to the GHG Protocol definition, direct GHG emissions are emissions from sources that are owned or controlled by the reporting entity; Indirect GHG emissions are emissions that are a consequence of the activities of the reporting entity, but occur at sources owned or controlled by another entity. See GHG Protocol, “What is the difference between direct and indirect emissions?”, online: GHG Protoc <http://www.ghgprotocol.org/calculation-tools/faq>. The Greenhouse Gas Protocol is the most widely used international accounting tool for government and business leaders to understand, quantify, and manage greenhouse gas emissions. 70 	emissions. Shanghai, in particular, is the only pilot to include domestic aviation under its scope of compliance.308  Shenzhen   Shenzhen pilot features a comparatively low inclusion threshold. In 2013, the pilot scheme covers industrial enterprises that emit more than 5000 tCO2e annually, covering 635 industrial companies from 26 sectors and 200 large-scale public buildings.309 The 635 companies that covered are responsible for 31.7 million tonnes of carbon emissions in 2010, accounting for 38 percent of all Shenzhen’s emissions.310 In the past decade, Shenzhen’s industry structure has been in transition, to one that places greater emphasis on value-added production and service industry. 311  The inclusion of 200 public buildings under Shenzhen's cap-and-trade system reflects this transition and is one highlight of the design of the Shenzhen pilot carbon market. Shenzhen pilot covers the enterprises and institutional organizations that emit over 3000 tCO2e per year, large public buildings over 20,000 square meters, office buildings for governmental agencies over 10,000 square meters.312   																																																						308 Shanghai DRC, “Methods for Verification and Reporting of GHG Emissions from Air Transportation Industry in Shanghai(上海市航空运输业温室气体排放核算与报告方法)”, (2012), online: Shanghai DRC <http://www.shdrc.gov.cn/xxgk/cxxxgk/14648.htm>. 309 Shenzhen Government, supra note 275. 310 Jinguang Long, “Shenzhen Will Lauch Carbon Trading in June, 635 Enterprises are Covered(深圳将于 6 月启动碳交易首批 635 家工业企业参与)”, South Dly (17 May 2013). 311 Barry Pearton, “Reshaping Shenzhen” (2012) 30:4 Asia Today Int 7. 312 Shenzhen Urban Development Research Center & China Emissions Exchange, The Annual Report on First-Year Operation of Shenzhen ETS (Shenzhen, 2015). 71 	Guangdong Guangdong’s Work Plan for Controlling GHG Emissions in 2013 requires that companies in the power sector, cement, iron and steel, ceramic, petrochemical, textile, non-ferrous metals, plastics, and paper, located in the area of Guangdong Province, with more than 20,000 tonnes of CO2 emissions (or an overall energy consumption of 10,000 tonnes of standard coal) in any one year of the years between 2011 and 2014 be put under the cap.313 In the first compliance period, Guangdong’s cap-and-trade program covers 184 companies that meet such criteria. Adjustments were made in 2014 and 9 new companies were added.314 Regulated entities include industrial companies that emit more than 10000 tCO2e per year; and hotels, restaurants, financial institutions, public organizations emitting more than 5000 tCO2e per year. 315 4.3.2 Cap and Total Amount of Allowances In a typical cap-and-trade scheme, the regulating authority agrees on a set cap on the amount of GHG gases that can be emitted in a given period of time (compliance period).316 The authority divides this amount into a number of individual allowances, each of which represents a unit of emission (an authorization to emit one tonne of carbon dioxide or its equivalent of other GHGs). Within a compliance period, the number of allowances is limited and the total for all emitters covered by the cap-and-trade system is equivalent to the cap set by the regulator. Emissions trading systems, such as the EU ETS, set an absolute emissions cap, and the cap is reduced each 																																																						313 People’s Government of Guangdong, supra note 283. 314 Research Center of Low Carbon Technology and Economy of Sun Yat-Sen University, Analysis Report on Guangdong Carbon Trading Pilot (2013-2014)(广东省碳排放权交易试点分析报告(2013-2014)) (Guangzhou, 2015). 315 People’s Government of Guangdong, supra note 283. 316 Betsill & Hoffmann, supra note 30. 72 	year by a certain percentage.317 Similar to the EU ETS, the California Cap-and-Trade Program has also created a declining carbon emissions caps for the covered entities.318 In China, the State Council sets carbon intensity targets for each of the regional pilots. Given the absence of an absolute economy wide emissions cap, the regional pilots mainly rely upon the bottom up approach to set the caps. Regulators at municipal/provincial levels strategically link the caps of the pilot carbon markets to the regional carbon intensity goals. Due to the differences in economic structures and development status, the emission caps of these pilots in 2013, as shown in the following table, ranged from the lowest 33 million (Shenzhen) to the highest 388 million (Guangdong). 319 Pilot Region Cap (MtCO2e) Beijing 50 Tianjin 160 Shanghai 160 Chongqing 125 Shenzhen 33 Hubei 324 Guangdong 388 																																																						317 European Commission, Preparing the EU’s Quantified Emission Limitation or Reduction Objective based on the EU Climate and Energy Package. Commission Staff Working Document (Feb 2012), online: European Commission <http://ec.europa.eu/clima/policies/international/negotiations/docs/swd_13022012_en.pdf>. 318 California Air Resource Board, Overview of ARB Emissions Trading Program (2011), online: CARB<http://www.arb.ca.gov/newsrel/2011/cap_trade_overview.pdf>. 319 Guangdong provincial government allocates the energy intensity target for Shenzhen. Shenzhen decides the absolute target by itself. Shenzhen Government, supra note 275. 73 	Table 2 The Caps of China’s Emissions Trading Pilots in 2013 The cap-and-trade pilot systems allow emissions from regulated sectors to be offset by credits generated by China’s Certified Emission Reduction (CCER) program.320 Offset provisions allow investors — even those not subject to the cap-and-trade — to develop emission reduction credits from projects involving unregulated sources. These offsets will be issued under a voluntary, government-administered Chinese offset program that is based on the CDM. The NDRC is acting as the ruling body, similar to the CDM Executive Board. The methodologies will be based on CDM methodologies and possibly include some simplifications. Shenzhen The carbon intensity reduction target for Shenzhen during the 12th Five-Year Plan is 21%, which means a reduction rate of 4.61% per year. Shenzhen sets an absolute emission reduction target for regulated companies overall and sets a carbon intensity target for each individual regulated company. Shenzhen’s absolute cap increases year by year — the cap for 2013, 2014 and 2015 is 33.2 MtCO2e, 33.78 MtCO2e, 34.78 MtCO2e respectively, accounting for around 40% of the city’s total annual emissions. But the carbon intensity of each regulated company and the average carbon intensity of all regulated companies is expected to decrease year by year. The Shenzhen DRC reviews companies’ Industrial Added Value on an annual basis, and increases or reduces the amount of emission allowance given to the companies. The total amount of allowances are 																																																						320 The NDRC has approved 177 eligible methodologies for its domestic offset program, of which 173 come from existing CDM methodologies. The four non-CDM methodologies aim to reduce emissions from forestry and land use and were developed by domestic think tanks. One CCER credit is equal to one tonne carbon dioxide equivalent reduced from the atmosphere. 74 	counted following the rule: (a) for industries producing single products, allowances = last year's production x last year's carbon intensity target; (b) for other industries, allowances = last year's actual industrial added value x last year's carbon intensity target.321 According to calculation, the 635 industrial companies and 200 large-scale public buildings covered by the Shenzhen cap-and-trade pilot scheme are granted allocations of over 100 million tonnes between 2013 and 2015, which represents a 30% cut in emissions per unit of output.322 In Shenzhen, project developers have been slow to embark on new offset projects as the existing CER supply in this region already makes up more than 8% of the capped emissions.323  Guangdong According to the Guangdong’s Work Plan on the Initial Allocation of Carbon Emission Allowances in Guangdong Province (for Trial Implementation), the total amount of allowances in 2013 was set at 388 MtCO2e, of which 350 MtCO2e were allocated to companies covered by the pilot cap-and-trade scheme and 38 MtCO2e were reserved for new facilities. 324   With a total allocation of 350 MtCO2e per year, Guangdong is the second largest carbon market in the world trailing the European market.325 Currently, regional pilots across China limit the percentage of 																																																						321 Qian, Neelis & Casanova, supra note 62. 322 J P, “The Cap Doesn’t Fit”, (2013), online: Econ <http://www.economist.com/blogs/analects/2013/06/carbon-emissions>. 323 Daphne Yin, “China’s Carbon Emissions Traders Await Offset Demand”, (2013), online: Ecosyst Marketpl <http://www.ecosystemmarketplace.com/pages/dynamic/article.page.php?page_id=9820>. 324 Guangdong DRC, supra note 281. 325 “Guangdong Launches Carbon Auction and Pilot Carbon Trading Market”, (2013), online: Shanghai Met Mark <http://www.metal.com/newscontent/56014_guangdong-launches-carbon-auction-and-pilot-carbon-trading-market>. 75 	emissions that can be offset. The Guangdong pilot requires that CCERs used by companies under the cap should not exceed 10% of the total emissions of the company. 326 4.3.3 Allowance Allocation Emissions allowance is a virtual product. Generally, there are two ways to allocate allowances: allowances can be auctioned off, or assigned for free.327 If free allocation is chosen, the principle for distribution must be determined. Options include granting allowances based on historical emissions (“grandfathering”), on levels of an output or input, or on an environmental performance “benchmark.”328  In the initial phase (2005–2007) of EU-ETS, 95% of the allowances are distributed to covered entities for free.329 In phase 2 (2008–2012), about 97% of emissions allowances — and the associated financial value of those allowances — were distributed for free to participating companies. Free allocation, along with an over allocation of permits, led to a dramatic collapse in permit prices in the EU ETS. 330  Since the third phase, the European Commission made a provision requiring that no less than 50 percent of the total permits in sectors other than the energy sector be distributed through auction; and in the energy sector, permits be obtained 100 percent through auction in 2013.331 The RGGI of the United States only covers the power sector. To ensure that all regulated entities have access to CO2 emission allowances under uniform 																																																						326 People’s Government of Guangdong, supra note 283. 327 Donald N. Dewees, “Instruments Choice in Environmental Policy” (1983) XXI:January Econ Inq 53. 328 Gayer & Horowitz, supra note 16. Suzi Kerr, Allocation of Greenhouse Gas Reduction Responsibilities Among and Within the Countries of the European Union (1999). 329 A Denny Ellerman, Frank J Convery & Christian de Perthuis, Pricing Carbon : the European Union Emissions Trading Scheme (Cambridge University Press, 2010). 330 Betsill & Hoffmann, supra note 30. 331 Åsa Löfgren et al, Architecture of the EU Emissions Trading System in Phase 3 and the Distribution of Allowance Asset Values (Göteborg, 2015). 76 	terms, approximately 90% of carbon allowances are issued through quarterly regional auctions in the covered states.332 Most of Chinese pilot cap-and-trade schemes comprise grandfathering based on historical emissions, complemented by auctioning a small part of the permits. Methods for free allocation of allowances vary across China’s cap-and-trade pilots. For example, Chongqing adopts a principle that is based on a company’s historic maximum emissions between the years 2008 to 2012. It is provided that, before 2015, the upper limit of the annual allowance allocation should be 4.13% lower than the previous year.333 Hubei and Guangdong pilots employ a mechanism that allows ex-post adjustment, i.e. if an enterprise’s actual emission of a year is significantly different (e.g. the difference is larger than 20% or 0.2 MtCO2e) from the amount of allowances allocated to it at the beginning of the year, the regulator will adjust (add or take back) certain amount of allowances based on that difference.334  Shenzhen Under the Shenzhen pilot scheme, allowances are largely distributed for free. For electricity, water supply and gas supply sectors, their annual carbon intensity targets and pre-allocated allowances are determined based on their industrial emission intensity benchmarks and their 																																																						332 RGGI, “About the Regional Greenhouse Gas Initiative”, (2016), online: RGGI <www.rggi.org>. 333 Chongqing Development and Reform Commission, “Specifications on Management of Carbon Emission Allowances in Chongqing (重庆市碳排放配额管理细则(试行))”, (2014), online: Chongqing DRC <http://www.cqdpc.gov.cn/article-1-20505.aspx>. 334 Hubei DRC, “Allowance Allocation Plan in 2015(湖北省 2015 年碳排放权配额分配方案)”, (2015), online: Hubei DRC <http://www.hbfgw.gov.cn/tztg/tpwj/201511/t20151125_91461.shtml>. 77 	estimated output.335 For a manufacturing company, its annual carbon intensity targets and pre-allocated allowances are decided based on the company’s historical emissions, emission rankings in its industry, and its estimated production output. 336 Allowances for buildings are allocated based on the function, areas and energy consumption of the buildings.337 It is required that allowances auctioned should not be less than 3% of the total allowance.338 As of January 2016, only one auction has taken place (in June 2014). 339 Guangdong Under Guangdong’s pilot cap-and-trade scheme, allowances are primarily allocated for free through grandfathering.340 Guangdong requires all incumbent enterprises to purchase at least 3% of their total allowances for the period 2013–2014 at auction, starting with a reserve price of 60 CNY per tonne. 341  The proportions of free and paid allocation during the 2013-2014 period for complying companies are 97% and 3% respectively. 342 In 2015, the figures changed to 90% and 10%.343  																																																						335 Shenzhen Urban Development Research Center & China Emissions Exchange, supra note 312. 336 Ibid. 337 Ibid. 338 Shenzhen Government, supra note 275. 339 Jiang et al, supra note 65. 340 Guangdong DRC, supra note 281. 341 Guangdong DRC, “Specifications on Management of GHG Emissions Allowances in Guangdong(广东省碳排放配额管理实施细则(试行))”, (2014). 342 Guangdong DRC, “Guangdong Province Carbon Emissions Allowances Allocation Plan in 2014(广东省 2014 年度碳排放配额分配实施方案)”, (2014). 343 Guangdong DRC, “Guangdong Province Carbon Emissions Allowances Allocation Plan in 2015(广东省 2015 年度碳排放配额分配实施方案), (2015). 78 	4.3.4 Monitoring, Reporting and Verification Accurate emission data support the market value of a cap-and-trade program's tradable allowances and create confidence in the cap-and-trade program's attainment of its emissions reduction objectives. 344 A full accounting of the actual emissions of each regulated facility is a precondition and requirement to ensure the fairness and credibility of China’s cap-and-trade program. 345  In China, national guidelines are developed to determine how different industries should choose monitoring technologies and how data should be reported.346  China’s seven pilot emissions trading schemes are responsible for developing their respective monitoring and reporting rules, specifying applicable monitoring and reporting requirements. All pilot schemes require third-party verification of the emissions data before they are reported by the emitter to the regulator. Registries are established to record and track holding, transfer and cancellation of emissions reduction volume. Online systems are also established for companies to report carbon emissions.  Shenzhen The Interim Regulations on Carbon Emissions Trading in Shenzhen provides that regulated entities must submit their GHG reports to the regulating department through the Shenzhen GHG Emission Information Management System before March 31st every year; and industrial companies must also submit the Accounting Indicator Statistics to the Shenzhen Bureau of 																																																						344 Lesley K McAllister, “The Enforcement Challenge of Cap-and-Trade Regulation” (2010) 40 Environ Law 1195. 345 Joe Kruger & Christian Egenhofer, “Confidence Through Compliance in Emissions Trading Markets” (2006) 6:2 Sustain Dev Law Policy at 6. Peeters, supra note 12, at 185-86. 346 NDRC, supra note 269.  79 	Statistics by the same deadline. 347 Before April 30th every year, regulated companies need to submit the verification report prepared by the third-party organization to the regulating department. 348  The Shenzhen HCB issued protocols and guidelines for quantifying, reporting and verification of  GHG emissions from buildings. 349  The Shenzhen MSA issued protocols and guidelines for quantification, reporting, as well as verification of organizational-level GHGs emissions. 350  The guidelines are developed based on international GHG protocols.351  In Shenzhen, verifiers are accredited by the Shenzhen MSA. Since 2014, covered entities in Shenzhen pilot have had the autonomy to shop around for verification services. But using a same verification agency or verifier for three consecutive years is prohibited. 352  The regulating department is to randomly select some GHG reports and their corresponding verification reports by third parties for a quality check. It is required that no less than 5% of all reports be checked.353     																																																						347 Article 30, Shenzhen Government, supra note 275. 348 Ibid. 349 Shenzhen Housing and Construction Bureau, supra note 302. 350 Shenzhen Market Supervision Administration, supra note 301.  351 ISO 14064-1:2006 gases—Part1: Specification with guidance at the organization level for quantification and reporting of greenhouse gas emissions and removals; ISO 14064-3: 2006 Greenhouse Gases— Part 3: Specification with guidance for the validation and verification of greenhouse gas assertions. Shenzhen Market Supervision Administration, supra note 301.  352 Shenzhen Government, supra note 275. 