Integrity of firms’ emissions reporting in China’s early carbon markets

Abstract

The integrity of greenhouse gas emissions data is essential to assess progress towards countries’ pledges under the Paris Agreement on climate change. Building credible systems for emissions measurement, reporting and verification is challenging, especially in developing countries. Using a unique dataset from two of China’s pilot emissions trading systems (Beijing and Hubei), we compare firms’ self-reported CO2 emissions with emissions verified by third parties (‘verifiers’). In Beijing, we find that the average discrepancy fell by statistically significant levels (from 17% in 2012 to 4% in 2014 and 2015), while in Hubei it started lower and showed a statistically insignificant decrease (from 6% in 2014 to 5% in 2015). We observe no evidence of deliberate misreporting in these two pilots, and show that improvements in firms’ reporting capacity are associated with discrepancies of decreasing magnitude in Beijing. The results suggest that the administrative and firm capabilities required to support emissions trading systems in developing countries will require substantial time and effort to build.

Full text

Articles
https://doi.org/10.1038/s41558-018-0394-4
1Research Center for Contemporary Management, Institute of Energy, Environment and Economy, Tsinghua University, Beijing, China. 2Joint Program on the
Science and Policy of Global Change, Massachusetts Institute of Technology, Cambridge, MA, USA. 3Climate Change and Energy Economics Study Center,
Economics and Management School, Wuhan University, Wuhan, China. 4Center of Hubei Cooperative Innovation for Emissions Trading System, Hubei
University of Economics, Wuhan, China. 5Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA, USA.
*e-mail: vkarplus@mit.edu; zhang_xl@tsinghua.edu.cn
Determining the impact of the Paris Agreement on climate
change will require confidence in the ability of nations to
accurately report emissions of greenhouse gases, most nota-
bly carbon dioxide (CO2) from industrial sources. This task is not
trivial: even in developed nations, reporting requirements are still
relatively new, while in many developing countries, few manag-
ers have heard of CO2 accounting. It is therefore of global interest
to study the progress of developing domestic capabilities in mea-
surement, reporting and verification (MRV) for CO2 emissions,
which can inform national paths to establishing effective systems.
These paths will be vital to increase transparency and accountabil-
ity—objectives that are now front and centre in the United Nations
Framework Convention on Climate Change process.
The challenge of developing reliable domestic emissions accounts
is not new, but it is often underestimated. The second Conference
of Parties in 1996 adopted the first reporting guidance for coun-
tries not covered by the Kyoto Protocol1. Twenty years later, how to
design these requirements flexibly, recognizing differences in capac-
ity, remains a major sticking point in global climate negotiations.
The implementation of these systems has been another matter
altogether. Most countries rely on data reported by emitting firms
themselves. Studies in developing countries have revealed that mis-
reporting of environmental data can be substantial2,3. On the one
hand, firms may not have the capacity to accurately measure and
report emissions, while on the other, data manipulation may be
more widespread when governments lack the funding and exper-
tise to monitor the accuracy of self-reported data. Given that these
countries account for a growing share of total global emissions, even
modest improvements in accounting practices can have a big impact
on the quality of global emissions inventories. Here, we study the
efforts of China—the world’s largest CO2 emitter and a developing
nation—to establish CO2 accounting in firms participating in the
nation’s emissions trading pilots. We find no evidence of deliberate
misreporting, although we do observe that discrepancies between
self-reported and verified emissions data decreased over time,
consistent with improvements in emissions accounting capabilities.
Role of reliable data
The nature of the Paris Agreement, as a collection of national contri-
butions designed to reduce countries’ greenhouse gas emissions, has
sharpened the accounting imperative. A total of 177 countries that
have submitted their first nationally determined contributions will
be asked to demonstrate progress towards their own self-imposed
goals. Credibility will hinge on the quality of emissions reporting.
The questionable accuracy of CO2 emissions data in China is a
well-known problem. Several years ago, the gap between annualized
national emissions totals and the national sum based on provincial
statistics was around 20%—equivalent to the annual CO2 emissions
of Japan4. Recognizing data quality challenges, the national gov-
ernment regularly updates historical statistics on national energy
use based on detailed economic surveys. A recent update revised
annual coal use statistics upwards for the years 1998 to 2014, with
the largest annual increase in coal consumption reaching 14%5,6.
Inaccuracies in Chinese data have historically arisen because energy
and emissions data are self-reported by companies and assembled
by local governments, serving as a basis for higher levels of govern-
ment to evaluate performance. These reports were subject to limited
independent scrutiny7.
The Chinese government has invested heavily in a national emis-
sions trading system (ETS) as a cornerstone of its climate change
mitigation strategy, building on its experience with regional pilot
programmes starting in 2013. The national system is expected to
gradually cover large entities that account for about half of total
domestic CO2 emissions, based on information released in connec-
tion with its official launch in December 2017. Given that an ETS
turns CO2 into a commodity that can be traded to meet covered
Integrity of firms’ emissions reporting in China’s
early carbon markets
Da Zhang 1,2, QinZhang1, ShaozhouQi3,4, JinpengHuang3, ValerieJ.Karplus 2,5*
and XiliangZhang 1*
The integrity of greenhouse gas emissions data is essential to assess progress towards countries’ pledges under the Paris
Agreement on climate change. Building credible systems for emissions measurement, reporting and verification is challenging,
especially in developing countries. Using a unique dataset from two of China’s pilot emissions trading systems (Beijing and
Hubei), we compare firms’ self-reported CO2 emissions with emissions verified by third parties (‘verifiers’). In Beijing, we find
that the average discrepancy fell by statistically significant levels (from 17% in 2012 to 4% in 2014 and 2015), while in Hubei
it started lower and showed a statistically insignificant decrease (from 6% in 2014 to 5% in 2015). We observe no evidence
of deliberate misreporting in these two pilots, and show that improvements in firms’ reporting capacity are associated with
discrepancies of decreasing magnitude in Beijing. The results suggest that the administrative and firm capabilities required to
support emissions trading systems in developing countries will require substantial time and effort to build.
NATURE CLIMATE CHANGE | VOL 9 | FEBRUARY 2019 | 164–169 | www.nature.com/natureclimatechange
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