China’s Bold New Blueprint for Resource & Environmental Markets: A Deep Dive for Investors & Innovators

China’s new policy on resource and environmental factor allocation is set to reshape key markets, signaling a major push towards sustainability and efficiency.

The General Offices of the CPC Central Committee (Dang Zhongyang 党中央) and The State Council (Guowuyuan 国务院) have officially rolled out their ‘Opinions on Improving the Market-Based Allocation System for Resource and Environmental Factors’.

This isn’t just another policy doc; it’s a roadmap to supercharge how China manages and utilizes crucial resources.

The core idea? To boost the market trading of carbon emission rights, water use rights, pollution discharge rights, and other environmental elements.

Why the big push? It’s all about cranking up the efficiency of how these resources are used and taking market-based reforms to the next level.

I. The Big Picture: Overall Requirements

This initiative is anchored in top-level national strategies, including:

• Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era (Xi Jinping Xīn Shídài Zhōngguó Tèsè Shèhuìzhǔyì Sīxiǎng 习近平新时代中国特色社会主义思想)
• The spirit of the 20th National Congress of the Communist Party of China (Dang de èrshí dà 党的二十大) and the Second and Third Plenary Sessions of the 20th Central Committee (Èrshí jiè èr zhōng, sān zhōng quánhuì 二十届二中、三中全会)
• Full implementation of Xi Jinping’s Economic Thought (Xi Jinping Jīngjì Sīxiǎng 习近平经济思想) and Xi Jinping Thought on Ecological Civilization (Xi Jinping Shēngtài Wénmíng Sīxiǎng 习近平生态文明思想)

The game plan involves several key tenets:

• Strengthening Party Leadership: Ensuring alignment with national goals.
• Stability and Progress: Balancing reform with steady development.
• Effective Market, Capable Government: Letting markets work while ensuring strong governance.
• Problem-Oriented & Differentiated Policies: Tailoring solutions to specific issues.
• Goal-Oriented & Coordinated Advancement: Moving systematically towards clear objectives.
• Gradual Progress & Risk Prevention: Phased implementation to mitigate risks.

The ultimate aim is to build a market-based allocation system for resource and environmental factors that is:

• Clearly defined in terms of responsibilities.
• Smoothly operating and efficient.
• Well-coordinated across various elements.

This system is expected to channel these factors to support the development of New Quality Productive Forces (Xīn Zhì ShēngChǎnlì 新质生产力) – a huge buzzword in China’s tech and economic development right now.

Think combined efforts in carbon reduction, pollution control, green expansion, and growth, all driving a comprehensive green transformation of the economy and society.

Key Milestones by 2027: What to Watch

By 2027, China aims to have:

• Basically perfected trading systems for carbon emission rights and water use rights.
• Established and improved the trading system for pollution discharge rights.
• More robust market-based energy conservation mechanisms.
• More active resource and environmental factor trading markets.
• More sound price formation mechanisms.

The payoff? Smoother flow and more efficient allocation of these factors, unleashing market potential and powerfully supporting China’s resource and environmental targets.

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II. Leveling Up: Improving the Resource and Environmental Factor Quota Allocation System

This is where the rubber meets the road in terms of how initial rights and limits are set.

(1) Syncing Up: Strengthening the Integration of Resource and Environmental Goals

Consistency is key. Here’s how different systems will be better linked:

• Carbon Emission Rights:
  • Enhanced linkage with the dual control system for carbon emissions.
  • A gradual shift for the national carbon market from intensity control to total amount control of quotas. This is a significant evolution, potentially making the market more predictable and impactful.
• Water Use Rights:
  • Strict implementation of dual control of total water consumption and intensity.
  • Integration of water use rights trading with river water volume allocation, water resource dispatching, water withdrawal permits, planned water use, and supervision. A more holistic approach to water management.
• Pollution Discharge Rights:
  • Stronger integration with the pollution permit system.
  • Establishing a system where pollution permits are the basis for rights confirmation and a regulatory vehicle. This standardizes the foundation for trading.

(2) Sharpening the Rules: Improving the Quota Allocation and Transfer System

How quotas are initially given out and moved around is getting a major rethink.

• Carbon Emission Quotas:
  • Optimization based on reduction targets, industry development stage, and historical emissions.
  • A steady move towards a mix of free and paid allocation, with an orderly increase in the proportion of paid allocation. This means more companies might have to pay for their emission allowances, creating stronger financial incentives for reduction.
• Water Use Rights:
  • Principle of “determining based on water, acting based on water volume,” with a strong emphasis on water-saving.
  • Coordinating water demands for living, production, and ecological needs.
  • Improving the initial allocation system, clarifying regional water rights, withdrawal rights, and irrigator rights.
  • In water-scarce regions, exploring paid transfer of water use rights.
  • Newly increased industrial water use should, in principle, be acquired through paid purchase in the water rights market. This is a strong market signal.
• Pollution Discharge Rights:
  • Better alignment of rights calculation with permitted discharge volumes and the classified management of polluting units.
  • Accelerating the build-out of a technical system for calculating rights that reflects environmental quality improvement goals, industry tech levels, and pollutant characteristics.
  • Pushing for paid initial allocation for key air and water pollutants.