353 Ibid. 80 	Guangdong The Interim Regulations on Carbon Emissions Trading in Guangdong Province requires that industrial companies that emitted more than 10,000 tonnes of CO2 (or have a comprehensive energy consumption of 5,000 tonnes of standard coal) in any one year from 2011 to 2014 must report their emissions every year. 354  Guangdong DRC published the Rules for The Implementation of the Reporting and Verification of Carbon Emissions of Companies in February 2015.355  All incumbent companies should submit their emissions reports through the online information system by March 15th every year. 356 Companies that are not subject to emission control but have the responsibility to report their emissions should at the same time submit hard copies of their reports to the city DRCs.357 By May 5th, entities subject to emission control should submit hard copies of their verified emission reports and the verification reports to the city DRCs. The city DRCs collect all the reports and submit them to the provincial DRC by May 10th.358 Guangdong select verifiers openly and put them on record. Verifiers are appointed to the companies by the provincial DRC in the first compliance year. Since 2014, companies can freely 																																																						354 People’s Government of Guangdong, supra note 283. 355 Guangdong DRC, Guangdong DRC on Rules for The Implementation of the Reporting and Verification of Carbon Emissions of Companies(广东省发展改革委关于企业碳排放信息报告与核查的实施细则) (2015). Guangdong DRC, Specification with Guidance for Reporting Carbon Emissions of Companies in Guangdong(广东省企业(单位)二氧化碳排放信息报告指南) (2014).  356 Ibid. 357 Ibid. 358 Ibid. 81 	choose verifiers as long as it is on the DRC’s record list. 359 Verifiers are trained by the provincial DRC for free.360 4.3.5 Trading Mechanism Each regional pilot has designated one local exchange as the trading platform. Beijing, Shanghai and Tianjin established their carbon trading exchanges as early as 2008. Shenzhen Carbon Exchange was established in 2010. Exchanges in Guangdong, Hubei and Chongqing were inaugurated after the NDRC releases the Notice on Carrying out the Work of Carbon Emissions Trading Pilot Program in 2011. Exchanges provide trading platforms and standard trading models for carbon trading. Capped entities must register at the exchanges to participate in the allowance trading market. Upon completion of a deal, it is required to register transaction information on the trading platform interface. Shenzhen The trading of Shenzhen's carbon emission allowances takes place in the Shenzhen Emissions Exchange. Companies that have emitted more GHGs than their quota are qualified to attend the auction, bidding for permission to emit more GHGs. 361 But each company could only bid for no 																																																						359 People’s Government of Guangdong, supra note 283. 360 Ibid. 361 China Emissions Exchange, “Regulations of Spot Trading in Shenzhen Emissions Trading Exchange(深圳排放权交易所现货交易规则)”, (2014). 82 	more than 15 percent of the excess.362 The company needs to go to the secondary market to buy the remainder from other companies. 363 At the Shenzhen Emissions Exchange, the price of carbon emission allowances is determined through electronic bidding. 364 Enterprises willing to sell the carbon emission quota can list their offer after approved by the regulation council. Then electronic bulletins are posted for bidding if there are multiple potential buyers.365  One thing worth mentioning about Shenzhen pilot is that besides institutional traders, individuals can also trade carbon emission allowances. Moreover, foreign investors are allowed to participate in the trading.366 Guangdong The exchange of the Guangdong pilot is located in Guangzhou city, named China Emissions Exchange.  Trading participants use the online system to process online biddings, register trading accounts, and log trading information.367 In Guangdong pilot, trading involves investment institutions, 																																																						362 Ibid. 363 Ibid. 364 Ibid. 365 Ibid. 366 “The First Transboundary Buy-Back Deal In Shenzhen, Mainland China(内地首单跨境碳资产回购落地深圳)”, (2016), online: Shenzhen Gov <http://www.sz.gov.cn/cn/xxgk/zwdt/201603/t20160324_3545686.htm>. 367 China Emissions Exchange, “Regulations of Carbon Emission Allowance Trading(广州碳排放权交易所(中心)碳排放配额交易规则)”, (2015). 83 	other organizations, and individuals.368 In March 2014, the pilot program allowed the first batch of non-regulated companies to invest in carbon emission quotas in the secondary market. Later in June 2014, the secondary market was opened to individual investors. 369  Companies and individuals are allowed to buy a maximum of 3 MtCO2e on the market.370  4.3.6 Price Containment Experiences with existing emissions trading schemes show that carbon price can be volatile.371 The most important price drivers include changes on the stock market and energy prices,372 the use of regulatory measures,373  large investors buying or selling large amount of allowances, economic growth (stagnation), technology development, 374  etc. When the price of carbon allowance is uncertain and volatile, covered entities may face difficulty determining their optimal response to the emissions trading policy. 375  Researchers have suggested potential cost-containment approaches as a solution to reduce risk and price volatility in emissions trading 																																																						368 Ibid. 369 Tingting Sun, “Guangdong Allows Individuals to Invest in Carbon”, Inf Times (6 June 2014). 370 Guangdong DRC, supra note 340. 371 Heiða Njóla Guðbrandsdóttir & Haraldur Óskar Haraldsson, “Predicting the Price of EU ETS Carbon Credits” (2011) 1 Syst Eng Procedia 481. 372 Benjamin Johannes Lutz, Uta Pigorsch & Waldemar Rotfuß, “Nonlinearity in Cap-And-Trade Systems: The EUA Price and Its Fundamentals” (2013) 40 Energy Econ 222. 373 Nicolas Koch et al, “Politics Matters: Regulatory Events as Catalysts for Price Formation Under Cap-and-Trade” (2016) 78 J Environ Econ Manage 121. 374 Harrison Fell & Richard D Morgenstern, “Alternative Approaches to Cost Containment in a Cap-and-Trade System” (2010) 47:2 Environ Resour Econ 275. 375 William Whitesell & Stacey Davis, Cost-Containment in Cap-and-Trade Systems: A Review of the Options (2008). 84 	markets. Cost-containment measures include price ceiling,376 allowance splits,377 safety valve,378 allowance expiration date,379 etc. Currently, many cap-and-trade programs permit allowance banking and borrowing, which can help equilibrate present value prices across different time periods and increase dynamic efficiency.380 The Shanghai and Tianjin pilot schemes allow participants to use surplus permits from past compliance periods to comply with emissions targets over the next compliance periods.381 The Shanghai pilot, for example, allows the emitters to carry over their surplus from the last three years and use one third of the surplus per year during the 2016-2018 period. 382 In addition, most of the exchanges in pilot regions have provisions that allow local governments to influence the supply of emission permits at times of great price volatility. The Guangdong and Shenzhen pilots both adopt the Allowance Reserve mechanism to adjust the total amount of 																																																						376 Price ceiling/floor ensures a maximum/minimum allowance price on carbon, thereby providing greater cost certainty to emitters.  Peter John Wood & Frank Jotzo, “Price Floors for Emissions Trading” (2011) 39:3 Energy Policy 1746. 377 Richard Newell, William Pizer & Jiangfeng Zhang, “Managing Permit Markets to Stabilize Prices” (2005) 31:2 Environ Resour Econ 133. 378 Safety valve is a price ceiling at which an additional unlimited supply of allowances can be purchased at a predetermined price in excess of the limit. Gilbert Metcalf, Cost Containment in Climate Change Policy: Alternative Approaches to Mitigating Price Volatility (Cambridge, MA, 2009). 379 William Pizer, Choosing Price or Quantity Controls for Greenhouse Gases, Resources for the Future (Washington, DC, 1999). 380 Banking allows companies to hold allowances and use them in subsequent compliance periods. Borrowing allows companies to use allowances from a future compliance period to meet obligations in a current period. Fell & Morgenstern, supra note 374. 381 Tianjin DRC, “Interim Regulations on Carbon Emissions Trading in Tianjin(天津市碳排放权交易管理暂行办法)”, (2013). 382 Shanghai DRC, “Notice on Issues Regarding Carrying over of Emission Allowance Surplus(关于本市碳排放交易试点阶段碳排放配额结转有关事项的通知)”, (2016), online: Shanghai Gov <http://www.shdrc.gov.cn/xxgk/cxxxgk/23507.htm>. 85 	allowances in the market. Shenzhen established a buyback mechanism that allows government buyback allowances to reduce the amount of allowances in the market. 383  Shenzhen  Two percent of total allocation in the Shenzhen pilot carbon market is kept as reserved allowances as a means to protect the market against high prices.384 In the event that regulators determine that prices are too high, they will release these allowances for sale at an established price. 385  These allowances can be used only for compliance and cannot be traded on the market. 386  Regulators can also buy a number of allowances back from the market if they determine prices are too low. The number of buyback allowances is restricted to 10 percent of the total allocation. Funds for buybacks would come from auction proceeds, fines and donations.387  Guangdong During the 2013-2014 compliance period, the overall cap for Guangdong pilot market is 338 MtCO2e. 38 MtCO2e of the allowances were removed by the government from the market and transferred to the allowance reserve.388 Part of the reserved allowances are prepared for the companies in the sectors of electricity, steel and iron, cement, and petroleum chemical that are prospected to reach the threshold of 20,000 tonnes of CO2 emissions in the 2014-2015 																																																						383 William Whitesell, Climate Policy Foundations: Science and Economics with Lessons from Monetary Regulation (2011). 384 Shenzhen Government, supra note 275. 385 Ibid. 386 Ibid. 387 Ibid. 388 Guangdong DRC, supra note 340. 86 	compliance period.389 The remaining reserved allowances can be purchased at specified prices if market prices are too high or the regulator speculates prices to be high in the future.390  4.3.7 Compliance Mechanism An entity that is required to participate in the cap-and-trade scheme is responsible for compliance under relevant laws and regulations. At the end of a compliance period, the covered entity measures and reports all of its emissions in the compliance period. Each covered entity must surrender allowances to cover the quantity of the GHGs it emitted in that period. The regulated entities that fail to comply with the obligations, or violate MRV rules or other regulations will be punished. The punishments include monetary penalties, forfeiting a certain quantity of allowances from the next compliance period, issuing criticisms on government websites and social media, suspension of all financial support from the Fiscal Department and of future funds applications.  Shenzhen In Shenzhen, a firm that fails to submit the allowances for excess emission must pay a noncompliance fee equivalent to three times the average market price of allowances over the prior six months or make up the deficit through forfeitures of allowances from the next compliance period.391  Covered companies that fail to comply will be reported to the fiscal 																																																						389 Ibid. 390 Ibid. 391 Shenzhen Government, supra note 275. 87 	department.392 All financial support from government will be canceled and future application for financial aid will be suspended for the next five years.393 For regulated companies or verification agencies that forge emission data, the regulator will order them to rectify within a specified time and pay a fine equals three times the average market price of allowances over the prior six months. 394  Companies and verification agencies that violate the rules of fair competition will be punished with a fine between 50,000 CNY and 100,000 CNY. 395 Guangdong In Guangdong, regulated companies that fail to turn in the required amount of carbon emission allowances within a certain period of time are liable to forfeit allowances from the next year, with the amount double the difference between its carbon emissions and retired allowances.396 Also, a monetary penalty of up to 50,000 CNY will be imposed.397 Companies that fail to report GHG emissions as required, will be fined 10,000 to 30,000 CNY.398 Verification agencies that 																																																						392 Shenzhen Government, supra note 275. 393 Ibid. 394 Shenzhen DRC, “Guidance on the Discretion of Administrative Sanction in the Interim Regulations on Carbon Emissions Trading in Shenzhen(《深圳市碳排放权交易管理暂行办法》行政处罚自由裁量权实施标准)”, (2015), online: Shenzhen Gov. 395 Ibid. 396 People’s Government of Guangdong, supra note 283. 397 Ibid. 398 Ibid. 88 	make fraud verification reports or leak the company’ trade secrets and confidential information to the public will be fined 30,000 to 50,000 CNY.399 The following table summarizes the major features of the designs of Shenzhen and Guangdong pilots in 2014.  Shenzhen Guangdong Sector Scope Power, water utility, manufacturer, building Power, cement, iron and steel, petrochemical engineering Compliance Coverage Enterprises emitting above 3000 tCO2e; Public Buildings: above 20000 m2; Governmental Buildings: above 10000 m2.  Industrial companies emitting more than 10000 tCO2e per year; Hotels, restaurants, financial institutions, public organizations emitting more than 5000 tCO2e per year Reporting Coverage Enterprises emitting more than 1,000 but less than 3,000 tCO2e in any year Enterprises emitting more than 5,000 but less than 10,000 tCO2e  Allowance  Allocation Allocation for free, auction (no less than 3% of the cap). Power, water utility companies: benchmarking; Other companies: historic emissions combined with benchmarking; Buildings: allocate for free, based on function, areas, and energy consumption Allocation for free, auction (no less than 3% of the cap); Historic allocation, benchmarking  Price Containment Allowance reserve (2% of the cap), Allowance reserve (5% of the cap) 																																																						399 Ibid. 89 	 Shenzhen Guangdong government buy back Noncompliance Deduct the amount of outstanding allowance from the entities’ account or from the next year;Penalty of three times the market price for each tonnes of outstanding allowances Deduct twice the amount of the outstanding allowances from the entities’ account or from the next year; Penalty of 50,000 CNY   Table 3 Major Features of Shenzhen and Guangdong Emissions Trading Pilots in 2014400 Whilst regulators in each province and municipality have the flexibility to design their cap-and-trade pilot’s features according to local circumstances, the pilot trading schemes look different from each other. In general, the differences in economic structure and emission intensity among pilot regions attribute to the variation. Despite that all seven pilot systems cover the power sector, there is variation in the inclusion of different sectors. Shanghai, for example, was the only pilot to include transport emissions covering civil flights, airports, ports and railways from the very beginning. 401  Hubei is the only pilot scheme to base its coverage entirely on energy consumption.402 Compared with other pilot schemes, Shenzhen pilot covers the largest scope of sectors and companies and treats the public buildings as a separate and independent sector. The emission threshold for eligibility ranges across the pilot schemes from 3,000 tCO2e per year in 																																																						400 Shenzhen Government, supra note 275. People’s Government of Guangdong, supra note 283. 401 Shanghai DRC, Carbon Emission Allowances Allocation and Management Plan for Shanghai City in 2013-2015 (上海市 2013-2015 年碳排放配额分配和管理方案) (2013). 402 The Hubei cap-and-trade pilot required participation from all firms in the province that consume over 60,000 tonnes of standard coal equivalent and reporting obligations for firms that consume over 8,000 tonnes of standard coal equivalent. Hubei DRC, "Allowance Allocation Plan in 2015(湖北省 2015 年碳排放权配额分配方案)", (2015). 90 	Shenzhen to 60,000 metric tonnes of coal equivalent (tce) in Hubei. 403  The reason for the variation lies primarily in the discrepancies in economic development level and industry structure of each pilot city and province. For example, Shenzhen is at the late stage of industrialization and urbanization, where high-tech industries, advanced manufacturing industries and high-end services have become the mainstay of its modern industrial system. Therefore, the threshold in Shenzhen pilot must be lowered to increase the market scale. Hubei province is the least economically developed among the seven pilot regions. Its economy heavily relies on secondary industry and coal consumption. 404 Hubei is also the only pilot region whose coal consumption contributes to more than 70% of its primary energy consumption.405 Therefore, the Hubei pilot scheme bases its coverage solely on energy consumption calculated in the unit of tonnes of standard coal equivalent.406 Given the differences in design elements and local circumstances among the seven cap-and-trade pilots, the outcomes (in terms of trading volume and value) of the seven pilots also varied. In an effort to improve market liquidity, Hubei pilot market is one of the first to encourage involvement by institution and individual investors in the emissions trading scheme, the first to allow carbon financial product, and the first to introduce forward contracts for carbon allowances.407 Through employing these innovative measures, Hubei pilot has become the most active carbon market in terms of trading volume and value, accounting for 52% of the combined 																																																						403 Zhongxiang Zhang, “Carbon Emissions Trading in China: the Evolution from Pilots to a Nationwide Scheme” (2015) 15:sup1 Clim Policy S104. 404 Shaozhou Qi, Banban Wang & Jihong Zhang, “Policy Design of the Hubei ETS Pilot in China” (2014) 75 Energy Policy 31. 405 Ibid. 406 Hubei DRC, Supra note 401. 407 Rahul Rana & Fen Li, “Hubei Announces Plans to Launch Forward Contracts for carbon”, (2016), online: China Carbon <http://chinacarbon.net.cn/hubei-announces-plans-launch-forward-contracts-carbon/>. 91 	trading volume and 43% of the aggregate trading value of the seven pilot carbon markets, with 27.49 MtCO2e traded at a total value of 650 million CNY.408 In 2015, the CCER was accepted by the cap-and-trade pilot schemes as the primary offset mechanism for compliance. Each pilot established the basic framework for using CCER credits as offset. Rules and restrictions vary on the eligibility criteria of CCER projects regarding project types and location. In terms of project type, Guangdong, Shenzhen, Beijing, Tianjin and Chongqing pilots do not allow the use of CCERs from hydropower projects. 409 Hubei pilot only accepts small hydropower projects.410 In Shanghai, both large and small hydropower projects are eligible.411 In terms of project location, all pilots except for Chongqing and Shanghai impose restrictions on location. 