Chinese NOCs Get Feel for Carbon Trading

Copyright © 2021 Energy Intelligence Group

China’s major state-owned oil and gas companies have started getting their feet wet in the country’s new carbon market, which so far impacts just the captive power generation arms of Sinopec and China National Petroleum Corp. (CNPC). But it’s only a matter of time before their core oil and gas businesses get drafted into the national emissions trading scheme (ETS), which currently imposes carbon emissions limits only on the power sector. In the future, ETS coverage will include the “petroleum and petrochemicals” sectors, alongside others like iron and steel, construction materials and non-ferrous metals, Zhang Xiliang, who heads the ETS design technical specialist team, told state media China News Service. The Ministry of Ecology and Environment has signaled that it hopes to include such highly-polluting industries during the current 14th five-year planning period, or before end-2025 (NE Jul.22'21). Refining sources, however, said they are not aware of a concrete timetable. Some also think that the ETS compliance date for refining could slip beyond 2025. China’s oil/petchems sector is estimated to account for around 14% of national emissions, compared with some 40% by power generation. While lower in terms of absolute emissions, some petrochemical operations can have a higher emissions intensity (as measured by the amount emitted per unit GDP) than the national average. Currently, a total of 17 Sinopec subsidiaries with captive power plants are covered under China’s ETS. Several of them -- the Shengli oil field and petchem complexes at Maoming, Shanghai and Inner Mongolia -- have traded on the national carbon market. CNPC also said four of its power subsidiaries -- affiliated to its Daqing oil field and petrochemical complexes at Dushanzi, Urumqi and Jinzhou -- traded on the launch day of the national carbon market. Participation by such large state-owned energy firms on the ETS launch day likely stemmed from the need to be seen as dutiful good citizens supportive of Beijing’s carbon policies. Trading volumes plunged subsequently to thin or even negligible levels. ETS entities each have an emissions intensity – or emissions allowed per unit of output -- imposed on them. They receive free carbon allowances for their expected outputs based on the permitted emissions intensity. Those emitting above their freely allocated amounts will need to buy extra carbon allowances from others with a surplus. Another means of staying within the emissions limit is through the use or purchase of carbon “offsets” -- or China Certified Emissions Reduction (CCER) credits awarded to approved carbon reduction projects such as wind or solar installations. But current rules allow such “offsets” to cover for only up to 5% of an entity’s total emissions. The Chinese ETS’ intensity-based approach differs from the absolute capping in the more mature EU system. At current settings, the intensity limits on Chinese power generators are lax, so many are expected to have a surplus of carbon allowances that they can sell. This means, for now, the carbon compliant cost on emitters would be limited as Beijing prioritizes post-pandemic economic recovery. Current prices – at around 50 yuan ($7.70) per ton -- are a fraction of EU levels. Nonetheless, all three state-owned Chinese oil majors have forayed into activities that can either directly cut emissions, or are eligible for CCERs. CNPC has set up a 10 billion yuan ($1.55 billion) investment firm for strategic emerging industries, new technologies and novel business scenarios. China National Offshore Oil Corp. (CNOOC) is deepening its offshore wind involvement through a recent partnership with China Three Gorges, which has also diversified from hydropower into offshore wind (NE Jul.1'21). Sinopec is diving into electric vehicle (EV) charging, hydrogen and scaling up its carbon capture, utilization and storage (CCUS) efforts (NE Jul.8'21). By the end of this year, Sinopec expects to complete a project for capturing 1 million tons per year of CO2 from its Qilu petchems plant for transport to the Shengli oil field, where the CO2 would be injected underground for enhanced oil recovery. It is also targeting 1,000 hydrogen refueling stations. The company already has 500 EV charging retail stations and targets 5,000 by 2025.

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