China's carbon market may cover refining and petrochemical sector by 2022-2023

China's national compliance carbon market could be rolled out in the country's refining and petrochemical sector as early as 2022-2023, in a move that will introduce carbon pricing in one of the most energy-intensive sectors.

The earlier-than-expected rollout by the environment ministry was mentioned by Zhang Gao, Vice President of Carbon Emission Allowance Registration and Settlement Company, at the 10th China International Oil and Gas Trade Congress Nov. 8. The Wuhan, Hubei-based company currently hosts China's national carbon market's registration and settlement systems.

The move will also bring China's national oil companies — which are some of the world's largest oil and gas producers, importers, refiners and distributors — into the carbon market, and cover a large segment of the petroleum supply chain.

China's oil refining and petrochemical sector accounts for 14.7% of the country's greenhouse gas emissions and 3.3% of global greenhouse gas emissions, according to a joint study by World Resources Institute and China University of Petroleum.

China's carbon market currently covers only its most emission-intensive sector — power generation — which accounts for around 4.5 billion mt CO2e emissions, or around 40% of the country's greenhouse gas emissions, official data showed.

Groundwork in progress

Beijing started the groundwork for including the refining and petrochemical sector in the national carbon market in late June, but no details have been announced yet.

The environment ministry commissioned China Petroleum and Chemical Industry Federation to carry out preparatory work that included planning the allocation of emissions allowances, testing the national trading system and development of monitoring, reporting, and verification systems, Zhang said.

The general threshold for companies eligible for carbon trading is annual greenhouse gas emissions of more than 26,000 mt CO2e, according to the environment ministry's carbon market policy released in January. So far it is unclear if this will also apply to the refining sector.

Prior to the launch of China's national carbon market, eight pilot exchanges located in different provinces conducted trial runs since 2013, out of which the Guangzhou pilot exchange included 12 local oil refining and petrochemical companies based in Guangdong province that traded their 2020 emissions, according to the Guangzhou exchange.

Emissions quotas under the test pilots were assigned based on the historical average emissions of each company, but the basis of these emissions calculations was not immediately available.

It is most likely that the refining and petrochemical sector will adopt an industry-wide emissions benchmark, which will create challenges for refiners with high emissions and energy intensity per unit of production outputs, Zhang said.

In the power market, companies using coal-fired or gas-fired generation calculate emissions based on a baseline amount of CO2 emissions per megawatt-hour, multiplied by the companies' annual electricity outputs.

National oil companies

The key state-owned oil giants that will be covered are China Petroleum & Chemical Corporation, or Sinopec, which is one of the world's largest oil refiners by capacity, China National Petroleum Corp, or CNPC, with its listed entity PetroChina, and China National Offshore Oil Corporation, or CNOOC, the state exploration company.

Other entities could also include petrochemical companies like Sinochem, private refiners like Rongsheng's Zhejiang Petroleum & Chemical and a host of independent refining units depending on whether they are above the emissions threshold.

Beijing has capped primary refining capacity at 1 billion mt/year by 2025 while boosting refinery utilization rates above 80% under the national carbon peaking action plan released by the State Council Oct. 26. China's refining capacity is expected to expand to 905 million mt/year in 2021 from 880 million mt/year in 2020, according to Sinopec.

Responding to the government's call for decarbonization, the NOCs have been increasing investment in renewables and reforestation projects which generate domestic voluntary carbon credits, or China Certified Emissions Reductions (CCERs), that can be utilized to partially offset emissions obligations.

Sinopec and PetroChina have committed to achieve carbon neutrality around 2050, which is 10 years ahead of China's national carbon neutrality pledge.

CNOOC has also invested in offshore wind power projects and was one of the first to import carbon neutral LNG. In June 2020, CNOOC Gas & Power Group signed an agreement with Shell Eastern Trading for delivery of its first two carbon neutral LNG cargoes to the Chinese mainland, and in September 2020, France's Total delivered its first shipment of carbon neutral LNG to CNOOC, from Ichthys LNG in Australia to the Dapeng terminal in China.

These three oil majors have over 30 captive power plants, which have already been enrolled in the national carbon market.

Zhang recommended that NOCs should establish internal emission trading mechanisms among their subsidiaries, which can voluntarily include emissions sources yet to be covered, such as oil and gas production and methane emissions.

China's independent refining sector concentrated in Shandong province has already been under pressure to accelerate decarbonization and phase out inefficient facilities, and additional carbon costs could squeeze out more capacity.