412  For example, Shenzhen allows covered entities to use CCERs generated from renewable energy projects, only if they originate from any of the following cities and provinces: Meizhou, Heyuan, Zhanjiang, and Shanwei (located within Guangdong), Xinjiang, Xizang, Qinghai, Ningxia, Inner Mongolia, Gansu, Shanxi, Anhui, Jiangxi, Hunan, Sichuan, Guizhou, Guangxi, Yunnan, Fujian, and Hainan.413 As a result of the lenient rules 																																																						408 Hubei Provincial People’s Government, “Briefing of the Hubei Environmental Protection Bureau, Issue 50”(湖北省环境保护厅简报第 50 期), (2016), online: Hubei Provincial People’s Government <http://report.hbepb.gov.cn:8080/pub/root8/auto582/201608/t20160824_97325.html>.  409 Partnership for Market Readiness, China Carbon Market Monitor 2015 (2015). 410 Hubei DRC, “Notice on Relevant Issues Regarding Carbon Trading Offset Mechanism in Hubei Province in 2015 (省发展改革委关于 2015 年湖北省碳排放权抵消机制有关事项的通知)”,(2015), online: Hubei DRC <http://www.hbfgw.gov.cn/ywcs/qhc/tztgqhc/gwqhc/201504/t20150416_86147.shtml>. 411 Partnership for Market Readiness, supra note 409. 412 Ibid. 413 Shenzhen DRC, Interim Regulations on CCER Offset in Shenzhen Carbon Market (深圳市碳排放权交易市场抵消信用管理规定(暂行)),(2015). 92 	regarding CCER eligibility, Shanghai pilot has the largest CCER trading volume among the pilot markets.414 4.4 A Preliminary Assessment of the Regulatory Scheme China’s national cap-and-trade program started with the launching of seven regional pilot cap-and-trade systems in its 12th Five-Year Plan (covering the period from 2011 to 2015).  Shenzhen became the first to launch its pilot program in 2013.415 Shanghai, Beijing, Guangdong and Tianjin followed Shenzhen later the same year. Hubei and Chongqing launched their respective pilot markets in 2014. By July 2015, more than 25 million tonnes of carbon dioxide were traded in the seven pilot markets, worth 830 million CNY.416  4.4.1 Incentive Mechanisms Promote Compliance To encourage companies to fulfill their obligations, regulators of each pilot scheme have established incentive mechanisms. Besides publicizing the compliance status of companies to create social pressure for compliance, the Guangdong DRC, for example, has set up credit records for regulated companies and verification agencies. The Guangdong DRC, together with the People's Bank of China (PBC) Guangzhou Branch, initiated an information sharing mechanism.417 A company’s non-compliance history will be put on the record of the Credit Reference System of the PBC. As an important incentive mechanism, companies who fulfill their 																																																						414 Partnership for Market Readiness, supra note 409. 415 Shaogang Lu, “Shenzhen Pilots the First Carbon Trading Exchange in China, Trading Starts Today(深圳试点中国首个碳排放权交易所,今正式上线交易)”, People’s Dly (18 June 2013). 416 Zhiqiang Yan, “Development of a National Carbon Emissions Market Accelerates(全国碳排放权交易市场建设加快)”, China Energy(中国能源报) (26 August 2015). 417 Junjie Zhang, “Guangdong Carbon Trading Seeks Innovation(广东碳排放权交易模式谋求创新)”, South Metrop Dly (11 December 2014). 93 	responsibilities under the cap-and-trade system will be given priority when applying for national/provincial funding for low-carbon renovation, energy conservation and emission reductions.418 Shenzhen, Beijing, Shanghai, Guangdong and Tianjin, which opened their cap-and-trade pilot markets in 2013, have completed two compliance periods. By June 2014, of the 635 enterprises covered by the Shenzhen pilot scheme, 631 companies fulfilled their commitments for the 2013-2014 period. In 2015, the compliance rate increased from 99.37% to 99.69% (634 out of 636 covered companies). 419  Shanghai achieved a compliance rate of 100% in two consecutive compliance periods. In 2013-2014, Guangdong achieved compliance rates of 98.9% measured against number of entities or 99.97% measured against allowances.420 In 2014-2015 compliance period, all 184 companies in Guangdong fulfilled their commitments. 421  The Beijing pilot program covered 415 companies in the 2013-2014 period. With 12 companies failing to meet their emission caps, Beijing achieved a compliance rate of 97.1%.422 In the 2014-2015 period, the coverage of Beijing pilot expanded (543 companies). Beijing extended the compliance deadlines for 10 days and the results turned out to be satisfactory—100% of the companies fulfilled their commitments.423 Tianjin, with 4 out of 114 enterprises failing to comply with their 																																																						418 Qingyu Xie, “100% of Covered Companies in Guangdong Fulfilled Their Commitments (粤控排企业年度碳履约率 100%)”, South Dly (10 July 2015). 419 Hairong Wang, “634 Regulated Companies Fulfilled Their Commitments(634 家碳交易管控单位成功履约)”, Shenzhen Econ Dly (2 July 2015). 420 Qingyu Xie & Ruoran Chen, “Compliance Rate of Guangdong Pilot Reaches 98.9%(粤 98.9%控排企业完成碳履约)”, South Dly (18 July 2014). 421 Ibid. 422 Yong He, “Beijing Carbon Market Launched for One Year, 97.1% of the Key Emitters Fulfilled Their Commitments(北京碳交易开市 1 年 重点排放单位 97.1%履约)”, People’s Dly (14 December 2014). 423 Yan Lin, “All of the 543 Carbon Emitting Companies Fulfilled Their Commitments On Time(543 家碳排放企业均按期履约)”, Beijing Youth Dly (2 July 2015). 94 	emissions caps, achieved a compliance rate of 96.5% in 2013-2014.424 Compliance rate for 2014-2015 is 99.1% (111 out of 112).425 On April 2 2014, Hubei was the sixth pilot cap-and-trade market in China to start trading. The system covers 138 of the most carbon-intensive companies in the province. By July 2015, 100% covered companies surrendered adequate allowances to cover their emissions.426 In Chongqing, after the compliance period being extended for a month, compliance rate reached 70%.427 4.4.2 Fostered and Inhibited Participation Approaching the end of the first compliance period, the 1900 companies covered by Shenzhen, Shanghai, Beijing, Guangdong, Tianjin, Hubei and Chongqing pilot schemes presented various responses to the nascent markets. 428  Much of the divergence stems from discrepancy in knowledge and capacity.  4.4.2.1 State-Owned Companies are Highly Involved China's large state-owned enterprises (SOEs) have taken the lead in the nascent domestic carbon trading. SOEs or government-owned corporations are the major sources of GHG emissions in China, as most of them are engaged in the production of cement, iron and steel, power 																																																						424 Tianjin DRC, “Tianjin DRC on Compliance of Covered Companies in Tianjin Carbon Trading Pilot in 2013(市发展改革委关于天津市碳排放权交易试点纳入企业 2013 年度碳排放履约情况的公告)”, (2014), online: Tianjin DRC <http://www.tjdpc.gov.cn/zwgk/zcfg/wnwj/ny/201406/t20140605_51471.shtml>. 425 Tianjin DRC, “Tianjin DRC on Compliance of Covered Companies in Tianjin Carbon Trading Pilot in 2014(市发展改革委关于天津市碳排放权交易试点纳入企业 2014 年度碳排放履约情况的公告)”, (2015), online: MEP <http://www.mep.gov.cn/gzfw_13107/zcfg/hjjzc/gjfbdjjzc/pwqjyzc/201606/t20160623_355873.shtml>. 426 Hubei Provincial People‘s Government, “First Compliance Year of Pilot Carbon Trading Finished Well(碳交易试点首年度履约圆满收官)”, (2015), online: Hubei Prov People‘s Gov <http://www.hubei.gov.cn/gzhd/gzhd/201508/t20150826_709551.shtml>. 427 Dong Zhao, “Chongqing Carbon Market Compliance Period Extended for A Month, Compliance Rate Reached 70% (重庆碳市履约延后一个月 履约率已达 70%)”, 21st Century Bus Her (13 July 2015). 428 Zhiqiang Yan, supra note 416. 95 	generation, machine manufacturing, petroleum chemicals, etc.429 The success of GHG mitigation in China relies on tasking these companies to proceed with mitigation-relevant policy implementation. In Guangdong, large electricity companies (which are all government-owned), together with institutional investors, are the major participants of the Guangdong pilot cap-and-trade program.430 By August 2015, the electric sector creates trading volume of around 2.45 MtCO2e, constituted 31.7% of the total market trading volume.431 Before the cap-and-trade pilot programs coming into vision, SOEs in China have been taking actions as response to the government’s call to conserve energy and reduce emissions. Measures include improving energy efficiency, adopting new technologies, substituting a part of their fuel consumption with solar, wind, biomass or other renewable energy sources, centralizing production under large units instead of small-scale local production (in coal-fired power industry, steel industry) and relocation (e.g. steel production).432  Most of the SOEs that engage in high energy-consumption intensity sectors have actively participated in CDM projects. When it comes to application for approval of the Chinese Certified Emissions Reductions (CCERs) to offset their emissions, the SOEs get preferential treatment because they apply directly to the central government for eligibility while private firms face a time-consuming process to get approval from regional authorities before they can turn to Beijing.433 These large government-owned companies usually 																																																						429 Christopher Marquis, Jianjun Zhang & Yanhua Zhou, “Regulatory Uncertainty and Corporate Responses to Environmental Protection in China” (2011) 54:1 Calif Manage Rev 39. 430 Fan Pu, “Guangdong Carbon Trading Shows a Growth Spurt; Institutional Investors and Electricity Sector are the Major Traders(广东碳市成交量‘井喷式’增长 机构投资者与电力行业为交易主力)”, 21st Century Bus Her (8 September 2015). 431 Ibid. 432 Henrik Bergsager & Anna Korppoo, China’s State-Owned Enterprises as Climate Policy Actors The Power and Steel Sectors (Copenhagen, 2013). 433 Stian Reklev & Kathy Chen, “China’s State Utilities Move on Preferential Rules in Carbon Offset Market”, Reuters (8 January 2014). 96 	have developed in-house compliance monitoring expertise or relationships with contracted expertise. Moreover, through participating in CDM, they have engaged actively with government regulatory bodies, industry associations, and research institutes.  Sinopec and Wuhan Iron and Steel Corporation are two representatives. Sinopec issued the Sinopec’s Rules for Carbon Assets Management in 2014. The document designates the company’s Energy Management and Environment Protection Department (EMEP Department) as the department in charge of carbon assets management and set rules for collaboration among departments.434 The EMEP Department’s responsibility includes supervising the reporting and verification, supervising the CDM and CCER projects, managing the “Sinopec National Registry”, and accounting the company’s carbon assets. 435  Wuhan Iron and Steel Corporation (Wuhan Steel) in Hubei province have established a special team in the company to coordinate carbon assets management. The Safety and Environmental Protection Department and the Energy Division of the Production Department are responsible for supervising mitigation work and allowance allocation within the company.436 The Wuhan Steel 																																																						434 Sinopec, Rules for Carbon Assets Management(Trial) (中国石化试行碳资产管理办法) (2014). 435 Ibid. 436 Qing Zhang, “Carbon Management Patterns of the 1700 Regulated Companies: Large SOEs and Foreign Companies are Responsive(1700 家控排企业碳管理图谱:大国企外企反应积极)”, 21st Century Bus Her (27 May 2014). 97 	even started an investment company to take charge of the emission allowances management.437 The Wuhan Steel also invested in the Hubei Emission Exchange, having 20% of its shares.438 4.4.2.2 Small and Medium Companies Lack Expertise and Resources Carbon trading requires highly specialized expertise. Companies that participate in cap-and-trade need trained personnel who understand the principles and rules of carbon trading, and are familiar with the process and operation. Carbon trading is a new and unfamiliar territory for most of the Chinese private companies. Participating in carbon trading poses big challenge for them. In practice, some companies designate only one person to take charge of all relevant issues and he/she may be a person of any background.439 For these personnel (employees), carbon trading related issues are extra burden to their normal daily duties. They lack the motivation because their performance on this extra duty has nothing to do with promotion or salary.440   “We are hoping that government focus less on collecting money,” said a representative form a regulated company in Guangdong, “but provide more support to the companies with emission reduction technology and equipment.”441 Chen Yijun, deputy director of the Guangdong DRC Climate Change Department, addressed the issue in an interview with 21st Century Herald. According to Chen, a special fund for energy and climate will be established soon by the 																																																						437 Ibid. 438 China Hubei Emission Exchange, “Capital Increase of the Hubei Emission Exchange Ltd.(湖北碳排放权交易中心有限公司 66.7%股权增资扩股)”, (2015), online: China Hubei Emiss Exch <http://www.hbets.cn/zxggXxpl/2344.htm>. 439 Qing Zhang, supra note 436. 440 Ibid. 441 China Emissions Exchange, “Guangdong Pilot Fulfilled its Obligation,Auction Rules Will Change(广东履约顺利完成 拍卖规则将改)”, (2014), online: China Emiss Exch <http://www.cnemission.com/article/jydt/scyj/201407/20140700000767.shtml>. 98 	provincial finance department; government revenues from allowance auctions will be used to support clean technology development.442 4.4.3 Inadequate Market Oversight Rules At current stage of China’s carbon markets, the Chinese authorities have not developed detailed enforceable rules that are needed to enable accurate monitoring and reporting. Title IV (“Acid Deposition Control”) of the 1990 Amendments to Clean Air Act in the US requires the largest emitters of SO2 to measure emissions through the use of Continuous Emissions Monitoring Systems (CEMS).443 To enable accurate monitoring and reporting, Title IV provides detailed rules and a wide variety of quality assurance and quality control requirements.444 For example, strict requirements are set forth for testing the accuracy of the CEMS. 445  After installing the CEMS, the facility is required to conduct certification tests and submit a certification application, including the test results.446  Once certified, the regulated source is required to perform quality assurance testing on a regular basis using either in-house or contracted expertise.447 Current MRV rules of the pilot emission trading schemes in China require that companies “check and evaluate data accuracy on a regular base” and “seek opportunities to improve the quality of 																																																						442 Ibid. 443 US EPA, OAR & OAP, Title IV of the Clean Air Act – Acid Deposition Control. 444 John Schakenbach, Robert Vollaro & Reynaldo Forte, “Fundamentals of successful monitoring, reporting, and verification under a cap-and-trade program.” (2006) 56:11 J Air Waste Manag Assoc 1576 at 1579. 445 McAllister, supra note 344. 446 Arnold W Jr Reitze & Steven D Schell, “Self-Monitoring and Self-Reporting of Routine Air Pollution Releases” (1999) 24:63 Colum J Envtl L. 447 Schakenbach, Vollaro & Forte, supra note 444 at 1583. 99 	data.” 448 But the rules do not authorize any form of inspection from the local authorities to verify the accuracy of the reported data.   In addition, rules regulating business conduct of financial institutions and carbon trading facilities are lacking. In a cap-and-trade system, investment banks, commercial banks, insurance companies and other financial institutions can engage in the trading directly, serve as providers of funding or technical consultations, or act as trading intermediaries to increase market liquidities. Carbon market designers in China have initially prohibited futures contracts from being used in carbon trading, worrying that speculators will create turmoil in the country's fragile financial sector.449 But later, there is a sign that the use of financial instruments in the Chinese carbon markets is going to be liberalized. May 2014, China launched its first carbon-tied financial product—a debt note issued by CGN Wind Energy Limited (a subsidiary of China General Nuclear Power Group). 450  The debt note’s future value would be decided by a combination of a fixed rate and the floating price of offsets from the five wind projects operated by CGN Wind Limited, as traded on the Shenzhen Emissions Exchange.451  So far, Hubei, Shenzhen, Shanghai and Beijing pilots have introduced carbon financial instruments, including carbon funds, emissions allowance pledge loans, green structured deposits, emissions allowance trusteeship, CCER pledge loans, etc.452 Banks and brokers see a market potential for carbon 																																																						448 See for example, Shenzhen Market Supervision Administration, supra note 301. Art. 5.3(c). 449 Coco Liu, “China’s Ambitious Cap-and-Trade Plan Rolls Down A Long, Bumpy Runway”, (2014), online: Environ Energy Publ <http://www.eenews.net/special_reports/global_climate_debate/stories/1060000102>. 450 Xiaohong Zheng,“First Carbon-Linked Debt Note Issued by CGN Wind Limited (国内首单‘碳债券’由中广核风电发行)”, (2014), online: China News <http://www.chinanews.com/ny/2014/05-12/6161839.shtml>. 451 Ibid. 452 In Hubei, the first carbon fund was registered, and financial institutions were authorized to engage in emissions allowance pledge loans. In Shenzhen, innovative green structured deposits linked to allowances were launched, and 100 	financing.453 However, securities regulators do not view carbon-financing products as falling under the scope of “financing product” and tend not to assume direct responsibility for regulating carbon markets. 454  Currently, there are no specific provisions regulating financial market activities associated with the cap-and-trade systems. General standards are lacking for market regulation including specific requirements regarding what instruments may trade, where trading should take place, and who may participate in the marketplace. There are also no specific rules on prohibition against price manipulation and fraud.  4.4.4 Inadequate Allowance Allocation Methods Principles of allowance allocation in most of the pilot cap-and-trade schemes comprise grandfathering based on historical emissions, complemented by auctioning a small part of the permits.455 Implementing grandfathering posed problems for regulating China’s pilot markets. First of all, the grandfathering approach relies predominantly upon historical emissions, but before China adopts the cap-and-trade program, reliable business information and emissions data are just not available.456 Second, free allocation based on grandfathering creates unfairness. By allocating allowances merely based on emissions in one or more base years, inefficient industries will be allocated a larger number of emissions permits than comparable firms that already made an effort to bring down their emissions per unit of output. Whereas the companies that took early 																																																																																																																																																																														allowance trusteeship was authorized. In Shanghai, the first CCER pledge loan was introduced. Partnership for Market Readiness, supra note 409. 453 Kathy Chen, Stian Reklev & Clarence Fernandez, “China to Launch First Carbon-Linked Financial Product On Thursday”, Reuters (6 May 2014). 