Carbon Trading Market Opens to Great Success

By Guo Yan

On July 16， the national carbon trading market was opened in the Shanghai Environment and Energy Exchange. The first trading day closed with a trading volume of 4.1 million mt and a trading value of RMB 210 million. Guosen Securities estimates that the total trading value of the national carbon trading market will reach RMB 10 billion within the first year. As the market keeps improving and the scale of coverage enlarges， the trading will become more vigorous. The total carbon trading value will reach more than RMB 100 billion in 2030.

With the opening of the national carbon trading market， China has become the worlds largest carbon trading market. Mei Dewen， general manager of China Green Trading Institute and secretary-general of the Beijing Green Finance Association， said that the launch of the carbon trading market will develop Chinas carbon market into an efficient， liquid and stable market. This market is also inclusive， flexible and will achieve carbon neutralization targets with low costs and high efficiency.

Opening the carbon trading market

After the launch of the carbon trading market， CNPC， Sinopec， China Huaneng Group， China Huadian Corporation and other enterprises all participated in the first day of trading. Among these， the 17 self-owned power plants owned by Sinopec were incorporated into the national carbon market， and four of its enterprises （Shengli Oilfield， Maoming Petrochemical， Shanghai Petrochemical and ZTHC Energy） also participated in the first day of carbon trading.

Liu Youbin， spokesman for the Ministry of the Ecology and Environment， predicted that in the wake of the launch of the national carbon market， the emissions covered by the market will exceed 4 billion tons， which will make China the worlds largest carbon trading market in terms of greenhouse gas emissions covered.

Lin Boqiang， director of the China Energy Policy Research Institute of Xiamen University， believes that the launch of the carbon trading market is of great significance for China to achieve its carbon peak and neutralization. On the one hand， this makes it possible to promote energy conservation and emission reduction， guide the optimal allocation of resources and achieve low-cost emission reduction through the market； on the other hand， it can improve the competitiveness of clean energy and develop Chinas energy structure towards being green and low-carbon.

Zhang Xiliang， head of the design expert group of the national carbon market， estimates that in light of the launch of the national carbon trading market， the carbon price should not be less than the cost of reducing one ton of carbon dioxide. It should be USD 7 in 2020 and USD 15 in 2030， and approximately USD 25 in 2035 and USD 115 in 2050.

A large-scale questionnaire and survey conducted by the China Carbon Market Research Center of Tsinghua University on the institutions included in the pilot system shows that approximately half of the key emission institutions included in the pilot have formulated internal emission reduction strategies. Moreover， one third have established a special carbon trading department， and more than 40% have incorporated the impact of the carbon price into their long-term investment decisions.

Professor Duan Maosheng， deputy director of the Energy， Environment and Economic Research Institute of Tsinghua University and director of the China Carbon Market Research Center， said that the carbon market is a mechanism for promoting reductions in emissions. It allows carbon emission resources to be allocated to different enterprises throughout the market. Compared with the administration measures， it is able to achieve the emission targets with lower costs.

Presently， Chinas carbon trading market includes seven pilot areas in Beijing， Tianjin， Shanghai， Chongqing， Hubei， Guangdong and Shenzhen， covering approximately 3，000 key emitting companies in more than 20 industries. By June 2021， the total trading volume of the pilot provinces and cities amounted to 480 million mt of carbon dioxide， with a trading value of RMB 11.4 billion. In the next step， the trading market mechanism will be extended from the pilot cities to the whole country.

Power generation industry acts as a breakthrough point

In the initial stages of the national carbon market， the power generation industry （pure power generation and co-generation） will be the breakthrough. The first batch of 2，225 key emission units of power generation enterprises have been included in the national carbon market， which is expected to cover approximately 4.5 billion tons of carbon dioxide emissions.

In this regard， Zhao Yingmin， vice minister of the Ministry of the Ecology and Environment， said that there are two factors which should be taken into consideration when choosing the power generation industry to be the breakthrough in the national carbon market： first， the power generation industry directly burns coal， resulting in a large amount of carbon dioxide emissions. The annual carbon dioxide emissions of more than 2，000 key emission units in the power generation industry， including those of self-owned power plants， exceed 4 billion mt. Therefore， taking the power generation industry as the cutting point could give full play to the positive role of the carbon market in controlling greenhouse gas emissions. Second， the power generation industry features a sound management system and a strong database. Access to accurate and effective data is the premise of carbon market trading. From the perspective of international experience， the power generation industry is the preferred industry in the carbon market in all countries. Since the amount of carbon dioxide emissions and coal consumption in this industry is large， the power generation industry was first included in the national trading market， so as to play a positive role in reducing pollution and carbon emissions at the same time.

