Carbon trading has wind in its sails
The one-year-old nationallevel carbon trading system has helped shape the basic structure of the Chinese carbon market and provide a benchmark for carbon pricing, but more needs to be done to nurture trading and include more participants, experts say.
Since carbon trading officially began on July 16 last year up to 194 million metric tons (214 million short tons) of carbon emission allowances have been traded, with the total trading value approaching 8.5 billion yuan ($1.23 billion), the Ministry of Ecology and Environment said. The price of carbon emission allowances closed at 58.24 yuan a ton on July 15, 14% more than on the first trading day.
The national carbon trading market now covers 2,162 companies, all of them electricity companies.
Li Gao, director of climate change at the Ministry of Ecology and Environment, said the stable operation of the national-level carbon trading system and the steadily rising prices have helped shape the basic structure of China’s carbon market. Companies have thus been motivated to reduce greenhouse gas emissions and head for greener transformation at a faster pace, he said, adding the trading system has effectively set carbon pricing.
To enrich the financial characteristics of carbon trading, the China Securities Regulatory Commission adopted industrial standards in midApril for carbon-related financial products.
More banks have implemented carbon emission rights pledge loans, and financial products linked to the carbon market have begun to emerge.
In August last year Datang International Power Generation Co.’s plant in Qitaihe, Heilongjiang province, obtained a 40 million yuan loan from China Minsheng Bank, with the company’s carbon emission rights serving as a guarantee. It is said to have been the first loan of its kind in China.
A month later China Datang Carbon Assets Co., a subsidiary of Datang International, teamed up with Postal Savings Bank of China to initiate the carbon asset pledge management model with which the Qitaihe power plant was granted another 20-million-yuan pledge loan based on carbon emissions allowances.
Hong Shaobin, marketing director of Datang International, said carbon emissions allowances are a green asset whose value is easy to assess, and they entail fewer risks and convert to cash more conveniently. “Companies’ carbon emissions allowances can be transformed into credit assets that link financial assets and the real economy,” he said.
Yu Zhongbo, vice-general manager of Beijing Peace Carbon Environmental Technology, said that most of China’s leading electricity groups began to reduce their carbon emissions about 10 years ago and are now well aware of carbon reduction policies and trading rules. Most have even set up their own carbon asset management companies, Yu said.
The progress is evident. Shanghai-listed Datang International had 302 million yuan of income from carbon trading for the 2021 fiscal year, after national carbon trading had been operational for only six months. In addition, Huaneng Power International Inc. made 269 million yuan, and Huadian Power International Corp. realized 140 million yuan in income from carbon trading.
“While companies were passively reducing carbon emission according to government requirements in the past, they are now attaching increasing importance to the value of carbon and are eager to manage their carbon assets well,” Yu said.
The first compliance cycle of China’s carbon market covered last calendar year, the Ministry of Ecology and Environment said.
The compliance cycle refers to the time at the end of which an emitter subject to the country’s regulation regarding the cap-and-trade system for greenhouse gas emission allowances must submit to the government all the carbon emission quota that the emitter reported for the period.
Preparations to launch the second compliance cycle started on March 15, marked by the release of the guideline for management of 2022 greenhouse gas emissions, said Zhang Jianhong, senior engineer at China International Engineering Consulting Corp.
While major electricity companies have benefited from carbon trading, Lu Zhengwei, chief economist of Industrial Bank, said trading activity was lower during the noncompliance period. The limited number of carbon trading participants is one cause, Lu said.
“Only electricity companies with emissions control targets are allowed (to participate in) carbon trading. Individual or institutional investors cannot access such trading. Therefore, compliance is the most important factor driving electricity companies to conduct quota transactions, which can be easily translated into higher transaction activity during the compliance period.”
The lack of a clear long-term carbon emissions goal has also resulted in lower trading activity, Lu said. The carbon emissions quota is now updated annually in China, and as a result, electricity companies cannot produce clear longterm market forecasts.
“The unused carbon emissions quota can be carried over to later trading periods in China. Therefore, electricity companies that have compliance obligations may tend to hold the unused quota, rather than trade it, so that they can cope with future uncertainties. This has also resulted in the lower willingness to trade.”
Zhang Xiliang, director of the Institute of Energy, Environment and Economy at Tsinghua University, began leading a team in designing the framework plan for national carbon trading in 2015. He suggested that shortterm, midterm and long-term development goals of the Chinese carbon market should be made public on time to stabilize market expectations.
“While electricity companies will still be the major participants in carbon trading during the second compliance cycle, the cement, electrolytic aluminum, steel, oil and chemical industries will take part in carbon trading in the future. Related government departments have been making such trading regulations.”
Institutional investors are sure to take part in carbon emissions allowances trading in the third compliance cycle, he said.