(Source: Southern Energy Watch) Several industry proponents have raised concerns about the implementation of a rolling compliance design in the national ETS, as reported by local media sources. In an interview in August, NDRC’s Deputy Director, Jiang Zhaoli, had stated that the state was working on a rolling compliance model for the national ETS. This would divide allocations and surrender deadlines across the year between specified cohorts (likely by industry).
Proponents interviewed by Southern Energy Watch have raised three main scenarios which may occur if a rolling compliance were to be implemented. The first assumes that trading remains concentrated around the surrender deadlines as it currently does in the pilot schemes. This is likely to reduce liquidity in the market as centralized trading would occur between entities having similar compliance periods and thus constricting trading to a cohort. It would also lead to multiple instances of increased price volatility through the year as different surrender deadlines are implemented. Centralized trading could also create a price differential between industries despite all allowances being deemed the same in value.
The second scenario assumes compliance quotas are loaned between industries with different compliance periods. As entities get more familiar with the emissions trading scheme, they may create a comparatively cheaper system of meeting obligations wherein industry A loans a second industry B, which has a separate compliance period, the allowances required to meet the latter’s obligation. In due turn, the favor is reverted and industry B loans industry A the required quota to meet industry A’s compliance as allocations for future performance would be distributed separately between these industries. This presents a danger to the entire policy objective of reducing emissions cost effectively since compliance could now be met by borrowing allowances from allocations made for future years.
The final scenario manages to avoid both conundrums by assigning a time stamp to the allowances that would mandate that each batch of allowances be used within a certain period. However, this would increase complexity and price volatility as entities must react to any surplus or shortage within a shorter time frame.
Furthermore, a rolling compliance model does not necessarily decrease workload of the administrators, instead it could make things even more complicated at a local level. This model has not been tested in any of the current pilots, and thus may also require a learning curve for regulators and covered entities alike. To achieve the objectives of reducing emissions in the most cost effective manner possible, experts suggest the development of financial derivatives such as a futures market which would allow entities to effectively manage their obligations over a longer horizon and thus reduce price volatility in the national ETS.