• Carbon Emissions: Enhanced linkage with dual control system; shift from intensity to total amount control for carbon market quotas.
• Water Use: Strict dual control implementation; integration of trading with water resource management steps (volume allocation, dispatching, permits, etc.).
• Pollution Discharge: Stronger integration with the pollution permit system, using permits as basis for rights confirmation and regulation.

III. Expanding Horizons: Optimizing the Scope of Resource and Environmental Factor Trading

More things will be tradable, and more players will be involved.

(3) Carbon Market 2.0: Perfecting Coverage

China’s national carbon market is set for significant expansion.

• Broader Scope: Steadily expand industry coverage, bring in more trading entities, and enrich trading varieties and methods. This will be guided by carbon peaking/neutrality goals, reduction potential, and accounting capabilities.
• Voluntary Market Boost: Improve the national voluntary greenhouse gas emission reduction trading market (often referred to as CCERs), gradually expanding areas of support. This is crucial for projects outside the compliance market.
• Green Certificates Link-Up: Strengthen connections between green certificates and both the national carbon emission rights market and the voluntary market. Care will be taken to avoid duplicate benefits for entities.
• Global Alignment: While focusing on domestic development, China will actively promote alignment and mutual recognition with relevant international mechanisms. This could be a game-changer for international carbon trading.

(4) Smart Savings: Improving Market-Based Energy Conservation Mechanisms

Efficiency is the name of the game.

• Conservation First: Improve energy conservation management across the entire energy lifecycle (production to consumption).
• Service Industry Growth: Develop comprehensive service models like energy conservation consulting, diagnostics, design, financing, retrofitting, and trusteeship. This will foster a stronger energy conservation service industry.
• Streamlining Trading: Enhance coordination between energy use rights trading and carbon emission rights trading.
• Avoiding Duplication: Based on carbon market development, promote the orderly cessation of energy use rights trading pilots in some regions to prevent duplicate compliance burdens. This shows a desire for regulatory efficiency.

(5) Water on the Move: Enriching Water Use Rights Trading

Making water rights more flexible and tradable.

• Cross-Provincial Trading: Actively explore and standardize water use rights trading across provincial borders in key river basins like the Yellow River (Huang He 黄河). This is a complex but potentially very impactful area.
• Surplus Water Trading: Encourage industrial enterprises and irrigation districts to boost water-saving renovations and allow surplus water to be traded on the market.
• Social Capital Welcome: Encourage private investment in water-saving projects (e.g., irrigation) with returns generated from trading saved water.
• Unconventional Water Sources: Promote trading of reclaimed water, collected rainwater, desalinated seawater, mine water, and brackish water, with supporting systems. This taps into new supply sources.

(6) Cleaner Future: Continuously Deepening Pollution Discharge Rights Trading

Expanding the market for the right to pollute, incentivizing reductions.

• Paid Use & Trading Systems: Establish and improve these systems at the provincial level, expanding trading entities, varieties, and methods based on local conditions.
• Geographic & Pollutant Expansion: Support regions in orderly expanding the types of pollutants and geographic scope of trading based on pollution control needs.
• Regional Integration: Deepen pollution discharge rights trading within the Yangtze River Delta Regional Integration (Chang Sanjiao Quyuan Yitinhua 长三角区域一体化) initiative.
• Cross-Provincial River Basins: Explore conducting trading across provincial borders within the same river basin.

IV. Building the Marketplace: Improving the Resource and Environmental Factor Trading System

The “how-to” of making these markets function smoothly and transparently.

(7) One-Stop Shop: Inclusion in Public Resource Trading Platforms

Streamlining access and data.

• Phased Integration: Orderly incorporate trading of carbon emission rights, water use rights, pollution discharge rights, etc., into the public resource trading platform system. This aims to “integrate one when it’s ready.”
• Data Aggregation: Promote the aggregation and sharing of trading data through these platforms.
• National Uniformity: Rationalize the relationship between local and national markets. Stop establishing new local or regional carbon emission rights trading markets. Strengthen guidance over existing local markets. Accelerate construction of a unified national water use rights trading market. This points towards consolidation and standardization.

(8) Rulebook Revamp: Strengthening Trading Rules

Clear rules make for fair markets.

• System Improvements: Enhance systems for rights confirmation, registration, mortgage, and circulation of these factors.
• Policy Cleanup: Remove policies that don’t align with the reform requirements.
• Standardized Procedures: Improve rules for data collection, product trading, information disclosure, and supervision.
• Operational Excellence: Perfect systems for business processes, data management, and risk prevention.

(9) Market Stability: Improving the Reserve and Adjustment System

A mechanism to manage supply and demand fluctuations.

• Factor Reserve Pool: Establish a reserve pool by reserving initial quotas, reclaiming expired ones, repurchasing surplus quotas, and developing additional ones.
• Market Intervention: Based on management goals, development needs, and market conditions, timely acquire, sell, or release relevant factors to regulate the market and guide expectations. This is a form of market stabilization.

