China's Carbon Neutrality Laws and Policies

Carbon Neutrality and Carbon Finance in China:
Legal and Policy Perspectives
▪ Prof SHEN Wei
▪ JCLI Conference in Bali
▪ 10 May 2023

Contents
1 Carbon Neutrality and Finance: Concepts & Significance
2 China’s Carbon Neutrality: Laws and Policies
3 China’s Carbon Finance: Laws and Policies

Contents
1 Carbon Neutrality and Finance: Concepts & Significance
China’s Carbon Neutrality: Laws and Policies
China’s Carbon Finance Laws and Policies
2
3

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▪ The environmental issues caused by the consumption of fossil fuels have
gradually threatened the sustainable development of human society as a result
of the rapid growth of global industrialization.
▪ Recent global carbon dioxide emissions have been much higher than the
earth’s ability to clean itself.
▪ It is crucial to develop policies that will cut carbon emissions and discourage
people from obtaining their energy from sources that produce a lot of carbon
dioxide.
1.1 Background

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▪ The global transition to sustainable and low-carbon development is mapped out in the
Paris Agreement on climate change.
▪ Article 4 of the Paris Agreement
Ø “In order to achieve the long-term temperature goal [...], Parties aim to reach global
peaking of greenhouse gas emissions as soon as possible, [...], and to undertake rapid
reductions thereafter in accordance with the best available science, so as to achieve a
balance between anthropogenic emissions by sources and removals by sinks of greenhouse
gases in the second half of this century[...].”
1.1 Background

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▪ China is a major emitter of greenhouse gases due to its large economy and population.
Ø The US claimed that China’s carbon emissions are nearly twice what the U.S. has, and it’s rising fast.
▪ The potential for meeting the global climate change goals will depend on how far
China goes with its bold pledge.
▪ On 22 September 2020, at the general debate of the 75th session of the United Nations
General Assembly, China formally declared its two carbon goals: reaching peak CO2
emissions before 2030 and becoming carbon neutral by 2060.
1.1 Background

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▪ All nations are required to take firm action to uphold Paris Agreement, which outlines
the minimal steps that must be taken to protect the Earth, our common home.
▪ In order to achieve a green recovery of the global economy in the post-COVID era and
thereby create a potent force driving sustainable development,
▪ all nations are encouraged to pursue innovative, coordinated, green, and open
development for all, and
▪ all nations are urged to seize the historic opportunities presented by the new
round of scientific and technological revolution and industrial transformation.
1.2 Importance of Carbon Neutrality

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▪ The term “carbon neutrality” refers to the target of reducing the greenhouse gas
emissions that cause global warming to zero by balancing the amount released into the
atmosphere with the amount removed and stored by carbon sinks. This is also
described as “net zero” or “climate neutrality”.
▪ The Net Zero Tracker’s 2022 Stocktake Report finds that 128 countries and territories
have some sort of net zero target.

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▪ Getting to carbon neutrality also requires significant abatement of greenhouse gas
emissions across all sectors of the economy.
▪ In order to be carbon neutral, a balance can be struck between the emissions of carbon
and the absorption of carbon:
Ø either in “carbon sinks” (such as the natural absorption of carbon by the planet and the
oceans); or
Ø in the approach of “carbon offsetting”, which involves lowering emissions in one sector
while increasing them in another. Carbon finance is an integral way to achieve carbon
offsetting.

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▪ Embedded in the process to reach carbon neutrality, carbon finance has emerged as a
crucial and effective tool that are prioritized by many nations.
▪ The UN Environment Programme states that it is necessary to direct financial flows to
support the achievement of the sustainable development goals in order to reduce
carbon emissions and increase resilience against climate change’s effects.
▪ Financial development can curb carbon emissions, through effectively promoting
technological innovation and raising environmental protection awareness.
1.3 Importance of Carbon Finance

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▪ Purpose: Calculating the carbon price and maximizing the distribution of carbon
resources are the two goals of carbon finance.
▪ It plans for the availability and application of market-based tools that can transfer
environmental risk and accomplish environmental goals.
▪ How Does Carbon Finance Work? - An Example of the EU
Ø The EU classifies carbon emission allowances as financial instruments in the updated MiFID II, making
it the first unified and mandatory GHG emission reduction trading market in the world.
Ø EU’s carbon border adjustment mechanism, which would impose carbon prices on imported goods from
less climate-ambitious nations, is a plan to cut emissions. This ought to deter businesses from shifting
their production from the EU to a region with laxer regulations on greenhouse gas emissions.

