The National Carbon Market, due to go live at the end of June, is being unveiled.
“At present, the basic construction of the national carbon market system has been completed, and the trading system contracted by Shanghai and the registration system contracted by Hubei are pressing ahead with the comprehensive docking and joint inspection test. According to the requirements of relevant departments, the trading system will be officially opened before the end of June to form the first single transaction. By then, the national carbon market will be the largest carbon emissions trading market in the world.” Liu Jie, general manager of the Shanghai Environment and Energy Exchange, told reporters that the first batch of participants in the deal had been granted a two-year quota for the power sector, which emits about 4 billion tonnes of carbon annually. The first batch of 2,225 electric power enterprises have all completed opening accounts.
From pilot projects in the 12th Five-Year Plan to preparations for the national carbon market in the 13th Five-Year Plan, the construction of the national carbon market has made rapid and steady progress. Facing the 14th Five-Year Plan, from the single industry to the integration of multiple industries, from the start of trading to the smooth and standardized operation, the national carbon trading system will form a carbon price signal in the whole society, lay a solid foundation for the low carbon transformation of the whole society, and help realize China’s commitment of “striving to reach the carbon peak by 2030 and achieve carbon neutrality by 2060”.
The structure of the market emerges
As an important starting point to promote carbon peak and carbon neutral, the construction of the national carbon market has stepped into the fast track since this year.
Since December last year, the Ministry of Ecology and Environment has issued a series of documents, including the Measures on the Administration of Carbon Emission Trading, the quota plan, the list of key emitters, the accounting and verification.
On March 18, Lu Xinming, deputy director of the Department of Climate Change under the Ministry of Ecology and Environment, revealed that the construction of a national carbon market will be accelerated, and the legislative review of the Interim Regulations on the Administration of National Carbon Emission Trading will be pushed forward, with the aim of introducing them this year. We will do a good job in the first implementation cycle of the power generation industry in the national carbon market, and strive to achieve the first online order trading in the carbon market in the first half of this year.
According to the deployment of the Ministry of Ecology and Environment, the overall structure of the national carbon market is gradually becoming clear.
“The construction of the national carbon market will adopt a ‘two-city’ model, with Shanghai in charge of the trading system and Wuhan in Hubei in charge of the registration and settlement system.” Liu Jie introduced that Shanghai and Hubei are also responsible for the construction of national carbon trading institutions and national carbon registration and clearing institutions while completing the system construction. In terms of equity structure, it will be led by the implementation agencies designated by Shanghai and Hubei respectively, with the voluntary participation of other co-construction provinces and cities.
On the overall design of the trading system, Liu Jie said that the system combined with the experience of the pilot market and the domestic financial market trading system construction experience, according to the national trading system to carry out the design. At present, the basic construction of the system has been completed, and the docking and joint inspection test and simulation trading among the systems are being carried out to prepare the system for the launch of the transaction.
Meanwhile, a registration system is ready to go. “At present, 2,225 key emission power enterprises have basically completed the opening of accounts.” The relevant person in charge of Hubei Carbon Emission Trading Center said that the registration system is responsible for carbon emission right registration, trading settlement, allocation and performance and other businesses. It is in the core position of the national carbon emission trading support system and plays a pivotal role in ensuring the smooth operation of the national carbon emission trading. “The establishment of the national registration system in Hubei will gather a large amount of financial capital and industrial capital, drive the rapid development of green finance and low-carbon industry in Hubei, and facilitate the construction of a national carbon trading center and carbon finance center in Hubei.” The person said.
In terms of coverage, as a big carbon emitter, the power industry has become a market leader. “According to the overall arrangement of the state, the national carbon market will start with the power generation industry in the first batch. During the 14th Five-Year Plan period, it is expected that eight key energy-consuming industries such as petroleum, chemical industry and building materials will be included in the carbon market.” By then, the quota issuance will make China’s carbon market the largest in the world, Liu said.
Product and service innovation will also be the next stage to enhance the activity of the national carbon market.
“Carbon financial derivatives, such as carbon forwards, carbon futures and other financial products, will be gradually introduced to promote the formation of a multi-tiered carbon market.” Liu Jie revealed that the next step will be to explore the introduction of financial institutions into the market for transactions. In the future, there will be about 8,000 to 10,000 enterprises in eight major industries to control emissions. Together with the introduction of investors, this will give a great boost to the improvement of market liquidity.
Guorong Securities analysis said that according to the current design scale forecast, the market value of the national carbon market may reach about 150 billion yuan, if the carbon futures and other derivatives trading volume is taken into account, the scale can reach about 600 billion yuan.
Local trials coexist with national markets
As early as 2011, the National Development and Reform Commission (NDRC) selected Beijing, Tianjin, Shanghai, Chongqing, Hubei, Guangdong and Shenzhen to carry out carbon emission trading pilot projects. In 2016, the Fujian carbon market was launched. At present, a total of 8 regions in the country are carrying out carbon emission rights trading pilot.
Data show that as of November 2020, the cumulative quota trading volume of each pilot carbon market is about 430 million tons of carbon dioxide equivalent, and the cumulative trading volume is nearly 10 billion yuan.
Due to the various pilot carbon market rules are not uniform, the degree of government intervention, carbon quota prices vary greatly and other factors, the establishment of a national unified carbon trading market is imminent.
