China ups support, regulations for market to increase participation, meet green goals

Wind turbines are at work off the coast of Pingtan Island in East China's Fujian province in August. China plans to advance large-scale and high-quality development of wind and solar power generation as it strives to realize carbon reduction goals, said an action plan released by the State Council. (WANG WANGWANG / FOR CHINA DAILY)

Editor's note: China aims to peak its carbon emissions by 2030 and achieve carbon neutrality by 2060, major goals in a national green transition drive. This series looks at efforts in various sectors to meet the goals.

While the year-old national-level carbon trading system has helped to shape the basic structure of the Chinese carbon market and provide a benchmark for carbon pricing, continued efforts should be made to nurture more active trading and include more participants, experts said.

Since carbon trading officially began on July 16 last year, up to 194 million metric tons of carbon emission allowances have been traded, with the total trading value approaching 8.5 billion yuan ($1.22 billion), said the Ministry of Ecology and Environment. The price of carbon emission allowances closed at 58.24 yuan per ton on July 15, up 14 percent from that on the first trading day.

The national carbon trading market now covers 2,162 companies, all of which are electric companies.

Stable operation

Li Gao, director of climate change at the Ministry of Ecology and Environment, said that the stable operation of the national-level carbon trading system and steadily rising prices have helped to shape the basic structure of China's carbon market. Companies have therefore been motivated to reduce greenhouse gas emissions and head for greener transformation at a faster pace, he said, and the trading system has effectively set carbon pricing.

To enrich the financial characteristics of carbon trading, the China Securities Regulatory Commission released industrial standards in mid-April for carbon-related financial products.

While companies were passively reducing carbon emissions 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 Zhongbo, vice-general manager of Beijing Peace Carbon Environmental Technology

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 was the first loan of its kind in China.

One month later, China Datang Carbon Assets Co, a subsidiary of Datang International, teamed up with Postal Savings Bank of China to initiate a carbon asset pledge management model with which the Qitaihe power plant was granted another 20-million-yuan pledge loan based on carbon emission allowances.

Hong Shaobin, marketing director of Datang International, said carbon emission allowances are a green asset in which the value is easy to assess, and they entail fewer risks and convert to cash more conveniently.

"Companies' carbon emission allowances can be transformed into credit assets that link with financial assets and the real economy," Hong said.

Green assets

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 footprint about 10 years ago and are now well aware of carbon reduction policies and trading rules. Most of these companies have even set up their own carbon asset management companies, Yu said.

The progress is evident. Shanghai-listed Datang International saw 302 million yuan of its income from carbon trading for fiscal year 2021, after national carbon trading had been operational for only half a year. 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 emissions 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.

According to the Ministry of Ecology and Environment, the first compliance cycle of China's carbon market took place from Jan 1 to Dec 31, 2021. Preparations to launch the second compliance cycle started on March 15 this year, marked by the release of the guideline for management of 2022 greenhouse gas emissions, said Zhang Jianhong, a senior engineer at China International Engineering Consulting Corp.

Key driving factor

While major electric companies have benefited from carbon trading, Lu Zhengwei, chief economist at Industrial Bank, said trading activity was lower during the noncompliance cycle. The limited number of carbon trading participants is one cause for the lower activity during the noncompliance period, Lu said.

"Only electric companies with emission 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 electric companies to conduct quota transactions, which can be easily translated into higher transaction activity during the compliance period," he said.

The lack of a clear long-term carbon goal has also resulted in lower trading activity, said Lu. The carbon emission quota is now updated annually in China, and as a result, electric companies cannot produce clear long-term market forecasts.

"Meanwhile, the unused carbon emission quota can be carried over to later trading periods in China. Therefore, electric 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 a lower willingness to trade," Lu added.

Zhang Xiliang, director of the Institute of Energy, Environment and Economy, began leading a team in designing the framework plan for national carbon trading in 2015. He suggested that short-term, mid-term and long-term development goals of the Chinese carbon market should be released on time to stabilize market expectations.

"While electric 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," said Zhang.

He added that institutional investors are sure to participate in the trading of carbon emission allowances in the third compliance cycle.

Lai Xiaoming, chairman of the Shanghai Environment and Energy Exchange, where national carbon trading is conducted, said that the 194 million tons of carbon traded over the past year only accounted for a very limited part of the 4.5 billion tons of carbon dioxide discharged by major electric companies. There is much room for development regarding the total traded amount of greenhouse gas, he added.