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▪ Through the auction, spot, and derivatives markets, they make it possible for carbon
emission allowances to be valued and traded.
▪ By valuing the reduction of GHG emissions, carbon finance refers to a variety of
financial institutional arrangements used to finance projects with benefits to the
environment, human health, and the economy.
▪ Financial risks are associated with carbon finance, such as fraud, false advertising,
manipulation, transfer pricing, and other occurrences that have happened in these
carbon markets.
Ø Risks associated with carbon finance will be discussed in detail in the third parts.

Contents
Carbon Neutrality and Finance: Concepts and Significance
2 China’s Carbon Neutrality: Laws and Policies
1
China’s Carbon Finance: Laws and Policies
3

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China

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Climate Change Performance Index 2023

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Is China Meeting the Goal?

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▪ China’s economy has experienced a rapid development, accompanied by an
increase in environmental pollution.
Ø To protect the environment, more than 30 laws have been enacted and implemented,
including the “Environmental Protection Law,” the “Air Pollution Prevention Law”, the
“Clean Promotion Law”, the “Coal Law”, and the “Mineral Resources Law”.
Ø China’s environmental legislation still faces a series of challenges and problems, including
the lack of full implementation of the concept of sustainable development, as well as gaps
and inconsistencies between laws and regulations, unclear responsibilities, an imperfect
system design, unbalanced rights and obligations, an implementation being significantly
affected by the GDP, the lack of applicability of legal content, and difficulties in public
participation.
▪ These problems also apply to the issue of carbon peaking and carbon
neutrality, in addition to a whole series of other legal problems in relation to
China’s carbon emissions.
2.1 Background of China’s Carbon Neutrality

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▪ As the world’s largest emitter of greenhouse gases, China has taken action
against climate change, aiming to peak carbon emissions by 2030 and become
carbon neutral by 2060.
▪ In September 2021, the Chinese government put forward the basic approach
to achieve this goal, based on the aim to extend the principle of overall
planning to the whole country, the strengthening of top-level design based on
a national strategy, giving full play to institutional advantages, and improving
existing laws and regulations.
▪ If China wants to achieve its carbon peak and carbon neutrality as soon as
possible, it must have a complete legal framework for carbon management.
2.1 Background of China’s Carbon Neutrality

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▪ The Central Committee of the Communist Party of China and the State
Council’s Opinions on Fully, Accurately, and Comprehensively Implementing
the New Development Concept and Achieving Peak Carbon and Carbon
Neutrality sets out the targets for carbon neutrality into several indicators
including carbon dioxide emissions per unit of GDP, energy consumption per
unit of GDP, forest stock, and forest coverage sets the specific objectives for
the various stages of implementation.
▪ On the eve of the Copenhagen Climate Change Conference in 2009, to
achieve a constructive outcome in international climate negotiations, the State
Council formally announced the country’s greenhouse gas emission control
target of reducing carbon dioxide emissions per unit GDP by 2020 by 40%–
45% compared to 2005 levels.
▪ To fulfill the international commitments on greenhouse gas control, the
carbon dioxide emission intensity per unit of GDP was set as a binding index
in the 12th and 13th Five-year plans.
2.2 Carbon Neutrality Targets in Chinese Laws and Policies

