New emission trading market needs laws, more players and more products
By Wang Jun  ·  2021-03-29  ·   Source: NO.13 APRIL 1, 2021

A molten-salt thermal power plant in Dunhuang, Gansu Province in northwest China, on February 21. It works by using 12,000 mirrors that concentrate the sunlight onto a receiver at the top of a solar tower, which then heats the molten salt (XINHUA)
To meet the government's avowed targets of peaking carbon emissions before 2030 and achieving carbon neutrality before 2060, all eyes are on the national carbon emissions trading scheme that is expected to go online in June. As a major step forward toward the launch, a set of interim rules for carbon emissions trading management came into effect on February 1.

Pilot trading of carbon emissions started 10 years ago in seven provinces and cities including Beijing, Shanghai and Guangdong, covering power generation, iron and steel production and cement manufacturing sectors. Later, a nationwide carbon emissions trading system in the power generation industry was inaugurated in December 2017.

The upcoming national market can connect the various local emissions exchanges, enhancing market liquidity and reducing trading costs for enterprises, Chai Qimin, head of the Strategic Planning Department of the National Center for Climate Change Strategy and International Cooperation, told Xinhua News Agency.

In addition to the first batch of 2,225 power plants across the country, a number of industries such as petrochemical, construction materials, steel, non-ferrous metals and aviation will be included in the national market in a phased manner, according to the interim rules released by the Ministry of Ecology and Environment (MEE). The participants can trade their assigned carbon dioxide emission quotas via the system whereby firms that exceed their caps can purchase unused quotas from those with low emissions.

During this year's sessions of the 13th National People's Congress (NPC), the national legislature, and the 13th National Committee of the Chinese People's Political Consultative Conference (CPPCC), the top political advisory body, the lawmakers and advisors detailed more measures needed to improve carbon emissions trading management.

Li Yonglin, a member of the 13th CPPCC National Committee and Deputy General Manager of China Petrochemical Corp., told Economic Information Daily that a law is needed to give authority to the carbon market, and pave the way for national regulations for carbon emissions trading.

In addition, there should be a mechanism to reasonably allocate carbon quotas. Li's suggestion is there should be uniform arrangements with the market playing a decisive role in encouraging businesses to take part in the carbon market.

In addition, more varieties of trading products should be designed to attract participants. This will make the carbon market more vibrant and stimulate entire society to contribute to carbon neutrality.

Wu Xiwei, a deputy to the 13th NPC and Executive Director of Zhongke Refinery and Petrochemical, said while some achievements have been made, the pilot markets have not achieved the expected goals. "Businesses are not motivated enough as they don't gain enough benefits," Wu told Economic Information Daily.

Financial support 

Guo Xinming, another deputy to the 13th NPC and head of the Nanjing branch of the People's Bank of China, suggested the authorities should develop financial products and services in a phased way to support the carbon market.

For instance, carbon quotas may be pledged as collateral for loans. During the implementation of carbon trading projects, financial services such as carbon credit and carbon risk management can be provided.

To diversify carbon financial derivatives, there should be pilot programs to introduce over-the-counter products such as carbon forward and carbon swap. Exchange-traded products such as carbon futures and carbon options can be developed subsequently.

Financial institutions should be motivated to participate in carbon market transactions while qualified institutional investors and individual investors be allowed to participate in trading carbon emission rights, Guo told Economic Information Daily.

Trading guideline

According to the newly effective interim rules for carbon emissions trading management, businesses producing 26,000 tons of carbon dioxide or more annually, or an equivalent of burning 10,000 tons of standard coal, will be labeled as major emitters of greenhouse gas. They are required to control their emissions, report their emission data, pay for their emission quotas and undergo government supervision.

It is the first time China has made clear the responsibilities of enterprises to reduce greenhouse gas emissions, according to Li Gao, head of the MEE's Department of Climate Change.

"By August 2020, the carbon emissions trading pilot schemes in the seven participating provinces and cities had covered around 3,000 enterprises in more than 20 industries such as steel and power," Li Gao told China Energy News.

He also said 400 million tons of carbon emission quotas had been traded for 9 billion yuan ($1.38 billion). 

"The total annual carbon emissions from the power generation companies are around 4 billion tons. So even though the industry will be the only constituent of China's national carbon market in its initial stages, it will still be the largest of its kind in the world," Mei Dewen, General Manager of China Beijing Green Exchange, told China Energy News.

In 2021, estimatedly 250 million tons of carbon emissions will be traded in the national carbon market, which will be three times the aggregate transaction volumes of all the pilot markets across the country. As the market covers more industries in the future, its transaction volume is likely to increase by three to four times during the 14th Five-Year Plan (2021-25) period compared to the previous five years.

By 2030, when China's carbon emissions peak, the cumulative transaction value of the market may exceed 100 billion yuan ($15.36 billion), according to Mei.

But before 2030, China's carbon emissions will continue to increase, which is different from the situation in developed countries whose carbon markets were set up after their emissions have already peaked and started to decline. Therefore the development of the Chinese market requires a package of complicated measures, Li Gao added.

Lin Boqiang, head of the China Institute for Studies in Energy Policy at Xiamen University in Fujian Province, southeast China, said despite the achievements in various pilot markets, the national carbon market still faces long-term problems such as large price fluctuations and insufficient activity. Carbon prices will be crucial to the success of the market.

"A good market requires an effective pricing regime and wide participation, with improving the pricing regime being the primary task," Lin told China Energy News.


Copyedited by Sudeshna Sarkar

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