China’s newly launched national carbon emissions trading system (ETS), the world’s largest, needs to raise its game on fraud prevention by imposing steeper penalties on offending companies to deter cheating, analysts said. Such measures are essential to preserve the integrity and effectiveness of the ETS, the main market-based tool for realising the nation’s goals to peak carbon emissions before 2030 and achieve carbon neutrality by 2060, they added. Success in China, the world’s largest emitter accounting for around 30 per cent of global carbon dioxide emissions, is key to achieving the 2016 Paris Agreement’s ambition to keep global warming at well below 2 degrees Celsius by 2100. Historical temperature rise had already reached 1.1 degrees last year. “Bridging the gap between China’s net-zero [emissions] pledge and implementation is absolutely critical for the country and the world to meet [commitments] to the Paris Agreement,” said Jacqueline Tao, an analyst at non-profit climate risk data provider TransitionZero. “However, China is seeing significant challenges currently due to its data integrity problem.” The scheme, which debuted last July, only covers 2,225 power generators that contributed some 40 per cent of national carbon emissions. Seven other industries are expected be included in the next few years. Covered emitters must submit emission reports on seven types of greenhouse gases to provincial-level environment watchdogs within three months after the end of each calendar year. Emission quotas for the carbon dioxide equivalent volumes are allocated based on the emitters’ reported volumes in the previous year, which are kept in a central registry to facilitate trading, settlement obligations and payments. Under-reporting of emissions can help emitters avoid or reduce their obligation to buy quotas. Over-reliance on self-reporting at this “relative infancy” stage of the China ETS and a lack of standardisation of key indicators and ways of reporting are some of the key problems, Tao said. This in turn amplifies the challenges for auditors in spotting fraudulent behaviour, as they are also grappling with the complexities of emissions accounting – partly due to China’s caps are imposed on emission intensity instead of absolute emissions, she added. Turnover under emissions trading scheme expected to reach US$15 billion in 2030 On-site inspections by 31 working groups in last year’s fourth quarter discovered information tampering and faking by various emitters and reporting and audit services providers, the Ministry of Ecology and Environment said on March 14. It has so far named and shamed the first batch of four offenders, all of which are service providers. They include reporting services firm Zhongtan Nengtou Tech, which forged data in test reports for its client Inner Mongolia Erdos High-Tech New Materials. Reports verifier SinoCarbon Innovation & Investment was found to have failed to detect obvious problems with authenticity, completeness and accuracy of data and documents in client reports. SinoCarbon conceded that it had failed to detect fabricated reports submitted by some clients, by forming its audit opinion based on photocopies of assessment reports and declarations of authenticity provided by them. China’s carbon trading exchange struggles with unclear policies as it eyes expansion The ministry is stepping up efforts to improve data quality as it prepares to expand the carbon trading scheme into more carbon-intensive industries. A lack of professional accreditation bodies for cross-checking the eligibility of verifiers approved by provincial authorities is another regulatory gap in the system, said Qin Yan, lead carbon analyst at financial data provider Refinitiv. In Europe, lists of eligible verifiers are published by national and region-wide accreditation bodies on a regular basis, she noted. “Emissions data is the foundation for measuring China’s progress towards its climate goal and also for measuring the progress at the local level,” she said. “China needs to build up a solid emissions data monitoring system.” Since last year, state leaders – including Vice-Premier Han Zheng who heads a high-powered leading group on climate neutrality – have emphasised the importance of establishing a uniform emissions statistics and accounting system, Qin noted. China ETS reduces carbon but needs map to cap-and-trade based system Working groups involving officials of the Statistics Bureau and the National Development and Reform Commission have been set up for the job. Companies that fail to present accurate reports or refuse to make timely disclosures on greenhouse gas emissions data are only fined between 10,000 yuan (US$1,570) to 30,000 yuan, according to current regulations. “These kinds of data integrity and reporting problems are very hard to fix in China, [as] the costs of cheating are low,” said Lucas Zhang Liutong, director of Hong Kong-based consultancy WaterRock Energy Economics. “At a minimum, the penalty [should] be increased substantially to reduce the incentives of cheating.” The Chinese government should also consider making carbon emissions data publicly available, which can incentivise emitters and audit firms to do their reporting and verification jobs properly, he added. Data frauds are not unique to China. Similar problems plagued the European carbon market between 2005 and 2007, which were tackled by improving the legal framework, raising penalties and revising rules on emissions monitoring and reporting. One possible way to enhance the quality-checking while keeping costs down is the adoption of so-called “anomaly detection” system, where sensors are installed on emitting assets to collect and send real-time estimates of emissions to regulators, TransitionZero’s Tao said. Satellite imagery and machine learning could be additional tools for the ministry, which already deploys drones equipped with pollutant sensors to enhance enforcement efficiency and discourage data falsification, she added.