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Objectives of central policies and laws
Legislator Laws and regulations Objectives
Ministry of Ecology
and Environment
Carbon Neutralization Implementation
Guide for Large-scale Activities (Trial)
To standardize the implementation of
carbon neutrality for large-scale
activities
Ministry of
Education
Carbon Neutral Science and
Technology Innovation Action Plan
for colleges and universities
To provide scientific and
technological support and personnel
guarantee for achieving carbon peak
and carbon neutrality
Ministry of Ecology
and Environment
Notice of the office of the National
eco-industry Demonstration Zone
Coordination Leading Group on
promoting carbon peak and carbon
neutrality of the national eco-industry
demonstration zone
To stress the leading role of the
national eco-industrial demonstration
park in promoting the reduction of
pollution and carbon synergy,
promoting a regional green
development model

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The CPC Central
Committee and the
State Council
The CPC Central Committee and the
State Council on the complete,
accurate and comprehensive
implementation of the new
development concept to achieve peak
carbon neutrality
To bring carbon peak and carbon
neutrality into the overall context of
economic and social development,
and ensure that carbon peak and
carbon neutrality are achieved on
schedule
State Council Carbon Peak Action Plan by 2030 To bring carbon peak and carbon
neutrality into the overall economic
and social development, and ensure
that these goals are achieved on
schedule
State-owned Assets
Supervision and
Administration
Commission
Guidelines on promoting high-quality
development of central enterprises
and achieving carbon peak and
carbon neutrality
To optimize the industrial structure
and energy structure of central
enterprises, and improve the energy
utilization efficiency of key
industries

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National Development
and Reform Commission,
Cyberspace
Administration of China,
Ministry of Industry and
Information Technology
of China, National Energy
Administration
Implement carbon peak and
carbon neutrality targets, and
promote green and high-quality
development of new
infrastructures such as data
centers and 5G
To promote the green and high-
quality
development of new infrastructure,
represented by data centers and 5G
All-China Federation of
Industry and commerce
Guidelines by the China
Federation of Industry and
Commerce on guiding private
enterprises to achieve carbon
peak and carbon neutrality
To guide and serve private
enterprises to achieve carbon peak
and carbon neutrality

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Ministry of
Transport of China,
National
Railway
Administration,
Civil Aviation
Administration of
China, State Post
Bureau
Guidelines by the Ministry of Transport,
National Railway Administration, Civil
Aviation Administration of China, and
State Post Bureau on implementing the
guidelines of the Central Committee of
the Communist Party and State Council
on implementing the new development
concept in a complete, accurate and
comprehensive manner to achieve peak
carbon and carbon neutrality
To achieve carbon peak in the
transportation sector
Ministry of
Education
Work program to strengthen the carbon
peak and carbon neutrality and personnel
training system construction of higher
education
To improve the training quality
of carbon peak and carbon
neutral professionals

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Treasury
Department
Guidelines on Financial support for
carbon peak and carbon neutrality
To establish and develop a fiscal and
tax policy framework conducive to
green and low-carbon development
Standardization
Administration of
China
Circular on Standard and the plan
for the National Carbon Peak and
Carbon Neutrality and for the
foreign language version of the
relevant standards by
Standardization Administration of
China in 2022
To improve the standard system for
carbon peak and carbon neutrality
National Energy
Administration
Notice by the National Energy
Administration of Issuing the
Action Plan to Standardize Carbon
Peaking and Carbon Neutrality in
Energy
To implement carbon peaking in the
energy sector

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The State Administration of Market
Supervision, the National Development and
Reform Commission, the Ministry of
Industry and Information Technology, the
Ministry of Natural Resources, the Ministry
of EcologicalEnvironment, the Ministry of
Housing and Urban Rural Development,
the Ministry of Transport, the China
Meteorological Administration, and the
State Forestry and Grassland
Administration
Establish and improve the
implementation plan of
carbon peak carbon
neutralization standard
measurement system
To promote the
construction of a carbon
peak and carbon
neutralization standard
measurement system