The Measures for the Administration of Carbon Emission Trading (Trial) issued by the Ministry of Ecology and Environment stipulates that key emitters included in the national carbon emission trading market will not participate in local pilot carbon emission trading markets.
With a national carbon market about to set sail, where will local pilot markets go?
“Existing power generation companies in the Shanghai regional market will be directly incorporated into the national carbon market, while the national market and existing local pilot markets will coexist.” Liu Jie said that after the launch of the national carbon market, the regional carbon market will indeed have a certain diversion effect, but the current regional carbon market industry scope and the main body threshold are wider than the national carbon market, not included in the national carbon market enterprises can continue to participate in the regional carbon market, through the marketization of carbon management.
“After the first power sector starts trading, companies in eight key industries will gradually move from the pilot market to the national carbon market.” A person in charge of Hubei Emissions Trading Center said that after the launch of the national carbon market, enterprises that have not yet been included in the national market will continue to trade in the pilot market. At present, more than a dozen enterprises in Hubei carbon market continue to operate in the regional market.
In fact, local pilot markets are actively seeking reform, innovation and transformation while doing a good job of docking with the national market.
“As a unified national carbon market is gradually being established, it is imperative to accelerate reform and innovation of existing regional carbon markets.” Liu Jie said that while serving the existing carbon emission trading work in the region, Shanghai carbon market has made many new explorations in carbon finance, such as the launch of quota pledge, carbon fund, carbon trust, carbon lending business and carbon forward products. Local pilot can provide mature experience for the national carbon market.
Zhu Ge, chairman of the Beijing Green Exchange, said that Beijing’s carbon emission trading pilot has been running smoothly for more than seven years since its opening in November 2013, and that a regional carbon emission trading market with a “complete system, standardized market, active trading and strict supervision” has been initially established. The Beijing Carbon Market will continue to summarize and improve the pilot work experience to provide strong support for the construction and development of the national carbon market. Beijing Green Exchange will make every effort to promote the construction of voluntary emission reduction trading platform and the development of green finance, and contribute to the platform’s strength in serving Beijing and the country to achieve the vision of carbon peak and carbon neutral through green finance.
The relevant person in charge of carbon emissions trading center of hubei province, said the next step, will accelerate the platform construction work to the national carbon market registration, set up “the low carbon industry of hubei province integrated service platform”, the construction of “the Yangtze river international low carbon industrial park, established 20 billion yuan of” low carbon industry development fund “, hubei province, to build a multi-level green financial industrial chain, etc., let the market mechanism play a biggest role, power environmental and economic win-win development.
We will accelerate top-level design
As the launch of the national carbon market is approaching, it is urgent to further improve the institutional rules and accelerate the top-level design.
Sun Chuanwang, a professor at the China Center for Energy Economics at Xiamen University, said the construction of a national carbon trading market should be based on the government’s top-level design and a top-down system for controlling emissions, including the establishment of unified market rules, clarifying the regulatory functions of competent authorities at all levels under the unified system, and establishing a unified standardized accounting system.
“We should speed up the improvement of the legislative system and management mechanism, push for the introduction of the Interim Regulations on the Administration of Carbon Emission Trading as soon as possible, and strengthen coordination among various departments.” Liu Jie believes that in order to enhance the activity of the carbon market, it is necessary to reasonably determine the total quota and distribution system, take the “3060 target” into consideration, adopt a more reasonable quota allocation method as far as possible, and introduce a paid quota distribution mechanism in a timely manner. We should further improve the trading market mechanism, start with quota spot trading, enrich trading varieties and trading methods, and expand the scope of market subjects. Strictly manage the trading market and fully respect the law of market prices. We should strengthen the supervision of the trading market, explore the establishment of a trading supervision mechanism and a risk management mechanism, pay attention to the coordination of various departments, and strengthen supervision before the event, during the process and after the event.
Green finance at the central university of finance and economics school of international studies, dean king yao advice, push the “total amount control trade” mechanism to work, on the basis of the total relevant policies to further improve and give full play to their role as the trading mechanism, encourage more stakeholder engagement, the formation of market liquidity and effective carbon pricing mechanism, give full play to the carbon market financial attributes.
In terms of carbon pricing mechanism and trading mechanism, Peng Wensheng, chief economist of CICC, believes that the analysis based on green premium shows that the carbon emissions of the power and steel industries with high emissions and low premium account for 62% of the total emissions, so it is more suitable to adopt carbon market pricing mechanism. For transportation, chemical and other industries with low emissions and high premium, carbon tax pricing mechanism may be more suitable. He suggested building a carbon market trading mechanism with “auction + futures” as the core, promoting an auction-oriented trading mechanism in the quota allocation link, and introducing derivatives such as futures in the quota trading link.
Peng said the potential problems of a unified carbon market are worth paying attention to. For example, pollutants may flow as carbon emissions move from one region to another, which could lead to distortions in emissions. There may be incentive incompatibility between national carbon market and environmental policy. How to achieve coordinated progress of carbon market and electricity pricing reform may require prudent pricing mechanism design and additional research to introduce targeted regulatory policies. Therefore, while promoting carbon emission reduction through the carbon market, it is also necessary to jointly analyze the interaction effects of various relevant markets and evaluate the true costs of various regulatory contents as soon as possible, so as to avoid the unintended externalities caused by the regulation of a single market.