4-3. China's Stricter Environmental Regulations: Impact on Emissions Trading and Factory Management

In recent years, China has positioned environmental issues as a cornerstone of its national strategy, rapidly tightening regulations on businesses. The nationwide Emissions Trading System (ETS), which was fully launched in 2021, is a particularly noteworthy example. This system, which targets industries with high greenhouse gas emissions, establishes an emissions cap and allows for the buying and selling of surplus or deficit allowances in the market. It is having a significant impact on corporate factory operations and environmental management.

1. Overview of China's Emissions Trading System

China's ETS currently covers thousands of entities, primarily power plants. The system is expected to expand to other energy-intensive sectors, including steel, cement, chemicals, and petroleum refining. Each company is allocated an emissions allowance (quota). If a company's actual emissions exceed its quota, it must purchase additional allowances on the market. This mechanism also allows companies that successfully reduce their emissions to profit by selling their surplus allowances.

2. Impact on Factory Management

The ETS directly influences a factory's operational policy. First, it makes improving energy efficiency and introducing renewable energy essential tasks. Second, companies are required to establish a robust Monitoring, Reporting, and Verification (MRV) system to accurately track emissions. The Chinese authorities strictly audit data accuracy, and false reporting can result in penalties and damage a company's credibility.

3. Risks for Japanese Companies

Japanese companies with production bases in China could be directly subject to this system. Furthermore, if their business partners or suppliers are covered by the ETS, Japanese companies face the indirect risk of being affected by emission reduction requirements and cost pass-throughs. Violations of environmental regulations can also lead to negative corporate image and business suspension, making this not just a factory management issue, but a strategic business challenge.

4. Key Practical Responses

• Thorough Emissions Data Management: Establish an MRV system to ensure accurate and transparent data recording.

• Promotion of Energy-Saving Investments: Introduce high-efficiency boilers and waste heat recovery systems, and switch to renewable energy sources.

• Adoption of Internal Carbon Pricing: Incorporate carbon costs into internal management indicators to inform investment decisions.

• Supply Chain Collaboration: Work with local suppliers to demand emissions reductions and achieve overall optimization.

Summary

China's tightening environmental regulations are not just a source of increased costs for factory management; they are also an opportunity to strengthen competitiveness through energy conservation and decarbonization. For Japanese companies, it is crucial to not only position ETS compliance as a risk management measure but also to proactively address it. This will build trust in the local market and establish a competitive advantage in the global arena.