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▪ China tries to achieve its emissions reduction goals through bureaucracy.
▪ China is trying to set up a low-carbon standard system to guide enterprises and
society to achieve green and low-carbon development.
▪ China has also imposed stricter requirements on key sectors such as energy,
new infrastructure, state-owned enterprises, eco-industrial parks zones, and
transportation.
▪ The policies and laws have a common feature of promoting and guiding the
whole society to achieve low-carbon development through government actions.
2.3 The Path to Carbon Neutrality

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Differences between the carbon peak legislation of China and the EU
Key Aspects China’s carbon peak action plan by
2030
EU climate law
Subject matter and
scope
Establish the guiding ideology and action
principle
Building a legal framework
Climate-neutrality
objective by 2030
Flexible multiple objectives Rigid single objective
Provisions on
science and
technology
Strengthen the layout and promotion of
basic research
Set up of the European
Scientific Advisory Board
Adaptation to
climate change
Promoting green and low-carbon
development in the region from a practical
perspecitve
Special concern toward the
most vulnerable and impacted
populations and sectors
Assessment of
Union progress and
measures
Strict supervision and assessment Review and evaluation every 5
years and adoption of
necessary measures
Public participation No rules Rules have been established

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▪ Strict environmental protection will hinder local development, and central
environmental policies are not fully implemented in some places.
▪ When the “Legislation Law” was amended in 2015, the local government was
authorized to formulate regulations in the field of environmental protection.
▪ A relatively ideal governance relationship - the central government and the
local governments should build up a cooperative model for environmental
governance.

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▪ From the 79 local policies
and laws analyzed, the
role of local governments
in the process of
achieving carbon
neutrality is still relatively
limited.
▪ 26.58% of these policies
and laws emphasize the
comprehensive legislation
of the central government,
while 35.44% emphasize
the development of
science and technology
for emission reduction in
the region.
Topic, quantity, and percentage share of local rules and policies
Topic Quantity %
Development of science and technology 28 35.44
Comprehensive 21 26.58
Finance 8 10.12
Fiscal 6 7.59
Education, training 5 6.33
Post and telecommunication 3 3.80
Construction 2 2.53
Energy 2 2.53
Agriculture 2 2.53
State-owned enterprise 1 1.27
Transportation 1 1.27
Total 79 100.00

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▪ The majority of the comprehensive policies and laws are not clear enough.
▪ Only a few provinces, such as Shanghai, Jiangxi, and Qinghai, have defined
their development indicators e.g., non-fossil energy consumption ratio, forest
coverage rate, and forest volume, while other provinces have not set specific
development goals.
▪ There are few specific policies in areas with high carbon emissions, such as
construction, energy, transportation, and agriculture.
▪ Local initiatives to implement low-carbon development are not strong.
▪ There are few policies and laws that impose rigid constraints, except through
financial subsidies and incentives for specific research and development
projects.

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▪ Compared to other countries, China’s carbon reduction efforts put more
emphasis on strengthening the top-level design, giving full play to
institutional advantages, and assigning equal responsibilities between the CPC
and the government, encouraging some key areas, industries and places to
take the lead in reaching the peak.
▪ China’s carbon neutrality is more emphasized on the use of administrative
means.
▪ The implementation of China’s carbon neutrality goal emphasizes both the
government’s and the market’s efforts to build a new nationwide system.
▪ China’s carbon emission reduction tools do not emphasize the application of
market instruments.
2.4 Characteristics of China’s Carbon Neutrality Law and Policy

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▪ The first problem is a lack of clarity. The realization of the vision on carbon
peak and carbon neutrality will touch on the interests of multi-sector actors.
The lack of clarity means that executive branches have room to abuse their
power.
▪ The degree of public participation is low. The public is only the target of
knowledge and policy dissemination. The EU’s 2020 proposal for a European
climate law, as well as the numerous revisions to the Carbon Market Directive,
include public participation in addressing climate change and the carbon
market and reinforce it as an important procedural rule. If China is to achieve
higher emission reduction targets, it must increase public participation in
emissions reduction to make legislation and policies more rational.
▪ Third, existing policies and laws have a low rank. Decentralized and
fragmented regulations make it difficult for various systems to create
systematic synergies for climate change mitigation, thereby reducing the
benefits of law enforcement.
2.4 Problems of China’s Carbon Neutrality Law and Policy