454 Martin Adams, Trials and Tribulations: China Experiments with Carbon Trading (Hong Kong, 2013). 455 Heleen Groenenberg & Kornelis Blok, “Benchmark-Based Emission Allocation in A Cap-and-Trade System” (2002) 2:1 Clim Policy 105. 456 Ling Xiong et al, “Assessment of Allowance Mechanism in China’s Carbon Trading Pilots” (2015) 75 Energy Procedia 2510. 101 	action in emissions reduction are granted relatively less allowances.  The benchmarking approach, on the other hand, rewards highly efficient installations and incentivizes less efficient installations to reduce emissions. Under the benchmarking mechanism, the total amount of free allocation each entity should receive is determined by product-related GHG emission benchmarks. Companies that are highly efficient should receive all or almost all of the allowances they need to comply with mitigation obligations. Inefficient installations have to make a greater effort to cover their emissions with allowances, either by reducing emissions or by purchasing more allowances. Given the merits of the benchmarking approach, China’s cap-and-trade pilots need to extend the scope of using benchmarking to allocate allowances. Currently benchmarking measures are adopted for allowances allocation but in a limited scale and for very few sectors. 457  From phase 3 onwards, a benchmarking approach is used for the free allocation of allowances under the EU ETS.458 The benchmark value is set at the level of the 10% most efficient facilities in the EU. 459  Using benchmarking will require extra effort for the Chinese regulators in collecting detailed information on products and technologies. For example, defining the bounds of the industry sector is typically needed as all installations within a sector receives the same allocation of allowances per unit activity. 460 Additional monitoring and enforcement issues also arise if the Chinese regulator wants to implement efficient benchmarking regulation. For 																																																						457 Ibid. 458 European Commission, EU ETS Handbook, at 40. 459 Ibid. 460 Joschka Gerigk, Ian A MacKenzie & Markus Ohndorf, “A Model of Benchmarking Regulation: Revisiting the Efficiency of Environmental Standards” (2015) 62:1 Environ Resour Econ 59. 102 	example, the regulator should be able to measure the difference between emissions from production under a baseline scenario and a scenario in which a firm takes measures to abate its pollution. 461  																																																						461 Ibid. 103 	Chapter 5  Potential Obstacles of Effective Governance of China’s Cap-and-Trade Market Since China launched its cap-and-trade pilot program, the regional pilots have been making progress with adapting emissions trading to their local context. Myriad of considerations arose during the process of establishing and implementing a cap-and-trade scheme for the first time. In order for the cap-and-trade system to function properly and to achieve the goal of reducing GHG emissions at the least possible cost to the economy, regulatory mechanisms must be developed to ensure an effective market for trading allowances.462 In the lead-up to the commencement of the nationwide cap-and-trade scheme, policymaking around the regulatory dimension will have to overcome several obstacles. This chapter discusses these obstacles, including the weak information mechanism, the challenges with integrating the cap-and-trade regulatory scheme with existing environmental, economic regulatory arrangements, challenges with inter-agency collaboration, challenges with scheme linking and coverage expansion, and the lack of transparency in decision making. 5.1 Weak Information Mechanisms Information disclosure from companies, regarding the amount each company historically emits, presently emits, and offsets, is critical for proper functioning of an efficient cap-and-trade 																																																						462 Pew Center on Global Climate Change, Carbon Market Design & Oversight: a short overview (2010). 104 	market. 463  It is the complete, consistent, accurate and transparent monitoring, reporting and verification system that creates trust in emissions trading. 464  5.1.1 Shortage of Third-Party Verifiers The enforcement of a cap-and-trade program requires that the regulators know the mass emissions of all capped entities, for the data is essential to determining each regulated entity's compliance. 465  Under China’s cap-and-trade program, it is required that covered entities report GHG emissions on an annual basis. 466 It is the responsibility of the regulated entities to ensure the accuracy of their emissions data.467 Currently, the credibility of emissions data disclosure in China’s cap-and-trade pilots has relied extensively on third-party verification.468 It is required that regulated entities contract with a private verification institution/verifier that is responsible for reviewing the entity’s GHG emissions report and submitting to the government a verification report indicating whether the report is accurate and in compliance with the law. 469  After receiving the reports, the DRC will randomly select the reporter’s verification for review.470  																																																						463 Schakenbach, Vollaro & Forte, supra note 444 at 1582. 464 Pérez Henríquez, supra note 38. 465 S Benkovic & J Kruger, “To Trade or Not To Trade? Criteria for Applying Cap and Trade” (2001) 1 Sci World J 953. 466 NDRC Climate Department, Notice on Starting the Work of Launching the National Carbon Emissions Market(关于切实做好全国碳排放权交易市场启动重点工作的通知) (2016). 467 Article 30, Shenzhen Government, supra note 275. 468 People’s Government of Beijing, Interim Regulations on Carbon Emissions Trading in Beijing(北京市碳排放权交易管理办法(试行)), (2014).  Shenzhen Government, Interim Regulations on Carbon Emissions Trading in Shenzhen(深圳市碳排放权交易管理暂行办法), (2014). People’s Government of Guangdong, Interim Regulations on Carbon Emissions Trading in Guangdong Province(广东省碳排放管理试行办法), (2014). 469 See for example, Guangdong DRC, Regulations on Verification of GHG Emissions for Companies in Guangdong(广东省企业碳排放核查规范) (2014).  470 Ibid. 105 	Currently, third-party verification institutions are accredited by provincial/municipal DRCs. 471 Covered entities are allowed to shop around for verification service from the pool of accredited verifiers. 472  The DRC defines the criteria by which a third-party verifier or a verification body is to be approved. 473 It is usually required that verification agencies have prior experience with GHG inventory. 474  For verifiers in Shenzhen, minimum qualifications call for a Bachelor's degree and four-year work experience.475 To the extent that the regional pilots set forth and apply strict accreditation requirements, there are not enough qualified verifiers with the necessary level of expertise. 476 Verification service is in short supply. According to NDRC, the initial phase of the nationwide carbon trading scheme will cover approximately 10,000 companies; yet only 300 verification institutions have been approved by provinces/municipalities. 477  																																																						471 Beijing DRC, “2016 List of Emissions Verification Institutions(北京市 2016 年碳排放第三方核查机构名单)”, online: Beijing Gov <http://www.bjpc.gov.cn/zwxx/tztg/201601/P020160121325149112367.pdf>. Guangdong DRC, “The List of The First Batch of Recommended Emissions Verification Institutions (广东省公布首批碳排放核查机构推荐名单)”, (2014), online: China Emiss Exch <http://www.cnemission.com/article/news/ssdt/201409/20140900000799.shtml>. Shanghai DRC, The First Batch of Third Party Verification Institutions On Record(关于公布首批上海市碳排放核查第三方机构备案名单的通知) (2014). 472 See People’s Government of Beijing, supra note 468; People’s Government of Guangdong, supra note 283; Shenzhen Government, supra note 468. 473 See for example, Shenzhen Market and Quality Supervision Commission & Shenzhen DRC, “Interim Regulation for Carbon Emission Verification Agencies and Verifiers(深圳市碳排放权交易核查机构及核查员管理暂行办法)”, (2014). 474 Ibid. 475 Ibid. 476 Yuping Wei, “Carbon Emission Verification Market is Hot, Conflict of Interests Exists Among Verification Agencies(碳排放核查市场火热核查机构存在利益冲突)”, 21th Century Her (7 April 2016). 477 Ibid. 106 	5.1.2 Difficulty with Supervising Third-Party Verification The National Guideline for Third Party Verification of Emission Trading requires that verification activities should be independent, objective, impartial, and professional. 478  The objectives of the verification exercise are, by review of objective evidence, to confirm whether the GHG emissions as declared in a company’s GHG report are accurate and complete.479 The verification work involves: on-site inspection of emission facilities, review of the emission monitoring records, review of the data collecting procedure, interviews with corporate staff responsible for data collecting, data management and report content. 480 Similar to the third-party verification incorporated into China’s cap-and-trade regulatory framework, China’s Environmental Impact Assessment Act (EIA Act) requires a project developer/owner to submit an "EIA Report" to MEP or its local counterpart for review and approval before commencing construction of any project that may have environmental impact.481 Under the EIA Act, EIA is defined as a system for (1) analyzing, forecasting and assessing the potential impact on the environment after implementation of planning and construction projects, (2) establishing strategies and measures to prevent or alleviate adverse impacts on the environment, and (3) implementing follow-up reviews and monitoring.482 An “EIA Report” is to be prepared by an EIA agency certified by MEP.483 As of the end of 2012, China had 1163 																																																						478 NDRC, National Guideline for Third Party Verification of Emission Trading(全国碳排放权交易第三方核查参考指南). 479 Ibid. 480 Ibid. 481 Article 16, National Congress, Environmental Impact Assessment Act of People’s Republic of China (2003). 482 Environmental Impact Assessment Act of People’s Republic of China (2003) 483 Ibid. 107 	qualified EIA agencies in total. 484 China’s EIA system has procedures for accrediting the third-party EIA agencies and guidance for how EIA is to be performed. However, the system is corrupted with fraud assessment reports. 485  Mao Da, a researcher from Beijing Normal University, wrote a reporting letter (jubao xin) to the MEP in 2013, criticizing the Chinese Academy of Meteorological Sciences (CAMS) for fabricating “public opinion” in its EIA report regarding an incineration plant project in the city of Qinhuangdao (in Hebei Province). 486 CAMS is a comprehensive research institution attached to CMA and is a certified EIA Institution. In CAMS’s EIA report in 2009, an “A grade” was awarded to the incineration project. 487 CAMS claimed that 100 questionnaires were distributed among relevant villagers to collect public feedback on the project, and all those answered the survey questions were in favor of the project.488 Through on-site investigation, Mao found that some of the signatories to the “public participation” section were those of the deceased, while others were from fugitives. 489 Moreover, the minutes of two village councils meetings were also forged. 490 In January 2013, the MEP released a report after reviewing 501 certifies EIA Agencies across the country, finding that 88 of them have committed violation of EIA law and regulations. 491 54 certified agencies that were required to take corrective actions include Peking University, Nankai University and Chinese 																																																						484 MEP, Investigation Results on EIA Agencies (环境保护部通报环境影响评价机构执法检查情况) (2013), online: Government <http://www.gov.cn/gzdt/2013-01/28/content_2321338.htm>. 485 Caiyuan Mu & Jun Ma, “Forged EIA Reports are More Dreadful than Pollution(‘环评报告’造假比企业污染更可怕)”, China Dly (June 27 2014). 486 Liu Yang, “EIA Agencies Committed Fraud(环评机构竟这样造假)”, People’s Dly (29 January 2013). 487 Ibid. 488 Ibid. 489 Ibid. 490 Ibid. 491 MEP, On the Punishment of EIA Agencies with Problems(关于环境影响评价机构专项执法检查发现存在问题的评价机构处理意见的通报) (2012), online: MEP <http://www.mep.gov.cn/gkml/hbb/bgt/201301/t20130105_244661.htm>. 108 	Research Academy of Environmental Science. 492 Another MEP investigation in 2015 showed that, 422 out of 1100 EIA agencies breached EIA law and regulations. 493 The developers of a construction project have the incentives to have its proposed project approved. Similarly, incentives exist for entities covered by the cap-and-trade program to have their emissions undercounted, particularly when allowance prices are high. 494 When government places greater reliance on private auditors to enhance the achievement of regulatory objectives of the cap-and-trade system, there is the risk that the lack of adequately supervision of the third-party verifiers by the government and the public may turn third-party verification into a “mere formality.” Strong standards must be in place for the accreditation of private verifiers and their performance. Competent government authorities need to closely monitor whether verifiers and accreditors are following relevant rules. But at present, there seems not to be enough inspectors or resources to perform the basic task of detecting the violations. 495  What’s more, some verification institutions are engaged in carbon asset management and carbon trading. 496 To avoid conflict of interest, a “conflict of interest” assessment should be conducted when companies select a verification institution.  																																																						492 MEP, On the Punishment of EIA Agencies with Problems(关于环境影响评价机构专项执法检查发现存在问题的评价机构处理意见的通报) (2012), online: MEP <http://www.mep.gov.cn/gkml/hbb/bgt/201301/t20130105_244661.htm>. 493 Ibid. 494 McAllister, supra note 344. 495 Tao Li & Jingfeng Cheng, “Shanxi Launched Carbon Emission Verification for the First Time (陕西首次进行大规模碳排放核查)”, China Environ News (4 June 2016). 496 Yuping Wei, supra note 453. 109 	5.2 Conflicts between Cap-and-Trade and Other Policies China has been late in introducing economic dynamics and actors into its environmental governance system. 497 It was not until mid-1990s that the China’s environmental officials began to experiment with policy initiatives that were more oriented towards and made use of the economic dimension. 498  The Chinese government has primarily been using command-and-control policies to deal with conventional pollutants, such as policies providing how much pollution an individual source or plant was allowed to emit, or the requirement to install a specific technology. 499  To integrate the cap-and-trade regulatory scheme with existing environmental, economic regulatory arrangements poses a major challenge to the effective governance of China’s cap-and-trade market. 500 The most explicit attempt by the Chinese government to use market-based policy to advance environmental protection may be the effort to promote tradable permits to control SO2 emissions.501 In 2002, SEPA and the U.S.-based nonprofit group Environmental Defense Fund (EDF) initiated a joint project to tackle SO2 and acid rain problems in China. 502 Emissions trading experiments were initially carried out in four provinces (Shandong, Shanxi, Jiangsu and Henan), three cities (Shanghai, Tianjin and Liuzhou), and the nation’s largest power production 																																																						497 Elizabeth Economy, “Environmental Governance: the Emerging Economic Dimension” (2006) 15:2 Env Polit 171. 498 Ibid. 499 MEP, “Notice on Publishing the List of Desulfurization Projects in the 11th Five-Year-Plan and the Statement of Responsibility to Reduce SO2 for Huaneng Group and Other Electricity Companies (关于印发华能集团公司等电力企业现役燃煤机组‘十一五’重点烟气脱硫工程项目名单及二氧化硫总量削减目标责任书的通知)”, (2006), online: MEP <http://www.mep.gov.cn/gkml/zj/jh/200910/t20091022_173625.htm>. 500 Productivity Commission, supra note 111. 501 Economy, supra note 153. 502 SEPA 原国家环保总局下发《关于开展“推动中国二氧化硫排放总量控制及排放权交易政策实施的研究项目”示范工作的通知》 110 	companies—China Huaneng Group.503 At the same time, the SEPA initiated a Total Emissions Control (TEC) policy, in which the government annually set caps for the total SO2 emissions throughout the country and divide the target among the provinces, autonomous regions and municipalities. 504 As part of China’s 10th Five-Year Plan (2001-2005), the central government established a national target to cut SO2 emissions by 10 percent below 2000 levels.505 During the 2001-2005 period, the SO2 emissions increased by approximately 27.8% compared to the 2000 levels, and only 33.5% of total industrial SO2 emissions were removed. 506 In the subsequent 11th Five-Year Plan (2006-2010), the Chinese government set a mandatory goal of reducing SO2 emissions by 10% below 2005 levels. 507  Evaluation metrics and consequences in case of non-compliance for local governments were explicitly defined to assure the implementation of industrial desulfurization. 508  At the end of the period, SO2 emission was reduced by approximately 14.3% below 2005 levels and the goal of SO2 emissions control was accomplished.509 																																																						503 China Huaneng Group was added in 2002. MEP, “Notice on Publishing the List of Desulfurization Projects in the 11th Five-Year-Plan and the Statement of Responsibility to Reduce SO2 for Huaneng Group and Other Electricity Companies (关于印发华能集团公司等电力企业现役燃煤机组‘十一五’重点烟气脱硫工程项目名单及二氧化硫总量削减目标责任书的通知)”, (2006), online: MEP <http://www.mep.gov.cn/gkml/zj/jh/200910/t20091022_173625.htm>. 504 Jinnan Wang et al, “Controlling Sulfurdioxide in China: Will Emission Trading Work?” (2004) 46:5 Environ Sci Policy Sustain Dev 28. 505 The 10th Five-Year Plan, online: China <http://www.china.org.cn/english/features/38198.htm>. 506 NBS, China Statistical Yearbook 2004 (Beijing: China Statistics Press, 2004) 507 MEP & NDRC, Program of Prevention and Control of Acid Rain and SO2 in the 11th Five-Year-Plan(国家酸雨和二氧化硫污染防治“十一五”规划) (2008). 508 Ibid. 509 NBS, China Statistical Yearbook 2011 (Beijing: China Statistics Press, 2011). 111 	Although mitigation targets were achieved in the 11th Five-Year Plan, the SO2 emission trading experiment did not live up to its potential.510  The interactions among relevant policies had affected the effectiveness of the SO2 permits trading and increased the costs of implementing it. As part of the administrative and bureaucratic system, the permit trading systems were never fully market-based. 511 They mainly served the role of legitimizing pollution fines and, to some extent, encouraged upgrading of pollution control technology.512 The SO2 emission permit prices were largely modulated or instructed by local government officials. Often, the government dominates the entire transaction process, including negotiations on trading price, trading volume and terms of permit ownership. 513  The legacy of planned economy has created distortions to the SO2 emissions trading market, and the command-and-control policies also undermine the effect of market mechanism. During the 11th Five-Year Plan, in the SO2 emissions trading pilot regions, the government imposed an important policy to curb SO2 emissions—a technology mandate to install new fluidized gas desulphurization (FGD) equipment on 137GW of existing power generation units. 