(10) Finding the Right Price: Improving the Price Formation Mechanism

Letting the market discover value.

• Market-Driven Prices: Adhere to market principles and categorize price formation mechanisms to fully reflect market supply/demand, resource scarcity, environmental damage costs, and the value of ecological products.
• Efficient Allocation via Price: Leverage the price mechanism to promote efficient and rational allocation.
• Transparency: Establish and improve price monitoring and information disclosure systems, relying on the trading markets.

(11) The Watchdogs: Increasing Market Regulatory Enforcement

Ensuring fair play and integrity.

• Strict Oversight: Strengthen supervision over trading institutions, entities, and third-party service providers.
• Crackdown on Malpractice: Investigate and punish data falsification, illegal/irregular trading, and market manipulation.
• Water Rights Scrutiny: Enhance full-process supervision of water use rights trading, including third-party and ecological impacts.
• Credit System: Accelerate the establishment of a credit system for these markets, disclosing credit info and severely punishing dishonest behavior.
• Cybersecurity: Strengthen trading system cybersecurity and data security to prevent sensitive data leaks. This is crucial for market trust.

• Public Platform Integration: Centralizing trading onto a unified system (“integrate one when it’s ready”).
• Rulebook Improvement: Enhancing clear rules for confirmation, trading, mortgage, and circulation.
• Market Stability: Implementing a reserve pool and adjustment system to manage fluctuations.
• Price Formation: Adhering to market principles to reflect scarcity and environmental costs.
• Regulatory Enforcement: Increasing oversight, combating malpractice, and improving credit systems.

V. Laying the Groundwork: Strengthening Foundational Capacity Building

Building the infrastructure and knowledge base for these markets to thrive.

(12) Laws & Standards: The Regulatory Backbone

Clear legal frameworks and technical standards are essential.

• Legal System Updates: Research and improve relevant legal systems to further clarify trading principles.
• Standard Setting: Scientifically formulate and revise standards for carbon emission accounting, water quotas, pollutant discharge, etc.
• Energy Efficiency Standards: Accelerate updates for energy conservation standards in key industries and for important equipment.

(13) Data Integrity: Strengthening Monitoring and Accounting Capacity

You can’t trade what you can’t measure accurately.

• Capacity Building: Boost monitoring and accounting capabilities for carbon emissions, water use, and pollutant discharge.
• Technical Specs: Improve relevant accounting technical specifications to enhance the authenticity, accuracy, and validity of trading data.
• Carbon Monitoring Pilots: Deepen the promotion of carbon emission monitoring pilots in key industries and refine technical routes.
• Water Resource Management: Strengthen monitoring and measurement of water withdrawal/use for better overall management and early warning.
• Pollution Monitoring: Accelerate the construction of a pollution discharge monitoring system.

(14) Show Me the Money: Improving the Financial Support System

Financial innovation will be key to market development.

• Financial Institution Involvement: Actively and steadily promote financial institutions’ participation in market construction.
• Green Finance Products: Guide financial institutions (under compliance, risk control, and commercial sustainability) to develop green credit, green insurance, green bonds, and other financial products and services related to these factors. This is a huge opportunity for the finance sector.
• Green Finance Disclosure: Promote standardized disclosure of green finance-related information by financial institutions.
• Guarantee Registration: Promote unified registration and public disclosure of guarantee businesses related to carbon, water, and pollution discharge rights. This can help in securitization and financing.

(15) Expert Help: Enhancing Market Service Levels

A robust ecosystem of service providers is needed.

• Third-Party Services: Cultivate and develop third-party institutions to provide comprehensive services like accounting and verification, valuation, consulting, and training. This creates new business opportunities.
• Platform Cooperation: Relevant trading platforms can cooperate with financial institutions and third-party service providers (legally and based on actual needs) to offer services like rights confirmation, trading, and value assessment.

VI. Making It Happen: Strengthening Organization and Implementation

Ensuring the plan is executed effectively.

Under the centralized leadership of the Party Central Committee (Dang Zhongyang 党中央), all regions and relevant departments are tasked with effective implementation.

They need to refine reform measures based on local realities and undertake innovative explorations.

The National Development and Reform Commission (NDRC) (Guojia Fazhan Gaige Wei 国家发展改革委), along with other departments, will oversee progress, assess outcomes, and analyze new developments.

Any significant matters will be reported promptly to the Party Central Committee (Dang Zhongyang 党中央) and The State Council (Guowuyuan 国务院) through established procedures.

This strategic overhaul in resource and environmental factor allocation signals a major shift towards a greener, more efficient, and market-driven economy in China, with wide-ranging implications for businesses, investors, and innovators.

References

• – Xinhua News Agency
• China’s National Carbon Market Takes Cautious Steps Towards Expansion – Caixin Global
• China promotes water rights trading to optimize resource allocation – China Daily
• China says to expand pollution permits trading by 2025 – Reuters