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1. Carbon neutrality targets are translated into quantative indicators such as energy
consumption per unit of GDP, CO2 emissions per unit of GDP, and forest cover;
2. Policy and law making focus on the role of government rather than carbon markets;
3. Central governments tend to promote and guide low-carbon development through
specific actions;
4. Local policy and law making is not very active and is influenced by localism;
5. China's carbon neutral policies and laws are characterized by broad coverage and an
emphasis on the rational use of administrative power and the development of low
carbon related technologies;
6. Existing policies and laws are still unclear, with low levels of legislation and
insufficient public participation.
2.5 Summary

Contents
Carbon Neutrality and Finance: Concepts and Significance
1
3 China’s Carbon Finance: Laws and Policies
China’s Carbon Neutrality: Laws and Policies
2

Page . 35
▪ Carbon finance is the term applied to the resources provided to a project to purchase
GHG emissions reduction, which represents a specific dimension of environmental
finance. It explores financial risks and opportunities associated with a carbon-
constrained society.
▪ Market-based instruments can be used to transfer environmental risk and achieve
environmental objectives.
Ø Carbon finance includes various financial institutional arrangements to fund projects with
environmental, health and economic co-benefits by valuing GHG emissions reduction.
Ø The drivers of carbon finance include compliance entities, energy companies, carbon exchanges,
brokers, traders, hedge funds, and venture capitalists. They enable the value circulation of carbon
emission allowances through the auction, spot and derivatives markets.
Ø In China, carbon products include spot trading, forward contracts, carbon asset management, allowance
pledge, repurchase, carbon funds, carbon bonds, among others.
3.1 Carbon Finance: A Premier

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▪ China is facing a series of arduous tasks regarding climate change, and
has agreed to comprehensively strengthen the response to climate change
that aims to peak CO2 emissions before 2030 and achieve carbon
neutrality before 2060.
▪ The Chinese Government Work Report has clearly formulated an action
plan for peaking carbon emissions by 2030.
▪ China began to launch seven pilot carbon markets in 2013.
Ø China’s carbon market has grown into the world’s second-largest carbon market in
terms of trading volume.
Ø At the beginning of 2021, the Ministry of Ecology and Environment promulgated the
‘National Measures for the Administration of Carbon Emissions Trading (Trial)’, and
officially announced that the national carbon market had entered its first compliance
period.
3.2 Carbon Finance in China: Forms and Features

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Product Description
Spot commodity Compliance entities, institutions and individuals make deals and settlements concerning carbon
emission allowances at carbon exchanges
Forward contract Transactions are conducted on the exchange. Except regarding the price of the forward contract, the
exchange has unified rules on variety, specification, quality, delivery location, settlement method,
etc. The transaction rules involve margin requirements, settlement by third parties, daily debt-free
settlement, etc
Asset
management
The compliance entities and investment institutions entrust their own allowances to the general
members or brokers, who have been approved by the exchange to manage carbon emission
allowances
Pledge For a guarantee, the owner pledges all carbon emission allowances that are registered at the
exchange
Repurchase The compliance entity sells a certain amount of carbon emission allowances to the carbon asset
management institution, then entrusts the carbon asset management institution with the funds’
management. The entity repurchases the same amount of allowances after an agreed period
Lending After depositing a certain margin, a qualified participant can borrow the allowances from the lender,
then trade them on exchange. After a certain period, the borrower should return the allowances to
the lender and pay the agreed proceeds
Fund The carbon fund is funded by the government, financial institutions, enterprises or individuals to
invest in the carbon market in the public or private interest
Bond The bond is issued to investors to raise funds for low-carbon economic projects. The income from
the projects is linked to the bond interest
3.2.1 Carbon Finance Products in China