514  The installation of this FGD equipment is expected to generate a reduction of 5.4 million tons of SO2 																																																						510 The SO2 experiment was characterized by government-organized transactions, discretionary tradding arrangements, and thin markets. Julia Tao & Daphne Ngar-yin Mah, “Between market and state: dilemmas of environmental governance in China’s sulphur dioxide emission trading system” (2009) 27 Environ Plan C Gov Policy 175. 511 Bing Zhang et al, “The Indecisive Role of the Market in China’s SO2 and COD Emissions Trading” (2016) 25:5 Env Polit 875. 512 Han et al, supra note 60.  513 Julia Tao & Daphne Ngar-yin Mah, “Between market and state: dilemmas of environmental governance in China’s sulphur dioxide emission trading system” (2009) 27 Environ Plan C Gov Policy 175. 514 SDPC, Managing SO2 Generated by Coal-Fired Plants During the 11th Five-Year-Plan(现有燃煤电厂二氧化硫治理“十一五”规划) (2007). 112 	emissions.515 Henan province, for example, was required to equip all the thermal power plants larger than 125MW with the FGD devices by the end of 2010, till they would meet the pollutants control targets. 516  Otherwise the plants would be shut down. 517 With the proactive mandates, SO2 emission dropped rapidly. 518 As a result, emissions allowance became redundant, leading to the lack of demand on the SO2 trading market. 519  For example, Henan province started implementing SO2 emissions trading in 2004, but it was not until March 2010 that the first deal was closed in Luoyang city. 520 Implementing an effective cap-and-trade program in China to reduce GHG emissions would only be more complex than it was creating a system to reduce emissions of SO2 for the fact that the acid rain program covered just one sector (electric power plants, the principal source of SO2 emissions) but the cap-and-trade carbon markets cover electric power plants, transportation, industry, residential and commercial sectors, etc. Moreover, the government will need to implement parallel policies alongside a cap-and-trade regime to ensure development and deployment of the full range of clean technologies.521 Designers of the carbon trading regulatory 																																																						515 Ibid. 516 Henan Environmental Protection Bureau, Environmental Protection in Henan Province During the 11th Five-Year-Plan (河南省环境保护“十一五”规划) (2007). 517 Ibid. 518 Jingjing Zhou, “Zhou Shengxian: Additional Emissions Reduction will Be Achieved in the 11th Five-Year-Plan(周生贤:‘十一五’期间中国减排目标可超额实现)”, Xinhua (December 21 2010). 519 Chao Jiang, Liang Su & Fangfang Tang, The Study of China’s SO2 Emission Trading Mechanism(中国二氧化硫排污权交易机制研究) (Strategic Managment, 2011). 520 Ibid. 521 These policies may include “requiring utilities to generate a higher percentage of their electricity from renewable energy sources, requiring automakers to increase vehicle fuel economy standards, stronger energy efficiency policies, incentives for investments in low-carbon technologies, and policies encouraging smart growth.” Rachel Cleetus, We Need a Well-Designed Cap-and-Trade Program to Fight Global Warming (2009). 113 	mechanism should pay close attention to the policy collaboration with pre-existing and future regulatory frameworks. 5.3 Challenges with Interagency Collaboration According to Kenneth Lieberthal’s fragmented authoritarianism model, the system of governance in China may be authoritarian in that political elites at the very top of the hierarchy have considerable power, but this power is undermined by a highly fragmented bureaucracy in which multiple actors with diverse interests can constrain or distort the processes of policy making and implementation. 522 Although political, economic and social realities are vastly different from those of the 1980s, “fragmentation” and “authority” remain the defining features of China’s political set-up. 523 Bargaining takes place between bureaucracies and state agencies, and still plays an important role in decision making. 524 The Green GDP experiment in China in 2004-2007 provides lessons on how the contradictory objectives of regulatory agencies failed a national regulatory policy.525 In March 2004, then president Hu Jintao first endorsed the Green GDP idea in a speech about the need to foster a “Scientific Development Concept.”526 In line with the new development strategy, the SEPA proposed to develop a new accounting system that would measure China’s economic 																																																						522 Kenneth Lieberthal & Michel Oksenberg, Policy making in China : Leaders, Structures, and Processes (Princeton University Press, 1988). 523 Kjeld Erik Brosdgaard, ed, Chinese Politics as Fragmented Authoritarianism: Earthquakes, Energy and Environment (Routledge, 2016). 524 Ibid. 525 Elizabeth Economy, Green GDP: Accounting for the Environment in China (2007). 526 Ke Zhou & Ling Xu, Challenges and Opportunities of Green Economy in China(我国绿色经济面临的挑战与发展机遇) (2011). 114 	growth to account for the costs of pollution. The Green GDP accounting program was carried out in ten pilot regions in 2005, with the ambition of nationwide application.527 However, the Green GDP program collapsed in failure and the Green GDP accounting remained stagnant since 2006. Beneath the struggle of China’s Green GDP experiment, lie the complex institutional interactions and hierarchies that govern the enactment and enforcement of national environmental policies.528 The project is co-host by China’s State Environmental Protection Agency (SEPA) and National Bureau of Statistics (NBS). Any accounting results must be agreed upon by both departments before releasing to the public. However, the two parties had contradictory views over the calculation method and verification standards.529 In September 2006, SEPA and NBS jointly issued China's 2004 Green GDP Accounting Report.530 The report, which involved forty-one areas of investigation, revealed that pollution caused losses of 511.8 billion CNY in 2004, accounting for 3.05 percent of the GDP that year.531 This report received wide domestic media attention because the economic losses from pollution for each province were shocking. Almost as soon as the report came out, it was met with fierce opposition from local officials and skepticism from the NDRC and other agencies at the national level, questioning over calculation methodology, funding, etc. 532  While compilation of the 2005 report was underway, SEPA 																																																						527 Jason N Rauch & Ying F Chi, “The Plight of Green GDP in China” (2010):3 Cons J Sustain Dev 102. 528 Vic Li & Graeme Lang, “China’s ‘Green GDP’ Experiment and the Struggle for Ecological Modernisation” (2010) 40:1 J Contemp Asia 44. 529 NBS spokesman Zheng Jingping claimed that Green GDP was not necessarily the best way to ensure sustainable development because it wouldn't include all the necessary factors. Elizabeth Economy, supra note 525. 530 State Environmental Protection Agency & National Bureau of Statistics, A Study Report on China Environmental and Economic Accounting in 2004(中国绿色国民经济核算研究报告 2004), online: CAEP <http://www.caep.org.cn/english/paper/China-Environment-and-Economic-Accounting-Study-Report-2004.pdf>. 531 Ibid. 532 NDRC expressed explicit skepticism of the practicality of Green GDP by publishing the article “The Concept, Methodology and Practice of Green GDP”(绿色 GDP 的概念、方法和实践) in China Economic Trade Herald. “The Concept, Methodology and Practice of Green GDP” (绿色 GDP 的概念、方法和实践), 16 China Economic Trade Herald (2004). 115 	received several requests from provinces and regions for not releasing the Green Accounting data. It was said that the 2005 report would show even higher losses and reductions in GDP than the 2004 report. 533 Also, the report would include figures on economic losses from pollution of each province.534 NBS thought the report, especially the data regarding certain specific areas, should not be publicized but only be provided to the State Council for their reference. 535 However, SEPA believed the report should be published publicly as was the 2004 report. 536 The SEPA and NBS failed to reach a consensus. As a result, the release of the 2005 Report was indefinitely postponed.537 Implementing the cap-and-trade market embraces the interaction between complex regulatory arrangements and will inevitably be conducted as a collaborative, interagency process.  The piloting program is implemented by different agencies with roles of policy development, supplying information for participants, monitoring, enforcement, etc. Government ministries including the NDRC, Ministry of Finance, Ministry of Industry and Information Technology (MIIT), Ministry of Science and Technology, etc., have enacted their respective departmental regulations to oversight the carbon market. For example, the NDRC has developed MRV rules for 25 industries, and the MIIT is also working on its own GHG monitoring system for industrial companies. 538 In principle, the NDRC leads policy development related to carbon trading. But 																																																						533 Elizabeth Economy, supra note 525. 534 Ibid. 535 Li Ma, “Green GDP Comes to A Deadlock: Major Disagreements Exist between SEPA and NBS(绿色 GDP 搁浅:环保与统计部门存重大分歧)”, Beijing News (23 July 2007). 536 Ibid. 537 The MEP decided to relaunch Green GDP research in 2015. Jianrong Qie, “Green GDP Research Relaunched after 9 Years(绿色 GDP 研究 9 年后重启)”, Leg Dly (30 March 2015). 538 Ministry of Industry and Information Technology, Enhancing Energy Conservation and Emission Reduction in Small and Medium-Sized Enterprises(关于进一步加强中小企业节能减排工作的指导意见) (2010). 116 	no institution has been created to align these similar functions in different Ministries to increase efficiency. Therefore, regulatory departments and agencies will have to develop innovative tools and methods to cooperate among themselves, across all levels of government. 5.4 Challenges with Scheme Linking: From Regional Pilots to a Nationwide Market Linking occurs when an emissions trading market allows regulated entities to use carbon credits from another emissions trading system to meet its compliance obligations. 539 If the recognition of allowances from another jurisdiction is not reciprocated, a unilateral link is formed and trade may occur one way (e.g. the use of offsets from another trading program for compliance); If recognition of allowances is mutual, a bilateral link is formed and trade may occur two ways.540 A cap-and-trade market can link to other cap-and-trade markets or to an emission reduction credit system which provides carbon offset credits for certified GHG reductions.541 There are in theory a number of potential benefits of an integrated cap-and-trade market. First of all, an integrated market takes advantage of diverse marginal abatement costs of firms in the larger linked system and offers the opportunity to shift where emission reductions occur across systems. 542 Additionally, by enlarging the scope of the relevant market, linking improves market liquidity hence reduces price volatility. 543  																																																						539 Judson Jaffe & Robert Stavins, IETA Report on Linking GHG Emissions Trading Systems (2007). 540 Ibid. 541 Ibid. 542 Christian Flachsland, Robert Marschinski & Ottmar Edenhofer, “To Link or not to Link: Benefits and Disadvantages of Linking Cap-and-Trade Systems” (2009) 9:4 Clim Policy 358. 543 Matthew Ranson & Robert N Stavins, “Post-Durban Climate Policy Architecture Based on Linkage of Cap-and-Trade Systems” (2012):May Chic J Int Law 29. 117 	Scheme linking is happening around the world.544 Instead of looking to join a global cap-and-trade system, policymakers in North America now often talk about creating an international trading system from the bottom up by linking markets organized in different political jurisdictions.545 For instance, at the beginning of 2014, California and Quebec linked their GHG cap-and-trade programs, which meant that sources of GHGs in each jurisdiction could trade emission allowances issued under either program.546 The EU has also expressed a desire to establish, through linking, an OECD-wide carbon trading market by 2015 and to extend this to other developing country emitters by 2020.547  There are also precedents for integrating a pre-existing sub-national program into a national program. One example is the Ozone Transport Commission program in the U.S., which was developed by states in the northeast and later folded into the federal NOx State Implementation Plan (SIP) Call program.548 According to the roadmap, China’s cap-and-trade regional schemes will eventually expand to a nationwide system. Developing a nationwide cap-and-trade scheme in China involves a variety of regulatory issues associated with the linking. As China’s carbon trading regional pilots expanding to a nationwide system, there is a need for consistency in some of the key design 																																																						544 Ibid. 545 Betsill & Hoffmann, supra note 30. 546 California Air Resources Board & the Government of Québec,“California-Quebec Agreement to Integrate and Harmonize their Cap-and-Trade Programs”(2013). 547 European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Towards a comprehensive climate change agreement in Copenhagen, Provisional version, Brussels, COM(2009) 39/3. 548 Robert J Martineau & David P Novello, eds, The Clean Air Act Handbook, 2d ed (ABA Book Publishing) at 117. 118 	elements in the linked systems, particularly concerning target type (absolute or intensity target), cap stringency, MRV and allowance distribution. 549  Inter-regional trading likely will gain support only if they are with systems deemed to have equally effective monitoring and enforcement provisions to ensure that emissions are reported in each regional program with equivalent rigor and accuracy. The California Air Resources Board (CARB) , for example, sets out conditions for linking the Californian program to other trading schemes, providing that once an external ETS has been approved by the CARB, compliance instruments issued by other programs may be used to meet Californian requirements. 550 On December 14, 2015, the Ministry of Sustainable Development, the Environment and the Fight Against Climate Change in Quebec amended the Regulation Respecting Mandatory Reporting of Certain Emissions of Contaminants Into The Atmosphere (RRQ,cQ-2,r15), to ensure the harmonization and integration of Quebec’s cap-and-trade system for GHG emission allowances with California's system.551 The amendments provide rules to improve the methods for assessing missing data and ensure the accuracy of measured data. 552 A GHG reporting protocol for fuel distributors whose emissions from these fuels exceed 25,000 tCO2e is added.553 The amendments 																																																						549 Dallas Burtraw et al, Linking by Degrees: Incremental Alignment of Cap-and-Trade Markets (Washington DC, 2013). 550 Justin Caron, Sebastian Rausch & Niven Winchester, “Leakage from Sub-national Climate Policy: The Case of California’s Cap-and-Trade Program” (2015) 36:2 Energy J. 551 Québec Ministère du Développement durable, de l’Environnement et de la Lutte contre les changements climatiques, Regulation to amend the Regulation Respecting Mandatory Reporting of Certain Emissions of Contaminants into the Atmosphere (2015). 552 Ibid. 553 Ibid. 119 	also include making the total quantity of reference units concerning the emitter’s activities a required item in the verification report. 554 Although linkage improves aggregate welfare in the linked system, it can create individual winners and losers. Some companies in a linked system could be worse off than they are in separate systems. Linkage changes the distributional impacts of GHG policies on regulated companies and the consumers that they serve. 555 Whether a covered entity benefits or suffers from the linking depends on: (1) whether the entity is a net seller or net buyer of allowances,  (2) their marginal abatement costs, (3) how allowances are initially allocated (via grandfathering or auctioning), and (4) whether the entity is located in the higher or lower price system. 556 Beijing and Shenzhen have relatively small industrial emissions and a larger share of emissions from service industry, compared to more industrial areas like Hebei or Chongqing. Average carbon prices in Beijing and Shenzhen pilot are significantly higher than those in the other regional schemes. 557 After a link to the Hebei cap-and-trade system, net buyers in Shenzhen should benefit from the opportunity to buy allowances at the lower post-linkage price. On the contrary, net buyers in Hebei would have to pay a higher price after linking, making them worse off. Therefore, a careful evaluation of the economic impact of the linking can occur will be needed, so that the conflicts of different program designs can be anticipated and addressed.  																																																						554 Ibid. 555 Ranson & Stavins, supra note 453. 556 Ibid. 557 Cao Jing, China’s Carbon Pricing: Status and Prospect (2014). 120 	5.5 Challenges with Expanding the Coverage There are sound economic arguments for broad coverage in a GHG emissions trading system. 558 The more sources are covered in the program, there will be more opportunities and cost-effective choices for emissions reduction across the economy. 559 In addition, broader coverage is likely to address the “sectoral leakage” problem—i.e. carbon emissions are diverted to sectors that are not regulated by a cap-and-trade program. 560  5.5.1 Institutional Barriers to Fully Involve Power Sector As previously discussed, a broader program is more desirable than a narrower one. In practice, a majority of carbon trading schemes in the world regulate multiple economic sectors, although the specifics vary to fit the local context (in terms of emissions status, administrative feasibility, etc.).561 California’s cap-and-trade program, for example, had a “narrow” scope in 2013 and 2014 that covers the electricity and industrial sectors and then expanded in 2015 to include transportation and heating fuels. 562  China’s power sector accounts for the major part of China’s carbon emissions.563 Among the economic sectors in China, the power generation sector is the most frequently regulated under 																																																						558 Robert N Stavins, “Addressing Climate Change with A Comprehensive US Cap-and-Trade System” (2008) 24:2 Oxford Rev Econ Policy 298. 559 Betsill & Hoffmann, supra note 30. 560 If leakage occurs in a sector, lower-priced imports will replace domestic production, and therefore the carbon price will not be passed through the value chain. Karsten Neuhoff, Translating Model Results into Economic Policies (Berlin, 2009). 561 Only two venues (RGGI and Denmark) cover single sector. Betsill & Hoffmann, supra note 30. 562 California Air Resources Board, “Cap-and-Trade Regulation Instructional Guidance”, (2012), online: California Air Resources Board <https://www.arb.ca.gov/cc/capandtrade/guidance/chapter1.pdf>. 