China’s Weak Carbon Market Hits a New Roadblock — Data Fraud

It took more than a decade for Europe’s carbon market to start cutting emissions, but the world no longer has the luxury of waiting that long for the world’s biggest polluter to improve its system

Emissions rise from cooling towers at a coal-fired power station in China.
Emissions rise from cooling towers at a coal-fired power station in China.Photographer: Qilai Shen/Bloomberg

ByBloomberg News 18 April 2022 at 17:00 GMT+7

China’s carbon market, hindered by low prices and thin trading, has struggled to become a useful tool in the country’s efforts to rein in its world-leading emissions. Now, accusations of data fabrication and questions over verification methods have added a new roadblock.More fromBloombergGreen

A recent provincial inspection unearthed widespread problems with emissions data submitted by power plants, who have to pay for every ton of carbon dioxide they generate that exceeds an allocated amount. Four consulting firms that help utilities prepare their submissions were criticized last month in connection with negligence or falsifying data.

Early teething issues seem to have been anticipated by Beijing. It launched the carbon market last year after several delays with just one industry — power generation — and ample allocations of free emissions allowances to keep prices low so compliance wouldn’t be too much of a burden. The idea was to hammer out the technical details, then slowly enroll seven other industries over the ensuing couple of years. By the end of the decade, when China plans to reach peak pollution, the government would be able to use it as a tool to effectively control emissions.

China carbon trading activity has gone quiet since the end of last year

But the data problems threaten to slow the rollout and prolong the time it takes carbon pricing to help reduce emissions. “If the data fraud issue can’t be sorted out in only one industry, then hastily expanding the scheme to eight industries will only make the problem worse,” said Yuan Lin, lead analyst of carbon research at Refinitiv.

In Europe, home to the world’s most-active carbon market, it took more than a decade after launching in 2006 before prices rose high enough to motivate utilities to reduce emissions. The problem for China is that the world no longer has the luxury of waiting that long. The world’s top scientists have warned that greenhouse gas pollution must peak before 2025 to keep the Paris Agreement’s targets alive.

That leaves precious little time for the kind of data problems that have recently come to light in China. In February, the Ministry of Environment and Ecology sent officials in one province the results of a spot inspection that found 18 of 19 randomly selected power companies had submitted problematic data, according to a document seen by Bloomberg. And in March, the ministry publicly scolded four consulting firms for either falsifying or being negligent in verifying data for power companies.

The issues underscore not just the incentives for companies to cheat, but also a lack of policing power by regulators.

A recurring problem in both cases was verifying coal quality. Emissions are calculated by measuring the amount of coal burned and applying a factor that accounts for the quality of the fuel; higher qualities tend to pollute less per amount of electricity generated. That means a company can buy a little bit of high-quality coal and submit it for examination but then use mostly cheaper, low quality coal and make it look like they spewed less pollution than they really did.

One way to prevent companies from doing that is to send inspectors out to power plants to see for themselves what’s going on. But the MEE has abdicated such policing authority to provincial governments, who have questionable manpower and technical ability. They also face conflicts of interests as many of the biggest emitters are state-owned enterprises key to local economies. MEE officials didn’t respond to a faxed request for comment.

Then there’s the problem of verifying the data. Several consulting firms in China have expertise in the field. but many are locked in vicious price wars to try to win new customers amid the national expansion of the carbon market. Provinces now pay about 10,000 to 20,000 yuan per case for verification work, compared to as much as 100,000 yuan in the early days of Beijing’s pilot market, according to a person familiar with the matter.

That creates more incentive for consulting firms to skimp on expenses such as site visits. China’s Covid-zero policy also made work trips harder, as did the fact that last year’s verification process was all condensed into the last month. And for the power plants, penalties for getting caught aren’t much of a deterrence. Under the current rules, violations are only subject to administrative penalty of up to 30,000 yuan ($4,712).

The government is trying to improve the system. In a meeting last month, Li Gao, head of the climate department at China’s environmental ministry, said it would draft legal regulations for the carbon market as soon as possible, and will build a training system for emission verifiers. China’s top economic planner this month pledged to have “zero-tolerance” on data fabrication, noting that the violations “damaged the quality, order, and confidence of the market.”

For Wang Jun, a carbon analyst and author of the book “The Carbon Neutrality Era,” the problems won’t go away until China’s created a sustainable regulatory structure for the market. While China is trying to build effective monitoring, reporting and verification systems, it hasn’t introduced sufficient guidelines and regulations for each of the three steps, leading to loopholes that allowed emitters to manipulate data.

“The imperfect top design is an important issue,” Wang said. 


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