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Carbon Finance Participants
▪ The statutory participants are compliance entities, institutions and individuals. The
compliance entities, which participate in the carbon market to buy and sell
allowances, should not only meet the commands from the government, but also
utilize financial instruments to manage the carbon assets and hedge the risks of
climate change.
▪ The institutions joining the carbon market are mainly institutional investors and
intermediaries. Their purpose is to yield returns by managing carbon assets,
providing brokerage, and offering consulting services.
▪ Institutional investors and intermediaries can be divided into three types:
Ø departments or branches of financial institutions;
Ø affiliates or subsidiaries of the compliance entities;
Ø the specially established companies for carbon asset management and consulting.

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Risks of Carbon Finance
▪ Carbon financial risks include:
▪ Integrity risk
▪ Investors are affected by misleading information to buy and sell carbon products;
▪ participants abandon honest, sustainable and credible trading strategies for economic reasons
under imperfect supervision.
▪ Information risk
▪ The information of the carbon market cannot be released in an orderly and timely manner.
▪ Market abuse
▪ The carbon market experiences market abuse like other markets.
▪ Liquidity risk
▪ The number of trading platforms and products and the degree of commoditization will both
affect the liquidity of the market, which further determines the function of the market and the
confidence of investors.

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Spot Carbon Market
▪ There is a specialized regime for the carbon market in China, based on the Administrative
Measures for the Trading of Carbon Emission Rights promulgated by the national and local
governments.
▪ The National Measures for the Administration of Carbon Emissions Trading (Trial) took effect in
February 2021 and provided the legal basis for the national emissions trading scheme. It
constitutes an administrative regulation, issued by the Ministry of Ecology and Environment. This
departmental regulation contains general rules about carbon emission allowance allocation,
registration, trading, settlement, reporting and verification, as well as supervision and management
of the said activities.
▪ In May 2021, the Management Rules for Registration of Carbon Emission Allowances (Trial) the
Management Rules for Trading of Carbon Emission Allowances (Trial), the Management Rules for
Settlement of Carbon Emission Allowances (Trial) were also issued by the Ministry of Ecology
and Environment. These departmental regulations are at the top of the legal hierarchy of laws of
the carbon market.
3.3 Pathway to Carbon Finance in China

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Rules Contents
Measures for the Administration
of Carbon Emissions Trading
(Trial)
Article 20. The trading products in the national carbon market are
carbon emission allowances. The Ministry of Ecology and
Environment may approve other trading products in accordance with
relevant national regulations.
Measures for the Administration
of Carbon Emissions Trading in
Beijing (Trial) (Beijing)
Article 15. Trading products include carbon emission allowances,
certified carbon emission reductions, etc. The government will
explore innovative carbon-related products.
Trial Measures for the
Administration of Carbon
Emissions in Shanghai
Article 19. The government encourages the exploration of innovative
carbon-related products.
Interim Measures for the
Administration and Trading of
Carbon Emissions in Hubei
Article 24. The trading products in the carbon market include carbon
emission allowances and China Certified Emission Reductions
(CCER). The government encourages the exploration of innovative
carbon-related products.
Administration of Carbon
Emissions Trading (Shenzhen)
Article 54. The carbon products created by the exchange include
carbon emission allowances, certified emission reductions, and other
carbon products approved by the relevant competent authorities. The
government encourages the exploration of innovative carbon-related
products
Rules to Encourage the Development of Innovative Carbon Products

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Absence of Financial Market Rules
▪ There are no clear financial market laws and rules for carbon emission allowances. For
instance, the Securities Law applies to the issuance and trading of stocks, corporate bonds,
depositary receipts and other securities recognized by the State Council. If carbon emission
allowances are to be governed by the Securities Law, it should be stipulated by the laws,
regulations or at least special rules made by the State Council. However, there are no laws,
regulations or special rules to recognize the carbon emission allowance as a security in China.
▪ The carbon emission allowance is not stipulated directly in the financial market rules.
However, it is not completely excluded from the scope of the underlying assets. The Interim
Measures for the Business Management of Derivative Transactions of Banking Financial
Institutions, the Specification for Over-the-counter Trading of Financial Derivatives of
Securities Companies, and especially the Futures and Derivatives Law allow various
underlying assets (including carbon emission allowances) to form derivatives.