563 Jifeng Li, Quantification of the Impact of Electricity Price Control on the Efficiency of China’s Carbon Market (电价管制对我国碳市场运行效率的定量测算) (2015). 121 	current cap-and-trade pilot systems. However, to fully involve the power sector into China’s carbon market will need to overcome some institutional barriers.  Under the cap-and-trade framework, the regulated power generator need to obtain allowances sufficient to cover their emissions (through free allocation or auction). If the company ends up with more allowances than it needs to surrender at the end of the compliance year, it can sell the excess in the secondary market or carry on the allowances to the future if that is permitted by program rules. This mechanism provides the power generators with the incentives to look for cost-effective measures it can take to reduce its need for allowances. 564 These measures include technology innovation, switching to lower emissions sources of electricity, etc. In general, if the emission-reducing measures cost more, the utility will purchase the additional allowances needed.565 To reflect the cost of these emission reduction measures, the electricity price would rise, hence passing the costs on to electricity consumers.  In general, China’s power plants run at the discretion and direction of the government. The Chinese government has long seen the need to let the market set end-user electricity prices, and policy makers have carried out reforms to introduce competition in both wholesale and retail market to gradually allow prices to be more responsive to the market. 566 But the progress has 																																																						564 Hethie Parmesano & Theodore J Kury, “Implications of Carbon Cap-and-Trade for Electricity Rate Design, with Examples from Florida” (2010) 23:8 Electr J 27. 565 Ibid. 566 See for example, CCP Central Committee & State Council, CCP Central Committee and State Council on Deepening The Power Sector Reform(中共中央 国务院关于进一步深化电力体制改革的若干意见) (2015). The policy document called for more direct pricing negotiations between power companies and big electricity consumers such as factories, as well as opening local power-distribution markets to private players and others. It wasn’t clear whether or how the plan would affect households’ electricity costs. No timeline for enacting changes was given. 122 	been slow. 567 Both the wholesale and retail prices of electricity in China are still regulated; competition has only been partially introduced into the wholesale market. 568As a result, the electricity rates would not rise to reflect the full allowance value, thus passed-on costs would be constrained. 569  The impact of the carbon price on the demand side is neutralized because electricity consumers do not have as much of an incentive to reduce their electricity consumption.570  5.5.2 Participating in Cap-and-Trade is Demanding for Small Companies Under existing cap-and-trade systems, the scope of the regulation usually includes thresholds for coverage in the compliance program. For example, under the California Cap-and-Trade Program, any entity whose emissions exceed the 25,000 MtCO2e threshold during any year of a compliance period has a compliance obligation for that period and the next compliance period.571 The RGGI cap-and-trade system applies to CO2 emissions from electric power plants with capacities to generate 25 megawatts or greater. 572 As of 2012, China's registered small and medium-sized enterprises (SMEs) exceeded 4.3 million in number and contributed to 58.5 percent of GDP. 573 Implementing cap-and-trade market in 																																																						567 Fei Teng, Xin Wang & LV Zhiqiang, “Introducing the Emissions Trading System to China’s Electricity Sector: Challenges and Opportunities” (2014) 75 Energy Policy 39. 568 Ibid. 569 Jos Sijm, Yihsu Chen & Benjamin Hobbs, “The Impact of Power Market Structure on CO2 Cost Pass-Through To Electricity Prices Under Quantity Competition – A Theoretical Approach” (2012) 34:4 Energy Econ 1143. 570 Ibid. 571 California Air Resources Board, Reporting Guidance for Determining Rule Applicability (2013). 572 RGGI, “Regulated Sources”, online: Reg Greenh Gas Initiat <https://www.rggi.org/design/overview/regulated_sources>. 573 Ministry of Commerce, “Small and Medium-Size Enterprises”, (2012), online: Minist Commer <http://english.mofcom.gov.cn/aarticle/zm/201205/20120508136044.html>. 123 	China will eventually cover most of these SMEs.574 Currently, the small companies generally lack the capacity to comply with cap-and-trade obligations. 575 Besides the lack of expertise, the compliance costs may be too high for some small and medium-sized businesses. 576  From the perspective of the firms, participating in cap-and-trade involves implementation costs, including establishing internal/external administration for monitoring, reporting, and verification, quantifying emissions for the base period, familiarization with allocation rules, software and trading platforms.577 Empirical evidence proves that smaller participants pay disproportionately large transaction costs in relation to their pollution. 578  Transaction costs from monitoring, reporting, and verification of emissions are the most important costs of compliance, with a share that exceeds 70% of the total transaction costs under the EU ETS. 579 After the first compliance year, regulated companies under China’s cap-and-trade pilot program have to bear the cost for third-party verification by themselves. 580  Verification agencies charge enterprises 50,000 to 60,000 CNY for each verification report in Beijing. 581 Average costs for verification in other pilot regions ranges from 30,000 to 40,000 CNY. 582  																																																						574 Ministry of Industry and Information Technology, Enhancing Energy Conservation and Emission Reduction in Small and Medium-Sized Enterprises(关于进一步加强中小企业节能减排工作的指导意见) (2010). 575 Ibid. 576 Xiaowei Xuan, “Xuan Xiaowei on the Present and Future of China’s Emissions Trading Market (宣晓伟谈中国碳交易市场的现状和未来)”, (2012), online: Dev Res Cent State Counc Inf Netw <http://edu.drcnet.com.cn/DRCNET.Channel.Web/gylt/20120730/index.aspx>. 577 Jessica Coria & Jūratė Jaraitė, Carbon Pricing: Transaction Costs of Emissions Trading vs. Carbon Taxes (Göteborg, Sweden, 2015). 578 Ibid. 579 Peter Heindl, “Transaction Costs and Tradable Permits: Empirical Evidence from the EU Emissions Trading Scheme” (2012) SSRN Electron J. 580 Qing Zhang, “Enterprises in Beijing Speed up Carbon Emission Reporting, Verification Agencies Compete with Each Other(北京加快企业碳排放报送进度 核查机构展开竞争)”, 21th Century Her (10 January 2015). 581 Ibid. 582 Ibid. 124 	5.6 The Lack of Transparency in Decision-Making Transparency in policymaking improves market credibility and stimulates participation. 583 Regulators of China’s carbon market will need to strengthen their policies and legislation, improve the transparency and inclusiveness of their decision-making process.  5.6.1 The Lack of Transparency Weakens Policy Credibility  Predictability requires that laws, rules, policies do not suddenly change, and are applied fairly and consistently within the framework. 584 It requires certainty and stability of the processes and procedures by which rules and decisions are rendered. 585  It also requires that regulatory objectives, sector composition, or regulatory substance will not be suddenly changed and that decision making is regular, consistent and orderly in relation to a set of objectives and criteria. 586  In the context of governing a cap-and-trade market, policy credibility is of great, if not most, importance to influence the incentive of private companies. 587 Complying with cap-and-trade obligations is likely to require significant irreversible investment from the regulated companies. 588  Decision makers of the companies face a series of uncertainties, including commercial and technological uncertainty, as well as uncertainties regarding the future 																																																						583 Joseph E Stiglitz, “The Contributions of the Economics of Information to Twentieth Century Economics” (2000) 115:4 Q J Econ 1441. See in general, Ellen Vos & Michelle Everson, eds, Uncertain Risks Regulated (Routledge, 2009). John C Bertot, Paul T Jaeger & Justin M Grimes, “Using ICTS to Create a Culture of Transparency: E-Government and Social Media as Openness and Anti-Corruption Tools for Societies” (2010) 27:3 Gov Inf Q 264. 584 Darryl S L Jarvis & Benjamin K Sovacool, “Conceptualizing and Evaluating Best Practices in Electricity and Water Governance” (2011) 36 Energy 4340. 585 Ibid. 586 Ibid. 587 The NAPs defined the national total of permits and the mode of allocation. William Whitesell, Preventing Market Disruptions in Cap-and-Trade Programs (2008). 588 Robert Hahn, Robert Stavins & John F Kennedy, The Effect of Allowance Allocations on Cap-and-Trade System Performance (2010). 125 	stringency, timing, nature or durability of the cap-and-trade policy. Making proper investment choice is difficult if the policies could not ensure a certain degree of predictability. 589  In Phase I (2005-2007) of the EU ETS, the European Commission settled the overall cap and the allowances were allocated primarily through grandfathering.590  Towards the end of the first reconciliation period (April 2006)591, there was wide speculation that the market would generally be short of allowances.592 As a result, the market price of EUAs was quickly bid up. 593 When in April 2006 the information about the actual emissions in 2005 was released, the market participants began to realize that the overall emission cap for Phase I was not restrictive. 594 This caused a correction and the price of allowances dropped from 28 Euros to 15 Euros within a few days. 595 A lack of timely data about emissions contributed to the large price swings. 596  The lack of policy transparency contributed to the chaos of China’s Energy-Efficient Product Promotion Program (“Jieneng Chanpin Huimin Gongcheng”).597  To promote use of energy-efficient products, the Ministry of Finance and NDRC launched a project called Energy-Efficient Product Promotion Program (hereinafter “Promotion Program”) 																																																						589 Ibid. 590 Barbara Buchner, Carlo Carraro & A Denny Ellerman, Allocation in the European Emissions Trading Scheme: Rights, Rents and Fairness (Cambridge University Press, 2007). 591 April 2006 was the deadline for trading to comply with the first year of the EU ETS. The first reconciliation of emissions and allowances would take place at the end of April 2006. 592 Lutz, Pigorsch & Rotfuß, supra note 372. 593 Wilfried Rickels et al, The Determinants of Allowance Prices in the European Emissions Trading Scheme (Kiel, 2007). 594 Lutz, Pigorsch & Rotfuß, supra note 372. 595 Rickels et al, supra note 593. 596 William Whitesell, Preventing Market Disruptions in Cap-and-Trade Programs (2008). 597 Ministry of Finance & NDRC, “Notice on Launching the Energy-Efficient Products Promotion Program(关于开展‘节能产品惠民工程’的通知)”, (2009), online: Minist Financ <http://jjs.mof.gov.cn/zhengwuxinxi/zhengcefagui/201110/t20111027_602666.html>.  126 	in June 2009. 598 The Promotion Program mainly involved subsidies for manufactures of energy-efficient appliances, aiming at bringing down the market price of these products hereby encouraging consumers to buy more energy-efficient products. At the time, the State Council also mandated all local governments purchase “more energy-efficient products” including certified refrigerators, air conditioners, computers and televisions.599  The Promotion Program was initially planned to run from 2009 to 2012. According to official report, from June 2009 to May 2010, nearly 30 million high-efficiency air conditioners, over 1 million energy-efficient motor vehicles, and 160 million energy-saving light bulbs were put into use. 600  Market share of the energy-efficient air conditioners, refrigerators, heaters and TVs significantly increased.601  The State Council announced on May 16, 2012 that the program would be continued, and the scope of eligible products would be expanded. 602 It was also announced that 26.5 billion CNY (4.2 billion USD) would be allocated to subsidize the purchase of energy-efficient home appliances. 603 Before the State Council announced the continuation of the program, several subprojects had run through their respective lifespan. The unpredictable future of the projects caused volatile storage 																																																						598 Ibid. 599 Malcolm Moore, “China Considers Introducing Carbon Emission Targets”, Telegraph (April 20 2009). 600 See National Development and Reform Commission, “Full text: Report on China’s Economic, Social Development Plan (2011)”, (2011), online: Government <http://english.gov.cn/official/2011-03/17/content_1826561_4.htm>.  601 Department of Economic Construction, “Energy-Efficient Promotion Program Made Remarkable Achievement(‘节能产品惠民工程’取得显著成效)”, online: Minist Financ <http://jjs.mof.gov.cn/zhengwuxinxi/diaochayanjiu/201307/t20130711_960347.html>. 602 Tianning Sima, “Energy-Efficient Product Promotion Program Upgraded, Purchasing Energy-Saving Products Enjoys National Subsidy(节能产品惠民工程升级 买节能家电享国家补贴)”(2012), China Quality News. 603 He Wei, “Doubts Emerge over Subsidies Sales Boost”, (2012), online: China Dly Asia <http://www.chinadailyasia.com/business/2012-06/05/content_114293.html>. 127 	fluctuations. For example, the subsidy program for energy-efficient home appliances, launched on June 1, 2012, was announced expired after one year operation.604  In April 2013, a lot of people thought the whole Promotion Program would come to an end. In anticipation of the termination of the related subsidy, manufacturers started to cut inventory, extend sales promotions through the month of June.605 The cloud of speculation hovered, till the day when the new list of project participants was released, much to the companies’ surprise. 606 In the case of Energy-Efficient Product Promotion Program, participating companies did not know if the subsidy for their products was going to extend for another term. The speculation distorted business’s incentives and resulted in significant inefficiencies. Similarly, under a cap-and-trade system, mere speculation about the political commitment to the indicated cumulative cap or amount of allowances might influence market outcomes. 607  Therefore, to improve transparency, policy information needs to be disclosed in a timely fashion. Moreover, there should be established processes and procedures for recording, storing and transmitting the information.608   As the economy opened up, private firms in China have become the dominant player in manufacturing, mining, construction, and wholesale and retail trade. 609 They are, notes Lardy, 																																																						604 Ministry of Finance, “On Ending the Subsidy Program for Energy-Efficient Home Appliance (关于停止节能家电补贴推广政策的通知)”, (2013), online: Minist Financ <http://jjs.mof.gov.cn/zhengwuxinxi/tongzhigonggao/201305/t20130529_892299.html>. 605 Yanhua Ming, “Defects Reveal after Implementing the Energy-Efficient Product Promotion Program for One Year(节能惠民政策执行近一年曝操作环节弊端)”, (2013), online: China Househ Electr Appliances Assoc. 606 Ibid. 607 Hasegawa, M., Salant, S. “The dynamics of pollution permits”(2015) Annu. Rev. Resour. Econ. 7. 608 Tom Tietenberg, “Disclosure Strategies for Pollution Control” (1998) 11:3/4 Environ Resour Econ 587. 609 Nicholas R Lardy, Markets over Mao: The Rise of Private Business in China (Washington: Peterson Institute for International Economics, 2014). 128 	"responsible for virtually all of the growth of employment in urban China since the reform began" and "consistently make more productive use of capital" than SOEs.610 The incentives inherent in private ownership have compelled company managers to economize on scarce capital and efficiently allocate funds to productive investments.611 In the context of complying with cap-and-trade, policy makers will need to deliver the predictability that investors will require for substantial long-term investments in GHG mitigation. Tang Renhu, general manager of Sino Carbon Innovation and Investment Co. said that only when policies provide predictable and long-term signals will potential innovators and adopters of climate-friendly technologies gain the confidence and motivation to consume, save, invest and innovate.612 The buyer of China’s first domestic transaction at the Shenzhen Exchange—representative from Hanergy Holding Group Limited, also expressed his concern in an interview about the stability of carbon price, “the prospect of Shenzhen’s carbon market is promising, however, certain regulatory mechanisms are necessary to stabilize the carbon prices.”613  5.6.2 Public Participation in Decision Making Remains Limited There is an increasing emphasis on public participation in environmental law. 614 In some of the instances, public participation in decision-making is required by law, and this operates as a condition of the legality of the decision. 615 In other instances, laws offer citizens rights which 																																																						610 Ibid. 611 Ibid. 612 He Li, “Technological and Institutional Support are Needed to Facilitate Carbon Trading(推动碳排放交易需技术和制度支撑)”, Sci Technol Dly (20 August 2013). 613 Liao Lu, “Shenzhen Carbon Market Being the First to Launch, 635 Companies Covered in the Trading System(深圳碳交易市场全国首启 首批 635 家企业纳入交易体系)”, China Bus News (19 June 2013). 614 J Steele, “Participation and Deliberation in Environmental Law: Exploring a Problem-solving Approach” (2001) 21:3 Oxf J Leg Stud 415. 615 Ibid. 129 	will provide them opportunities to question, challenge, or otherwise influence decision-making.616 Recent studies have described the expanding role of civil society in China’s environmental protection. 617   The number of registered and unregistered environmental NGOs has greatly increased since 1993. 618China has attempted to facilitate public participation in environmental decision-making through official channels such as public hearings. 619 The importance of public participation has been stipulated in various environmental legislations (e.g. the 2003 Environmental Impact Assessment Act in 2003, the 2004 Administrative License Law). 620 However, rules on how to enforce public participation and how to incorporate public opinion in decision-making lacks explicitness and sophistication. 621 The enactment of the EIA Act in 2003 marked a watershed moment for public participation in China. 622  The EIA Act requires public notice of environmental reviews, disclosure of environmental review documents, public comment periods, the potential for hearings or meetings to garner public opinion, and responses to comments received. 623 Article 5 of the EIA stipulates that the state should encourage relevant entities, experts, and the general public to participate in 																																																						616 Ibid. 617 Yang, Guobin & Craig Calhoun. “Media, Civil Society, and the Rise of a Green Public Sphere in China” (2007) 21 China Information 211. 618 Neil Carter & Arthur P J Mol, Environmental Governance in China (Routledge, 2013) at 160. 