Driven by the goal of carbon neutralization， the establishment of the carbon trading market was imperative， and many relevant enterprises also chose to develop new energy. Datang Power said that the main direction of the companys business in the future is new energy. As the thermal power sector of Zhejiang Energy Group， Zheneng Power has already been involved in the new energy business through joint ventures.

After the power generation industry， the national carbon market will gradually extend to the petrochemical， chemical， building material， iron and steel， nonferrous metal， paper-making and aviation industries in the future.

Chen Guangwei， deputy general manager of the Energy Management and Environmental Protection Department of Sinopec， said that through participating in the pilot carbon trading， especially with the further cost increases of carbon trading， enterprises will start to pay more attention to carbon emission management. For example， when it comes to building new projects or expanding existing projects， companies will consider the impact of carbon emissions. Such consideration advances the cooperation in carbon emission management between multiple corporate departments and promotes the implementation of corporate responsibilities in the fields of carbon emission management and reduction.

After enterprises are incorporated into the carbon market， the carbon emission quota in the initial stage is distributed for free. In the future， a paid distribution mechanism will be introduced.

It has been reported that during the pilot period， Hubeis carbon market adhered to the principle of moderate and tight control over total emissions. From 2014 to 2019， the free emission quota obtained by enterprises decreased year by year， and the proportion of enterprises with quota gaps gradually increased， effectively forcing enterprises to reduce emissions.

Duan Maosheng pointed out that the paid quota distribution method should be introduced to the national carbon market as soon as possible. Furthermore， the proportion of paid allocation should be gradually expanded， and use of the free distribution method should be reduced. This will guarantee a relatively high carbon price， which will effectively promote domestic emission reduction， and will also cope with the potential impact of external policy changes， such as the impact of the EU carbon border adjustment mechanism on Chinas exports.

At present， carbon trading is still in the early stage of development， and the standard for issuing carbon emission quotas is relatively loose. Most of the quotas are distributed for free， but in the future， there will be a large proportion of paid distribution quotas.

More industries are expected to be included in the trading market

How does the environmental department supervise enterprises and units in terms of carbon emission trading？ How does the environmental department deal with false registration and trading？ In this regard， Zhao Yingmin said that it is important to implement relevant working systems from the following aspects. The first is to enhance guidance and supervision， in order to ensure that all market entities trade in strict accordance with relevant the systems and regulations. The second is capacity-building， which is mainly for strengthening the capacities of market entities and the carbon market systems. The third is joint supervision， in order to coordinate the relevant departments to organize and carry out joint supervision on all links of carbon market operation in accordance with the laws and regulations. The fourth is a legislative guarantee， which is used to promote the promulgation of the Interim Regulations on the Administration of Carbon Emission trading as soon as possible， and to ensure the effective implementation of various systems in the carbon market with higher-level legislation.

Since the launch of the carbon market， society， as a whole， has generally started paying attention to the carbon price. Zhao Yingmin said that the carbon market will guide the optimal allocation of carbon emission reduction resources through price signals， so as to reduce the emission reduction cost of society as a whole， promote investments in green and low-carbon industry investment and guide the flow of capital.

At present， the weighted average carbon price of the past two years is approximately RMB 40 according to the operation experiences in the seven local pilot locations in China. In the system design related to the national carbon market， the market expectation is guided by improving the quota allocation method and introducing a trade-off mechanism， so as to create a reasonable carbon price. The level of the carbon price is a market signal. If enterprises conform with the general trend of green and low-carbon transformation， they will take a lead in the market development.

Zhao Yingmin pointed out that since the opening of the national carbon market online， China has the worlds largest carbon trading market. Compared with other mature carbon markets across the world， Chinas average carbon price is still at a relatively low level.

According to the past conditions of carbon markets in other countries， the carbon price was low and the transaction was inactive at the initial stage of opening-up. Recently， the carbon price in the EU hovered around 50 euros/ton for a long time. Chinas carbon emission amount is larger， and in the future， as more industries become included in the trading market， the market will gradually become mature. In addition， as institutional and individual investors are allowed to enter the market， the scale of domestic carbon trading will rise sharply. Since the launch of the national carbon market， businesses in the power grid industry， which provide support for the government， emission control enterprises， financial institutions and other carbon market entities， will fully benefit in the market in the future.

Mei Dewen predicts that in the future， the main body of Chinas carbon trading market will shift from emission-control enterprises to diversified market subjects including emission-control enterprises， non-emission-control enterprises， financial institutions， intermediaries and individuals. Only the diversification of subjects can create a fair and reasonable carbon price that can reflect the marginal emission reduction cost， externality cost or comprehensive social cost. Products will shift from spot goods to spot goods， futures and derivatives. The market pattern may change from regional to national， or from domestic to the international market. One thing is certain， in the end， the carbon market will go international.