Key role for market can make carbon trading biz-friendly
The establishment of a national-level carbon emissions trading system augurs well for China.
Until now, China mainly relied on administrative instructions to curb carbon emissions. Yet, as the social cost of carbon emissions is not directly visible for enterprises, and global warming is not so closely related to their operations either, enterprises are not that motivated to take green action, more so probably because energy conservation and emission reductions could mean additional expenditure.
Simply put, under the previous regulatory framework, reducing emissions entailed additional costs for enterprises, while the incentives for enterprises to actively reduce carbon emissions were insufficient.
In 2017, China started the national carbon emissions trading system, which aims to regulate carbon emissions through market mechanisms.
The system includes high-emission enterprises in the trading system and sets a free emission quota for each of them. If an enterprise’s carbon emissions are below the limit, it saves credits that become carbon assets, which can be sold in the trading system to obtain benefits.
It is very wise to adopt a marketoriented approach. If enterprises can obtain benefits through the carbon emissions trading system in the process of reducing emissions, they will have greater incentives to participate.
However, it is extremely difficult to incorporate enterprises across the country into this trading system. The United States has not yet formed a national carbon emissions trading market. Only some US states have adopted regional carbon trading policies. Yet, reducing carbon emissions requires overall planning, for which efforts by local governments can have only limited influence.
China’s rollout of proactive measures to deal with global climate change reflects its sense of responsibility, among which the establishment of a national carbon emissions trading market is undoubtedly an important one.
China’s carbon emissions trading market is expected to become the largest in the world, as the country’s total carbon emission reductions will exceed that of the European Union by far.
That raises an important question as to how to give full play to the market mechanism.
China started establishing a carbon emissions trading market as early as in 2010. Shenzhen, Shanghai and Beijing were included in a pilot program in 2013, followed by Chongqing, Tianjin, and Guangdong and Hubei provinces in 2014.
A second-phase pilot program started in July 2016. By then, the seven regions involved in the first phase had already accounted for about 7 percent of national carbon emissions.
We studied potential co-benefits of carbon trading on local air quality. In our recent publication “Carbon-Trading Pilot Programs in China and Local Air Quality”, we showed that since the second phase, regions included in the pilot program showed a significant improvement in atmospheric visibility compared with other regions.
One example came from Guangdong province. From 2010 to 2012, annual carbon dioxide emissions of the four industries involved in the province’s pilot program, which were thermal power, petrochemicals, steel and cement, all stood above 20,000 metric tons each.
During the second phase of the pilot, especially since 2018, carbon emissions trading in Guangdong became very active, and we estimated atmospheric visibility in regions hosting those regulated enterprises had an average 4 percent growth.
The pilot works accumulated good references for the establishment of a national carbon emissions trading system. Yet, it is significantly difficult to promote the pilot work to the whole nation.
The seven pilot regions are relatively better developed and have relatively high degree of marketization, while different regions in China have huge development gaps among them. In addition, many enterprises with high carbon emissions are State-owned and need to become more market-oriented.
How to efficiently participate in market-oriented carbon emissions trading? That is currently a challenge for those enterprises.
Moreover, it took several years for carbon emissions trading to become gradually active in the pilot regions. Compared with them, it will take longer to cultivate carbon emissions trading market in other less-developed regions.
One key for cultivating the market is to make carbon emissions trading price better reflect companies’ emission reduction costs.
If the price is too low, no company will take initiatives to reduce emissions, to take the saved allowances to the trading market for sale. So, how to increase the trading price? Perhaps the best way is to form an effective pricing mechanism based on the market supply and demand relations.
How can the power industry better adapt to the challenge?
The national carbon emissions trading market starts with power companies, which is a necessary and natural choice. For one thing, China now vigorously promotes clean energy, while thermal power plants are big carbon emitters. For another, the power industry has long been regulated with a series of requirements for energy conservation and emission reduction.
In the future, it is highly likely major electricity user enterprises will also be included in the trading system, since electricity consumption and carbon emissions are positively correlated to a certain extent (for example, for some internet e-commerce companies, carbon emissions mainly come from data centers, and computers in data centers consume large amount of electricity).
Besides, some supporting measures are still necessary. For example, China has a firm grip on electricity pricing, yet once power companies are included in the carbon trading system, they will be prompted to use cleaner energy to generate electricity, leading to increases in power generation costs. If electricity prices are not flexible, the profits of power companies will be curbed, and they will not be motivated to reduce carbon emissions.
Strict control of electricity prices and low electricity price levels will also make industries and enterprises that consume large amount of electricity less motivated to save energy or reduce electricity consumption.
To promote the implementation of the carbon trading system, the reform of the electricity pricing system is a must, so that the market supply and demand can influence electricity prices.
For the pricing of carbon trading and the supporting electricity price reforms, the most important thing is to let the market play a leading role.
How can companies pass the “test”?
For companies that are about to be included in the carbon trading market, the most important thing is to actively embrace changes and consider both their own cost expenditures (private costs), and social costs such as environmental pollution.
Companies also need to change their perceptions of benefits. Energy conservation and emission reduction used to mean cost expenditures for enterprises. However, with the carbon emission trading platform, companies can reduce carbon emissions by updating emission equipment and actively reducing energy consumption, and convert the saved emission allowances into carbon assets that can be sold on the market to increase revenues.
Of course, the impact of carbon trading platforms on different types of companies is different and not instant. It cannot immediately reduce carbon emissions or allow companies to obtain benefits.
Although with prospects for longterm benefits, it is still questionable whether such a system can offset the short-term additional costs it will bring to enterprises.
The price of carbon trading in the EU rose slowly over a long period before playing its expected role. Only after the national carbon emission trading system kicks off official operations can we slowly estimate its short-term impact on enterprises.
With the national carbon emissions trading market now in place, industry’s upgrade will also accelerate. Rather than waiting passively, it is better for companies to leverage the opportunity and take the initiative to transform their corporate development models, to pass the “test” more easily.
It is very wise to adopt a market-oriented approach. If enterprises can obtain benefits through the carbon emissions trading system in the process of reducing emissions, they will have greater incentives to participate.