Page . 43
Name Legislator Content
Securities Law of the
People’s
Republic of China
Standing Committee of
the National People’s
Congress
Article 2. This Law shall apply to the offering of and trading in stocks, corporate
bonds, depositary receipts, and other securities recognized in accordance with the
law by the State Council within the territory of the People’s Republic of China.
Regulation on the
Administration
of Futures Trading
State Council of the
People’s Republic of
China
Article 2. For the purposes of this Regulation, ‘futures trading’ means trading
activities with futures contracts or option contracts as the subject matter of
trading conducted in the manner of centralized public trading or any other
manner approved by the regulatory authority of the State Council.
Business Management of
Derivative Transactions
of Banking Financial
Institutions
China Banking
Regulatory
Commission
Article 3. The term ‘derivative’ as mentioned in these Measures shall refer to
a financial contract with its value depending on one kind or a number of
underlying assets or indexes. The basic categories of such contracts include
forwards, futures, swaps and options. A derivative also includes structured
financial instruments with features of one or more forwards, futures, swaps and
options.
Specification for Over-
the-counter
Trading of Financial
Derivatives of Securities
Companies
Securities Association of
China
Article 2. ‘Financial derivatives’ refers to financial agreements in which the
value of forwards, swaps, options, etc. depends on equity, debt, credit, funds,
interest rates, exchange rates, indices, futures, etc. or a combination of multiple
products.
Futures and Derivatives
Law of the People’s
Republic of China
Standing Committee of
the National People’s
Congress
Article 3. For the purposes of this Law, ‘trading in derivatives’ means trading
activities other than futures trading, which have swap contracts, forward contracts,
and non-standard option contracts, as well as their portfolios as the subject matter
of transactions.
Financial Market Rules on Carbon Emission Allowances
and Underlying Assets

Page . 44
Alternative: The Self-Discipline of Carbon Exchanges
▪ Carbon exchanges are trading venues that centralize traders, brokers, dealers and other
participants to facilitate trading, settlement, monitoring, dispute resolution, etc.
▪ The self-discipline of carbon exchanges originates from members’ voluntary agreements, in
which the standards of products, trading behaviors, and responsibilities of participants are agreed.
▪ Carbon exchanges have the power to manage and supervise the members according to self-
discipline rules. All carbon exchanges in China have formulated their own systems.
▪ The carbon exchange is also responsible for front-line supervision. Based on the self-discipline
rules for products, trading methods, and participants, the carbon exchange implements rules of
management and supervision.
▪ The authority competent for the carbon market in China is the Ministry of Ecology and
Environment, whose main expertise is to control environmental pollution and protect ecosystems
but not to supervise the trading market. In practice, the Ministry of Ecology and Environment
authorizes carbon exchanges to monitor and supervise the carbon market, and has the power to
manage and regulate carbon exchanges according to the specialized regime.

Page . 45
▪ As the world’s first unified and compulsory greenhouse gas emission reduction trading market, the
EU classifies carbon emission allowances as financial instruments in the revised MiFID II.
▪ In the early stage, the EU lacked adequate arrangements for financial supervision of the carbon
market. In order to ensure the consistency and continuity of the EU Emissions Trading System (EU-
ETS), the MiFID II began to apply to all segments of the carbon market.
▪ With unified supervision, the participants could trade in a transparent and protective market.
Ø The MiFID was revised in 2014 and 2016. The MiFID II was implemented in January 2018. It recognized
carbon emission allowances as financial instruments but was not aimed at dealing with the legal nature of
emission allowances (on the grounds of private law).
Ø It integrated the auction, spot and derivatives markets into a unified regulatory system.
Ø With the strong regulation and effective stabilization reserve mechanism, the carbon price of the EU-ETS in
2019 continued to rise. Even in early 2020, the carbon price declined due to the impact of the COVID-19
epidemic, then soon had a strong rebound, showing resilience.
3.4 Financial Market Rules and the EU’s Carbon Market