619 Y Wang, RK Morgan & M Cashmore, “Environmental Impact Assessment of Projects in the People’s Republic of China: New Law, Old Problems” (2003) 23:5 Environ Impact Assess 543. 620 Allison Moore & Adria Warren, Legal Advocacy in Environmental Public Participation in China: Raising the Stakes and Strengthening Stakeholders (2006). 621 Ibid. 622 Wang, Morgan & Cashmore, supra note 619. 623 Environmental Impact Assessment Act (promulgated by the Standing Comm. Nat'l. People's Cong. Oct. 28, 2002, effective Sept. 1, 2003) 2002 Standing Comm. Nat'l. People's Cong. 77 (P.R.C.) 130 	the assessment of impacts on their environment. 624  Articles 11 and 12 state that public opinion should be included in the EIA reports of construction projects. 625 However, provisions that set forth public participation are in general and ambiguous terms that detailed requirements such as the specific number of participants and the procedure of hearing were not explained in the EIA Act. In addition, the chapter on legal responsibilities does not define what would happen when responsible entities fail to comply with the requirements for public participation. Article 31 of the EIA Act allows construction projects and government to “make up” a missing EIA report after the construction project has started, without penalty for the consequences of the delay. 626 In the two years following the implementation of the EIA Act, broad public involvement in China's EIA process has been limited. 627 Access to information is often insufficient and participation is limited and unrepresentative. 628  In 2006, China’s MEP proposed the Measures for Public Participation in Environmental Impact Assessment (Trial) (Measures). 629 The Measures, in very general terms, describes the mechanisms for the MEP and other departments to solicit public input. 630 The mechanisms include public reviews, the use of questionnaires to take surveys, symposia and workshops which brings together stakeholders, scholars and experts to discuss specific projects affecting the environment, and public hearings. 631 However, the requirement to disclose relevant information and solicit comment is not framed as mandatory (“should” rather 																																																						624 Ibid. 625 Ibid. 626 Ibid. 627 Canfa Wang, “Chinese Environmental Law Enforcement: Current Deficiencies and Suggested Reforms” (2007) 8 Vermont J Environ Law 159. 628 Ibid. 629 Ministry of Environment Protection, “MEP Issues Measures for Public Participation in Environmental Impact Assessment (Trial)(环保总局发布《环境影响评价公众参与暂行办法》)”, (2006), online: Minist Environ Prot. 630 MEP, Measures for Public Participation in Environmental Impact Assessment (Trial) (2006). 631 MEP, Measures for Public Participation in Environmental Impact Assessment (Trial) (2006). 131 	than “must”).632 Moreover, no specified rules are available on how governmental authorities will be held accountable if they fail to adhere to the Measures.633  In April 2005, SEPA held China’s first national-level public hearing on the environmental impact of the Old Summer Palace (Yuanmingyuan) lake anti-drainage project—a massive construction project to line the Old Summer Palace’s famous lakes with plastic and cement in order to prevent drainage. The project had been carried out without regard for EIA procedures and approvals. 634 The project sparked huge media and public attention after being exposed online in March 2005. SEPA ordered the developers to immediately cease construction on the project and undertake the missing EIA application and approval procedures. 635 Shortly, the SEPA organized a hearing regarding the project. Besides experts and scholars, general participants include 73 representatives selected from 200 applicants and representatives from prominent NGOs.636 After the hearing, the park administration submitted an EIA report with modified project plan at the end of June 2005. No public hearing was convened after the submission of this EIA report. 637 The members of the affected community did not receive a complete substantive response to the issues they had raised at the hearing in April. No park officials who engaged in carrying out the 																																																						632 Ibid. 633 Ibid. 634 Rongzhen Ma & Feng Ge, “Yuanmingyuan Hearing in Retrospect and Reflection(‘圆明园事件’听证会之回顾与思考)”, (2015), online: Qin Shi(求是) <http://www.qstheory.cn/llqikan/2015-11/25/c_1117258570.htm>. 635 Ibid. 636 Joel Jay Kassiola & Sujian Guo, China’s Environmental Crisis: Domestic and Global Political Impacts and Responses, 1st ed. ed (New York: Palgrave Macmillan, 2010) at 140. 637 Qing Wang, “After 35 Working Days, EIA of Yuanmingyuan Project in Favor of Lining(圆明园环评报告认可铺膜 35 个工作日出最终结果)”, (2005), online: Xinhua <http://news.xinhuanet.com/newscenter/2005-07/02/content_3164766.htm>. 132 	project had been sanctioned for their failure to conduct an EIA, or for the losses and restoration costs caused by their unlawful action. 638 Participation requires information disclosure sufficient to allow stakeholders to have informed participation.639 Corporate disclosures of climate-related information among firms are considered to be a useful mechanism for internal and external decision making.640 There is an increasing demand from governments, investors and other stakeholders for corporate climate-related information.641 Studies show that regulatory pressure is one of the primary factors that shape the companies’ strategies regarding environmental and emission disclosure. 642  A number of governments have established voluntary or mandatory GHG measurement and reporting schemes over the past decade.643  e.g. In March 2004, the Government of Canada adopted a phased approach to launch the GHG Emissions Reporting Program (GHGRP).644 In 2009, U.S. EPA released a final rule for Mandatory Reporting of Greenhouse Gases from sources that in general 																																																						638 Jianrong Qie, “The Aftermath of the Yuanmingyuan Anti-Drainage Project Incident, Why No One is Legally Accountable (圆明园防渗事件犹未平 环境违法问责为何落空?)”, Leg Dly (27 September 2005). 639 Steele, supra note 614. 640 Jane Andrew & Corinne L Cortese, “Carbon Disclosures: Comparability, the Carbon Disclosure Project and the Greenhouse Gas Protocol” (2011) 5:4 Bus Financ J 5. 641 Céline Kauffmann & Cristina Tébar Less, Corporate Greenhouse Gas Emission Reporting: A Stocktaking of Government Schemes (2012). 642 Dennis M Patten, “The Relation Between Environmental Performance and Environmental Disclosure” (2002) 27:8 Accounting, Organ Soc 763. Other factors drive firms to disclose emission information, see Juan Peng, Jianfei Sun & Rui Luo, “Corporate Voluntary Carbon Information Disclosure: Evidence from China’s Listed Companies” (2015) 38:1 World Econ 91. 643 Kauffmann & Less, supra note 641. 644“Archived - Government Notices”, (2011), online: Canada Gaz <http://www.gazette.gc.ca/rp-pr/p1/2011/2011-10-01/html/notice-avis-eng.html>. 133 	emit 25,000 MtCO2e or more per year in the United States. 645  Besides, non-governmental initiatives also emerge to encourage enterprises to measure and report their GHG emissions.646  For the Chinese regulators, GHG emission information from companies is necessary to support the cap-and-trade schemes and to refine national GHG inventories. Chinese investors will need to scrutinize the climate-related information and integrate it into investment decision-making. Companies, through measuring their GHG emissions, analyze their carbon efficiency, develop improvement plan considering carbon risks and opportunities. 647  Currently, GHG-related information reporting is mandatory for companies covered by the cap-and-trade schemes. Other companies disclose their carbon-related information on a voluntary base. 648 According to the KPMG Survey of Corporate Responsibility Reporting 2015, among all the Global Fortune 250 companies investigated, China has the lowest rate of companies reporting carbon emissions.649   																																																						645 Environmental Protection Agency of US, “Fact Sheet: Mandatory Reporting of Greenhouse Gases”, (2009), online: Environ Prot Agency <https://www.epa.gov/sites/production/files/2014-09/documents/ghgrp-overview-factsheet.pdf>. 646 Kauffmann & Less, supra note 641. 647 Ibid. 648 Lei Zhang et al, “An Implementation Assessment of China’s Environmental Information Disclosure Decree” (2010) 22:10 J Environ Sci 1649. 649 Wim Bartels & Adrian King, Currents of change: The KPMG Survey of Corporate Responsibility Reporting 2015 (2015) at 12. 134 	Chapter 6  Governing China’s Carbon Market: Implications for China’s Environmental Governance Reform In China, there are clear synergies between reducing GHG emissions and other strategic goals of protecting the environment such as improved energy efficiency, reduced air pollution, enhanced public health, and conservation of biodiversity. Climate policy in China is thus closely associated with China’s environmental policy. This chapter discusses the implications of governing China’s domestic carbon market for China’s environmental governance system. First of all, the multilevel, inclusive governance structure has the potential to enable more effective and equitable allocation of resources, costs and benefits, and improved access to a diversity of knowledge and expertise. Secondly, policy adjustments responding to new information and changed circumstance should and can be transparent. 6.1 A More Inclusive Approach to Participation Governance arrangements of China’s cap-and-trade markets involve the participation of diverse sets of state and non-state actors, and also embrace new perspectives on the roles and responsibilities of these actors. The governments would always have a legitimate place in governing the carbon market. The initiation of China’s cap-and-trade program is the result of a political process and not of economic necessity per se. Political interventions are the precondition for the market to exist in the first place. For the nature of a carbon market, the government does not control emissions through direct mandates. In China’s market-based system, the government performs much the same as it would in a command-and-control situation, in the sense that the government still sets 135 	the regulatory drivers—the legal constructs of the marketplace—without which there would be no market for the emissions allowances to be traded; and also in the sense that it set the agenda for developing the emissions trading system.  Governing a carbon market is an arena where a wide array of non-state actors such as project developers, investors, carbon brokers, consultancy firms and third-party auditors have assumed a range of responsibilities in parallel to, and oftentimes beyond, the state.650 The need of Chinese governments to seek resources from other actors to increase their capacity in governing the carbon market is accelerating the shift away from state hierarchy and traditional “government” and towards more horizontal and inclusive subnational arrangements.651 The involvement of private actors in carbon market governance is an expression of a changing rationality of government where the private realm is mobilized for the purpose of climate change mitigation.652  The self-monitoring and reporting requirements for the companies, for example, shift much of the burden for documenting compliance from the government to the regulated entities. Verifying emission data requires extensive resources dedicated to field audits. 653  Private third-party verifiers are acting in the place of governmental agents to conduct inspections and make regulatory compliance determinations. Assuming the truthfulness of reported data, there is the advantage that, in comparison to periodic inspections by a governmental agency, self-monitoring 																																																						650 Stripple J, Pattberg P. “Agency in global climate governance: setting the stage”in F Biermann, P Pattberg FZelli eds. Global Climate Governance Post 2012: Architectures, Agency and Adaptation (Cambridge University Press, 2010). Newell P, Paterson M. Climate Capitalism, Global Warming and the Transformation of the Global Economy (Cambridge University Press, 2010).  651 Waterman, Chris. “Local Government and Local Governance: 1944–2011.” Local Government  Studies (2014) 40 (6). 652 Lövbrand & Stripple, supra note 121. 653 McAllister, supra note 344. 136 	and recording has the potential to produce a continuous data stream, which gives the firms a much better indication of how emissions vary over time. 654  Credit record systems are also integrated into China’s cap-and-trade regulatory scheme. The credit system is connected with the central bank. A company’s non-compliance history will be put on record in the Credit Reference System of the central bank. As an important incentive mechanism, companies who fulfill their responsibilities under the cap-and-trade system will be given priority when applying for national/provincial funding for low-carbon development, energy conservation and emission reductions. Climate change is such a complex system that knowledge to meet the climate challenge is widely distributed. Market actors such as company managers, local stock exchanges, financial service providers, verification institutions are learning about carbon management and trading. Firm managers, for example, base their decisions on their first-hand knowledge about emission abatement and the relevant technologies. When complying with mitigation obligations, these actors learn to develop ways of collaboration based on climate-related information disclosure, regular contact with diverse actors, and being flexible. The market actors are expected to play an increasingly large role in coordinating mitigation actions, improving information flows and mobilizing relevant knowledge.655  																																																						654 Ibid. 655 Derek Armitage, Rob De Lö E & Ryan Plummer, “Environmental Governance and Its Implications for Conservation Practice” (2012) 5:4 Conserv Lett. 137 	From the above discussions, it can be seen that the governance structure of the carbon market fosters linkages among diverse actors at multiple levels and creates multiple centers of decision making and mechanisms for coordinated action. The multilevel, inclusive governance structure has the potential to enable more effective and equitable allocation of resources, costs and benefits, and improved access to a diversity of knowledge and expertise. 656 China has employed a mix of top-down command-and-control measures with market-based mechanisms to propel the switch to a resource-efficient and low carbon growth path. 657 Yet the experiments with market-based tools are still in infancy and China’s environmental governance system continues to rely primarily on top-down command-and-control instruments, more specifically, rely on binding environmental targets.658 The top-down command-and-control has been successful in providing a continuous supply of ecosystem services in China but it has also generated numerous undesirable consequences. 659 Because command-and-control regulations do not take into consideration that regulated entities face different compliance options and associated costs, they tend to cause significant social welfare loss that relate to compliance, enforcement, and conflict, and are not able to provide continuous incentive for inventors and investors to develop lower-emitting technologies. In response to the challenge of large-scale and urgent environmental problems in China, environmental governance arrangements should enable the active participation of multilevel state and non-state actors. A principal task of governments 																																																						656 Örjan Bodin & Beatrice I Crona, “The Role of Social Networks in Natural Resource Governance: What Relational Patterns Make a Difference?” (2009) 19:3 Glob Environ Chang 366. 657 Genia Kostka, “Command without Control: The Case of China’s Environmental Target System” (2016) 10:1 Regul Gov 58. 658 Ibid. 659 Alex Wang, “The Search for Sustainable Legitimacy: Environmental Law and Bureaucracy in China” (2013) 37 Harvard Environ Law Rev 365. 138 	would involve using its institutions, networks, policy instruments and policy practices to facilitate the joint working, coordination and cooperation. 6.2 Transparency in Policy Adjustment Carbon policy has to deal with plenty unknowns. Taking into account the long-run nature of GHG emissions trading projects, regulators of carbon market have to allow for flexibility to respond to new incoming information such as new technology, economic downturns, international politics, temperature, the degree of international mitigation.660  The need for governance and decision-making processes to be flexible and adaptive in the face of uncertainty seems to be in conflict with the market actors’ desire for policy certainty and predictability. In this sense, dealing with complex and unexpected changes and ensuring flexibility will need to find appropriate relations between legal certainty and flexibility, in order to cope with changes and complexities.  To respond to unforeseen contingencies in a transparent and accountable way, policymaking could set out how targets and measures will be evaluated and adjust when learning over relevant parameters.661 For example, legislations could provide the grounds on which the allowances, once granted, can be reviewed and even revoked. This is based on the idea that changing the policy parameters does not necessarily provide more uncertainty to investors, as long as this is 																																																						660 See e.g. Cambridge Econometrics, “An Impact Assessment of the Current Economic Downturn on UK CO2 Emissions: A final report for the Committee on Climate Change”, (2009). 661 D Helm, C Hepburn & Richard Mash, “Credible Carbon Policy” (2003) 19:3 Oxford Rev Econ Policy. 139 	done in a predictable manner.662 For example, to deal with uncertainty on total GHG emissions associated with future economic growth, the Hubei pilot has set out that surplus allowances that are not used for trading in the current compliance period must be cancelled.663  Similarly, knowledge in environmental governance is also dynamic and uncertain, and laws and policies will also need to be adaptive in the context of changing circumstances. 664 Substantive laws should be in place defining the factors and aspects to be taken into account when making decisions. On the other hand, the laws regarding administrative or judicial procedures (e.g. procedures for reviewing policies in light of new circumstances, follow-up monitoring of the effects of the new policies) are also critical for the transparency of policy adjustment. The input of knowledge and science in the decision-making is evidently essential for the ability to foresee and adapt to changed circumstances.665 Procedural rules should facilitate drawing knowledge from multiple sources in the decision-making process. The rules could involve, for example, defining the scope of organizations and individuals that are allowed to participate, and procedures for public participation that give stakeholders and public members the opportunity to voice their concerns at an early stage in the decision-making process.   																																																						