China’s national carbon market opens after 10 years of piloting

China’s national carbon market, which has been brewing for 10 years, has finally opened for business, as the Measures for the Administration of Carbon Emission Trading (Trial) issued by the Ministry of Ecology and Environment of China came into force this month.

According to the requirements, enterprises with annual greenhouse gas emissions of 26,000 tons of carbon dioxide equivalent, equivalent to the energy consumption of about 10,000 tons of standard coal, are included in the key greenhouse gas emitters, and should control greenhouse gas emissions, report carbon emission data, pay off carbon emission allowances, disclose trading information and accept supervision.

Carbon markets are seen as a bellwether for using market mechanisms to tackle climate change. Many Chinese experts pointed out that this is the first time that China has placed the responsibility of greenhouse gas control and emission on enterprises at the national level, and promoted green and low-carbon development through the market coercion mechanism. However, the national carbon market is still at an early stage and faces many uncertain factors. It is still a process from the completion and improvement to the real realization of carbon emission trading.

From pilots to the whole country, turnover is expected to double

“The work started in 2011 on a pilot basis. By August 2020, carbon markets in the seven pilot provinces and cities had covered more than 20 industries, including steel and power, and nearly 3,000 companies, with a cumulative turnover of more than 400 million tons and a turnover of over 9 billion yuan.” Li Gao, director of the climate department of China’s Ministry of Ecology and Environment.

Pilot projects have proved that the use of market-based measures to address carbon emissions will be less costly and more efficient. “There are more than 9,800 different types of players in Hubei’s carbon market, effectively covering greenhouse gas emissions from the industrial sector. Among them, emissions from the four major industries of power, steel, cement and chemical industry account for 81 percent of the included enterprises.” The person in charge of Hubei carbon emission trading center told reporters that the included enterprises have achieved an emission reduction income of 350 million yuan, and the market-oriented emission reduction incentive mechanism has initially taken shape. Another 2.17 million tons of carbon emissions from poverty-stricken areas in the province were traded on the market, generating revenue of more than 50 million yuan.

Li Gao said that on the basis of the pilot project, preparations for China’s national carbon market have been started since the end of 2017. After the period of infrastructure construction and simulation operation, it has now entered the stage of real spot quota trading. In addition to the first batch of 2,225 power generation enterprises to be included, the steel, chemical and electrolytic aluminum industries have also made long-term preparations, and the next step is to consider accelerating the inclusion.

“The total annual carbon emissions from China’s power generation sector are about 4 billion tonnes. So even though only the electricity sector is currently trading, the national market will be the largest carbon market in the world when it starts.” Mei Dewen, general manager of Beijing Green Exchange and secretary-general of Beijing Green Finance Association, further said that many forecasts show that in 2021, the trading volume of the national carbon market may reach 250 million tons, which is three times the total volume of each pilot trade in 2020. In the future, the coverage of the carbon market will gradually expand, and the trading volume during the 14th Five-Year Plan period is expected to increase 3-4 times compared with the 13th Five-Year Plan period. By 2030, the carbon peak will be achieved, and the cumulative trade volume may exceed 100 billion yuan.

The lack of participation has led to frequent fluctuations in the carbon price

Li also pointed out that China’s carbon emissions will continue to grow to some extent, unlike developed countries that have set up carbon markets when they have already peaked and are declining year by year. Therefore, the construction of a national carbon market is a very complex system engineering.

In this regard, Lin Boqiang, dean of the China Energy Policy Research Institute at Xiamen University, admitted that although the major pilot markets have made a lot of achievements, there are problems such as large price fluctuations and insufficient activity for a long time. In the transition from pilot to national, a carbon price is key to the success of the market. “A good market requires an efficient price mechanism and high market participation, and improving the price mechanism is the top priority. The power industry was the main target of all the pilot projects. Later, they were gradually extended to other industrial sectors. The number of enterprises involved was still small, and the entry threshold was limited. “The carbon neutral target is an opportunity to attract more investors and professionals, as well as to include more trading products to improve the efficiency of carbon markets.”

The Beijing carbon market, for example, has been the most expensive among the seven pilot markets since its opening in November 2013. However, the reporter found that carbon price fluctuations are also frequent, such as the average transaction price in the last half-year as low as about 10 yuan/ton, and the high was nearly 100 yuan/ton.

“The enthusiasm of companies to participate in the market is closely related to carbon price trends. A carbon quota is a cap on the amount of carbon dioxide a company is allowed to emit within a certain period of time. When the quota is exhausted, the company will have to pay for the right to emit carbon. However, many companies are not active until they find that there is a shortage of quotas, which inevitably pushes up the price, resulting in a big difference in the price of carbon at different times of the year.” Wang Ke, a professor at the Energy and Environmental Policy Research Center of the Beijing Institute of Technology, said the problem behind this reflects the lack of awareness of enterprises to reduce emissions. Only by spreading the trading activity evenly throughout the year and seizing the right time to “sell high and buy low”, can we avoid the high carbon price and increase the cost.

To carry out the first online carbon trading as soon as possible

So how can companies better participate in the national carbon market? Instead, Wang suggests managing carbon allowances as an asset, bought and sold like a commodity. “The ultimate purpose of the carbon market is not to buy or sell allowances or burden companies, but to use economic means to push companies to be deeply involved in reducing emissions. On the one hand, carbon emission reduction is a long-term task, and we should not rush to buy quotas and meet the deadline when we are in compliance regulation. “On the other hand, if companies take the initiative to reduce emissions, they can sell their ‘saved’ quota to others and get a certain amount of profit from it.”

As the initial stage of the carbon market, the allocation of carbon quotas has a direct impact on the cost of emission reduction and the enthusiasm of trading, Wang said. The authorities need to be careful how tight the initial quota is. The allocation is too loose, and the constraint on enterprises is not enough, and the pressure of emission reduction is weakened; Because the carbon price cannot be transmitted through the electricity price for the time being, the distribution should not be too tight, causing the cost of enterprises to rise too fast. The national carbon market has just been put into operation. We need to do a good job of risk control and truly urge and help enterprises to reduce emissions.

On the basis of the electric power industry, He Jiankun, director of the Climate Research Institute of Tsinghua University, proposed that during the 14th Five-Year Plan period, enterprises with annual comprehensive energy consumption reaching 10,000 tons of standard coal, such as petrochemical industry, chemical raw materials and chemical products manufacturing industry, ferrous metal smelting and rolling processing industry, should be included. Both direct emissions from the burning of fossil fuels and indirect emissions from the use of electricity and heat should be taken into account. In the absence of a price transmission mechanism in China’s electricity market, the linkage between the power consumption sector and the power generation sector will be promoted, which is also a feature of China’s carbon market design that is different from that of developed countries.

Reporters have learned that China’s Ministry of Ecology and Environment will carry out the first carbon emission right trading online as soon as possible. “We will promptly open accounts in the national carbon emission registration system and trading system, and do a series of preparatory work for the first trading in the power generation industry.” Li Gao said.

Source: China Energy News

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