Page . 46
▪ According to the MiFID II, the carbon emission allowance and its relevant market
activities will all be governed by the financial market rules.
▪ The MiFID II, as the core rule for the EU’s carbon market, guides other financial
rules in applying to the carbon market.
▪ Professional traders in the carbon market are required to hold the MiFID II license
and comply with all MiFID II organizational and operational requirements
(including know-your-customer checks, transactions reporting, record keeping and
investor protection rules).
▪ The carbon exchanges obtain MiFID II authorization in accordance with their
specific profile (such as a regulated market, a multilateral trading facility (MTF) or
the new category, an organized trading facility (OTF)).

Page . 47
▪ The MiFID II states that institutions or individuals that meet any of the conditions,
such as (1) being market makers, (2) being members or participants of a regulated
market or a multilateral trading facility or having direct electronic access to a trading
venue, (3) applying a high-frequency algorithmic trading technique, and (4) dealing on
own account when executing client orders, should be governed by the MiFID II and
relevant financial market rules.
▪ There are exemptions in the application of the financial market rules in the EU. One is
that some financial market rules do not blindly apply to the auction, spot and
derivatives markets. Another is that participants meeting certain conditions may be
excluded from application of the financial market rules.
▪ The applications and exemptions show that the financial market rules in the EU are
tailored to the EU-ETS specificities. Their purpose is to pursue a balance between the
development of the carbon market and the control of financial risks. Thus, in the EU’s
carbon market, the eligible market participants follow the right rules with no extra
expense.

Page . 48
Pathway to Carbon Finance is based on the Market Participants and Behaviors
▪ The legal nature of carbon emission allowances in China is still under discussion.
Therefore, whether the legal and policy pathway of carbon finance adopts the
regulatory mode of commodity or finance, it may not only depend on the nature of
carbon emission allowances. Another way is to clarify the market participants and
their behaviors. In detail, the application of the specialized regime of carbon market
or financial market rules could be based on whether the participants engage in
relevant financial behaviors or not.
▪ The application and exemptions in the financial market rules shall follow two
standards: (1) such activities will be ancillary to carbon trading, or (2) such
activities will be part of financial activities. If one of those two conditions is
fulfilled, the application of or exemptions from financial market rules will be
available to the market participants.

Page . 49
Application and Exemption for Compliance Entities
▪ Compliance entities perform emission allowance trading activities that are always ancillary to
their main task of GHG emission reduction.
▪ In these cases, compliance entities will be dispensed from the obligation to have a financial
license which is normally required for financial investment firms. Without a license,
compliance entities should be able to become member of or directly participate in exchanges
offering carbon trading (as long as they satisfy the conditions for membership or direct access
set by that trading venue). Compliance entities have to abide by the prohibitions of insider
dealing and market manipulation.
▪ The specialized regulatory regime should provide exemption for compliance entities.

Page . 50
Application and Exemption for Intermediaries and Investment Institutions
▪ In the financial market, entities providing investment services will be required to
hold a financial license and comply with financial organizational and operational
requirements (including know-your-customer checks, transactions reporting,
record keeping and investor protection rules).
▪ Investment institutions which administrate their own assets and emission
allowances by dealing on their own accounts, which are not market makers,
members or participants of a regulated market or an MTF, which have no direct
electronic access to a trading venue, or which do not apply a high-frequency
algorithmic trading technique, will obtain an exemption from the financial market
rules.

Page . 51
Application and Exemption for Carbon Exchanges
▪ Carbon financial products and trading methods currently are mainly
developed and designed by the carbon exchanges. The carbon exchanges
are increasingly and abundantly innovating financial products.
▪ Some carbon exchanges were on the list to rectify the financial risks.

China's Carbon Neutrality Laws and Policies

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