662 OECD, Promoting Technological Innovation to Address Climate Change, online : OECD <http://www.oecd.org/env/cc/49076220.pdf>. 663 Article 20, Hubei Provincial People’s Government, “Interim Regulations on Carbon Emissions Trading in Hubei Province (湖北省碳排放权管理和交易暂行办法)”, (2014). 664 Iain J Davidson-Hunt & R Michael O’flaherty, “Researchers, Indigenous Peoples, and Place-Based Learning Communities” (2007) 20:4 Soc Nat Resour. 665 Jonas Ebbesson, “The Rule of Law in Governance of Complex Socio-Ecological Changes” (2010) 20:3 Glob Environ Chang 414. 140 	Chapter 7  Conclusions 7.1 Findings Domestic concerns, such as energy security, environmental deterioration, political stability and the vulnerability of the country to the impacts of global warming are convincing the Chinese leadership of the urgent need to act on curb GHG emissions.  The climate problems have become so complex that command-and-control measures are no longer able to deliver the desired results. Taking into account that China has a large population of 1.3 billion people, decreasing resources, severe pollution problems, energy intensive economic structure and a fast-growing economy, the potential cost of tackling climate change for China is exceptionally high.666 This has led China to pursue carbon trading as a more sustainable and cost-effective model to control GHG emissions. The cap-and-trade pilot program is an expression of the Chinese “crossing the river by feeling the stones” spirit. It is designed and implemented to ensure that the requisite infrastructure and experience are in place before a nationwide market is fully launched. The seven pilot regions are taking on and testing different implementation paths. Rivalry among regional government authorities are deliberately introduced by the central decision makers to encourage a degree of “policy competition” to test different approaches to see which works best.667  The thesis assesses the regulatory framework adopted by the regional pilots for implementing cap-and-trade. It is found that incentive mechanisms established by regulators of each cap-and-																																																						666 Heggelund, supra note 105 at 158, 165. 667 Mark Nicholls, “Carbon Trading with Chinese Characteristics”, (2013), online: Sci Am <http://www.scientificamerican.com/article.cfm?id=carbon-trading-experiments-in-china&print=true>. 141 	trade pilot have successfully ensured high rate of compliance of the regulated entities in the first two years. However, various companies covered by the pilot schemes presented various responses to the nascent markets, due to discrepancy in knowledge and capacity. China's large state-owned enterprises have taken the lead in participating in the cap-and-trade markets, because they have developed the compliance expertise and resources through participating in CDM. Small and medium companies, on the other hand, have yet to grapple with the unfamiliar territory. The assessment of the MRV system of the cap-and-trade schemes indicates that the Chinese authorities have not developed detailed enforceable rules that are needed to enable accurate monitoring and reporting of emission data. In addition, rules regulating business conduct of financial institutions and carbon trading facilities are also inadequate. As to allowance allocation methods, currently, grandfathering is widely adopted. China’s cap-and-trade systems need to extend the scope of using benchmarking to allocate allowances.  Lessons drawn from international cap-and-trade practices and previous environmental regulatory policies in China help define the challenges and opportunities accompanying with developing China’s domestic cap-and-trade market.  Information disclosure from companies, regarding the amount of GHGs each company emits and offsets, is critical for the functioning of an efficient cap-and-trade market. China’s cap-and-trade schemes require that covered entities report GHG emissions on an annual basis. Currently, the credibility of emission data disclosure has relied extensively on third-party verification. However, there is great shortage in qualified third-party verifiers. Moreover, the third-party verification agencies are not adequately supervised by the government and public.  142 	Integrating the cap-and-trade regulatory schemes with existing environmental and economic regulatory arrangements poses a major challenge to the effective governance of China’s cap-and-trade market as the Chinese government has primarily been using command-and-control policies to deal with conventional pollutants. Implementing the cap-and-trade policy embraces the interaction between complex regulatory arrangements and is inevitably conducted as a collaborative, interagency process. Uncoordinated interests among regulatory agencies would undermine the regulatory regime. Governing the carbon market needs to deal with the complex institutional interactions.  According to the plan, China’s cap-and-trade regional schemes will eventually expand to a nationwide system. Currently, each regional pilot is an independent system, with different regulatory structures. Linking the regional schemes will require harmonization of administrative rules and the major design elements. Potential economic impact should also be evaluated before the linking of regional cap-and-trade systems can occur, as the linking could create individual winners and losers.  Challenges exist if China is to expand the coverage of the cap-and-trade market. Firstly, it is difficult to fully engage the power sector because the prices of electricity are regulated. When the electricity rates would not adjust to reflect the compliance cost of power companies, passed-on costs would thus be constrained. As a result, the impact of the carbon price on the demand side would be neutralized. Secondly, China's cap-and-trade scheme will need to cover most of the small and medium-sized companies eventually but theses companies lack the expertise and financial resources to comply with cap-and-trade obligations. 143 	Complying with cap-and-trade obligations is likely to require significant irreversible investment from the regulated entities. Transparency in policymaking improves market credibility and stimulates participation. Regulators of China’s carbon market will need to strengthen their policies and legislation to improve the transparency and inclusiveness of the decision-making process. Also, corporate disclosures of climate-related information need to be strengthened to allow stakeholders to have informed participation in the cap-and-trade market.  China’s environmental governance arrangements should enable the active participation of multilevel state and non-state actors to respond to the challenges of large-scale and urgent environmental problems. Substantive and procedural laws should ensure transparency regarding policy adjustment when facing changed circumstances.  The ultimate success of China’s domestic carbon market would rely on whether the emissions targets set by the government are achieved while reducing unnecessary costs. After all, it is the magnitude of the challenge to minimize the costs of reducing GHG emissions that has drawn the policymakers’ attention to the use of market-based instruments. 668  The cap-and-trade pilot markets have become fully binding only for three years and the complete implementation of a nationwide program is still some years away. Given the numerous obstacles pilot regulators are facing, the development of the cap-and-trade schemes that substantially reduce emissions at the lowest costs should be considered as a long-term effort.  																																																						668 Joseph E. Aldy & Robert N. Stavins, “Economic Incentives in a New Climate Agreement”, Belfer Center for Science and International Affairs (2008). 144 	Although we should be cautious drawing conclusions about the cap-and-trade pilot program's performance (in terms of effectiveness in GHG mitigation669), measuring short-run success may be beneficial to inform the development of China’s national carbon market. 670 China’s carbon trading pilot program has delivered seven regional cap-and-trade markets. The seven pilot markets are independent, and has local characteristics corresponding with their respective economic development level, industrial structure, as well as energy-saving and emission reduction technologies. Preliminary legal and institutional infrastructure for carbon trading is developed in each regional market and most participants are aware of the rules.671 Nearly all regulated entities have, as required, successfully surrendered enough allowances to cover their emissions or report their CO2 emissions at the end of each compliance period. In the process, relevant personnel are getting trained and industries are getting more prepared for data collecting and reporting. In this sense, the three years of policy experiment and capacity building are valuable.  																																																						669 PricewaterhouseCoopers’ (PwC) annual Low Carbon Economy Index has found that China decreased its carbon intensity by 6.4% in 2015 and for the first time topped the list of countries in terms of its change in carbon intensity. The report attributes the result to the falling coal use and the rapid growth in services. PwC, The Low Carbon Economy Index 2016 (2016). Other analysis argues that China’s drop in coal consumption and CO2 emissions is partly due to China's economic slowdown and partly driven by the political imperative to tackle air pollution (which first sparked major public outrage in 2013). Barbara Finamore, “Good News: China's Dropping Coal Consumption Is Putting the Brakes on Global Carbon Emissions” (2016), online: NRDC <https://www.nrdc.org/experts/barbara-finamore/good-news-chinas-dropping-coal-consumption-putting-brakes-global-carbon>. 670 Clayton Munnings et al, “Assessing the Design of Three Pilot Programs for Carbon Trading in China” (2016) 96 Energy Policy 688. 671 According to a 2015 survey, the majority of regulated companies have been making compliance strategies. Dimitri De Boer, Renato Roldao & Huw Slater, The 2015 China Carbon Pricing Survey (2015). 145 	However, the pilot markets may not be considered as successful in the sense that firstly, the market liquidity is low.672 The total volume traded in the pilots to date is lower relative to the cap size as that in other markets like the EU ETS and California cap-and-trade market.673 Although the Guangdong and Hubei markets have issued rules for forward trading, the Chinese pilot markets have been limited to spot deals. 674 To boost market vitality and liquidity, the regulators need to facilitate the use of futures trading in the emissions market and levy much greater levels of accountability on the financial sector. Another interesting observation about China’s pilot carbon markets is that the trading volume usually surged in the last days before the end of the compliance cycle. 675  This phenomenon shows that many entities only trade to meet their emission obligations and few of them have incorporated mitigation into their development agenda.676 The supposed economic benefits of carbon markets depend on active participation of these entities to liquidate the market. So the Chinese regulators need to help these companies understand that the cap-and-trade system is not a mere compliance mechanism but it can also help them to achieve emission goals at a lower cost.677 To facilitate the learning process, the regulators could organize workshops and forums that bring together business leaders, company managers as well as other relevant entities and individuals.  																																																						672 Jeff Swartz, China’s National Emissions Trading System: Implications for Carbon Markets and Trade, ICTSD Global Platform on Climate Change, Trade and Sustainable Energy, Climate Change Architecture Series, Issue Paper No. 6 (Geneva, 2016). 673 Ibid. 674 Currently, the Chinese securities regulators do not view carbon-financing products as falling under the scope of “financing product” and only allows futures trading in a handful of commodity markets. Martin Adams, Trials and Tribulations: China Experiments with Carbon Trading (Hong Kong, 2013). 675 Miao Zong, “Trading Volumn Surged by 200% in Guangdong, Carbon Intensity Reduced in 60% Enterprises(广东碳交易成交量猛增超 200% 6 成企业排放强度下降)”, (2015), online: China Emiss Exch <http://www.cnemission.com/article/news/ssdt/201505/20150500000891.shtml>. 676 John Chung-en Liu, Assembling China’s Carbon Markets: The Carbons, the Business, and the Marginalized (Cambridge, MA, 2016). 677 Ibid. 146 	Secondly, carbon prices in the Chinese pilot markets are too low to induce emissions reduction. Research shows that the abatement cost required for the reduction of 5% of Shenzhen’s total emissions is about $20 USD per tonne of carbon dioxide emissions. 678 Shenzhen has the highest performing price out of all the pilots, yet the average price of carbon in Shenzhen in the fourth quarter of 2015 is only $6.07 USD, less than one third of this amount.679 During the 2013-2014 period, the average allowance price ranges from $4.1 USD in Hubei to $12.4 USD in Shenzhen.680 Prices had been volatile and a significant price drop occurred at the end of the compliance period in 2015. During April 2015-August 2015, the average carbon price arranges from 2.25 USD per tonne for Tianjin and $6.41 USD per tonne for Shenzhen.681 Some market observers attribute this low carbon price to the oversupply of allowances and CCERs in the market. 682 Others argue that the main reason for the low carbon prices is the uncertainty in the transition from the pilot phase to the national phase. 683 Because covered entities were not sure whether the excess allowances in the pilot phase would be bankable to the national scheme or would they be voided, potential short players and investors cautiously stopped buying allowances while long players were aggressively selling their excess allowances.684 Solving the problem of over-allocation is a difficult task. Based on the experiences of other emissions trading schemes, it will probably take some time for Chinese regulators to get the numbers, procedures and institutions right. To reduce price volatility resulting from policy uncertainty, the regulators 																																																						678 Mengjin Jiao, Lili Xue, Xiaoming Ma, and Liyu Chen, “A Knapsack Model Based Approach to Measure the Carbon Reduction Space of Industry Sector: A Case Study of Shenzhen, China” (2014) Journal of Medical and Bioengineering 3 (4). 679 Partnership for Market Readiness, China Carbon Market Monitor, Issue 3 (2016). 680 World Bank, State and Trends of Carbon Pricing (Washington DC, 2014), at 64. 681 Partnership for Market Readiness, supra note 409. 682 Environomist, China Carbon Market Research Report 2016 (Beijing, 2016). 683 Ibid. 684 Ibid. 147 	should increase transparency in policymaking and disclose policy information in a timely fashion. 7.2 Future Research A number of important questions remain to be answered on the topic of China’s domestic carbon policy.  First of all, the emphasis on carbon markets as China’s route to low emissions is itself up for debate. More research may be needed to examine the alternatives of cap-and-trade as a mitigation policy. In fact, China’s finance ministry has been considering and promoting a carbon tax since 2007. 685 Su Wei, China’s leading Climate Change negotiator, said a carbon tax and an emissions trading scheme are “not mutually exclusive.”686 To define the most suitable approach that may help China meet its GHG mitigation goals in a more cost-effective and politically popular way will require more research and policy experiment.  Secondly, given that the cap-and-trade schemes became fully binding only for 3 years, a number of important questions remain. For example, little is known empirically about the impact of carbon trading on technological change. Also, much more empirical research is needed on how the pre-existing regulatory environment affects the operation of the market-based programs. 																																																						685 Nicholls, supra note 667. 686 Richard Scotney et al, Carbon Markets and Climate Policy in China: China’s Pursuit of a Clean Energy Future (2012). 148 	Since 1978, when the economic reform started, China has witnessed booming economic growth at an average annual growth rate of 9.8 percent.687 The ever larger role of markets in resource allocation and the emergence of a dynamic private sector have contributed to the long-term economic growth in the past three decades. 688 Despite the dramatic rise in the role of private sector, there had not been a progressive decline in state control over the economy in China. 689 Differs from a real market economy, frequent political and bureaucratic interventions, significant state ownership of enterprises and tight price controls still exist in China’s economy. 690 So far, the Chinese government has been slow to change its price-setting controls for fuels, power and gas, which has been causing trading distortion in the power market for a long time. It is not rare of the Chinese government to intervene in markets to help the economy respond to longer term challenges such as energy and climate change, for example, providing subsidies for renewable energy production. Carbon market, though different from a real free market, still enjoys the elements of market mechanisms such as free competition. Interventions such as subsidies can have important impacts on competition. Future research will be needed to provide insight on questions such as how much government intervention is appropriate. Thirdly, there are some institutional factors that have profound implications for the operation of a carbon market. To achieve successful regulatory outcomes, China must reform important elements in its approach to environmental/climate governance. The challenges that China faces are no less vexing and important than the challenge of economic or legal reform. Institutional 																																																						687 See data from World Bank, online: World Bank <http://data.worldbank.org/country/china>. 688 Nicholas R Lardy, “China’s Economic Reforms and Growth Prospects” (2015) 8:2 China Econ J 95. 689 For example, since the late 1990s, state-led investments in roads, airports, and housing had loomed large as drivers of economic growth. Carl F Minzner, “China After the Reform Era” (2015) 26:3 J Democr 129. 690 Carl E Walter & Fraser J T Howie, Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise (Wiley, 2011). 149 	challenges include the restructuring of the management of state-owned enterprises, and effective management of the state’s (and the citizens’) financial assets, independent judiciary, etc.691 These constrains are imposed by the present political, economic, and judicial systems, literature on each of the issues is abundant. 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