China’s carbon market needs better data

Emission calculation and reporting is fraught with error and prone to manipulation. Things cannot go on like this much longer.

Photo from CFP

Photo from CFP



It’s quite easy to fall foul of China’s environmental agency. Rules are strict and supervision stringent. The agency wants more, better emission data, and doesn’t mind pointing the finger. But in March, four companies were named in the Ministry of Ecology and Environment (MEE) for forging emission reports.

Of the four, two were consultancies that produced the reports rather than the actual emitters.  Zhongtan Nengtou instructed clients to tamper with samples and fabricate results. The company has a history of faking reports. It admitted the wrongdoing and will close its carbon consulting business. Liaoning Dongmei didn’t issue a response.

The other two were not the actual emitters either. Auditors who do not audit give the OK without actually doing anything. SinoCarbon Innovation & Investment blamed Covid and denied colluding with clients to commit fraud. Qingdao Xinuo Renewable also blamed the pandemic.

Cooking the books

Emission auditing is carried out at province level, usually by private companies selected through open bidding. Criteria vary from province to province. Emitters sign off on their own reports, hardly a guarantee of accuracy. If an emitter is not able to calculate its own parameters, a conservative default value is used which can overestimate emissions by 20 percent or more.

More often than not, the same set of parameters is assigned to all emitters within a province. “Different companies use different coal,” an industry insider said. “Assigning the same value across the board punishes companies dedicated to cutting emissions.”

Without rigorous auditing, inconsistency creates opportunities for fraud. The carbon market assigns emission quotas and when that is used up, extra must be bought from those with surpluses. Zhongtan Nengtou contracted to turn a client from deficit to surplus through cooking the data.

The money involved creates the perfect environment for fraud to prosper. To avoid being caught, some companies go to great lengths to fake every set of data from the very beginning. Auditors are stretched, both financially and emotionally.

Fraud has become more sophisticated and harder to spot, and the stakes are much higher. Most auditors make money by taking on more clients. Margins are thin and many have decided it’s not worth the hassle.

Between a rock and a hard place

“We don’t have the expertise. We don’t have authority. But we are held accountable,” a manager at SinoCarbon Innovation & Investment said. “If we report fraud, the client is unhappy. If we don’t and later the authorities found out, our reputation is ruined.” SinoCarbon has shut down its emission auditing business.

Lawmakers raised concerns during this year’s Two Sessions, suggesting a standard methodology. LI Yonglin, an executive from Sinopec and a member of the CPPCC National Committee, proposed establishing a measurement, reporting, and verification system for emission data.

Emission calculations are still mostly manual, time-consuming, and prone to error. The ministry came up with new rules for data management in March. Raw data must now be kept for at least five years and be uploaded to a central platform on a monthly basis. Companies should automate collection, calculation and reporting to minimize potential for tampering.

Missing, inaction

 “Many companies do not voluntarily disclose emission data, and don’t have the collection and reporting expertise. The numbers are often missing, or simply wrong,” said LI Jing, partner at Ernst and Young.

Reporting requirements are getting higher and real-time automation is advocated by everyone. The carbon market is still governed by pilot measures issued in 2020. Data management is expected to be an important part of the new legislation when it is passed this year.