In recent years, with the increasing attention to the issue of global warming, carbon peaking and carbon neutrality have become the consensus of the international community, in order to better mitigate and adapt to climate change, and at the same time reduce the risk of carbon tariffs, carbon trading and carbon markets with "carbon dioxide emission rights" as commodities should be born.
1. What is carbon trading and carbon market?
Policies to control greenhouse gas emissions are generally divided into three categories: command control, economic stimulus, and persuasion and encouragement, among which economic stimulus is favored because of flexibility and continuous improvement. There are also two types of economic stimulus, one is the government's compulsory means, that is, the introduction of carbon tax, and the other is through market means and the establishment of a carbon emission trading system to encourage enterprises to join the carbon trading system and obtain additional income through the carbon assets accumulated by their own emission reductions.
The basic principle of carbon trading is that one party to the contract obtains a certain amount of greenhouse gas emission reduction by paying a certain amount to the other party, and the buyer can use the purchased emission reduction to mitigate the greenhouse effect and achieve its emission reduction goals, so the carbon trading market is called the carbon market.
At present, there are three types of global carbon markets: supranational carbon markets, national carbon markets and regional carbon markets, including major carbon markets such as the European Union, the United Kingdom, and New Zealand. Among them, China's national carbon market is the carbon market with the highest carbon emissions coverage in the world.
In mainland China, the carbon market is the abbreviation of the national carbon emission trading market. In 2011, the carbon market pilot project was carried out one after another, and in 2021, a unified national carbon trading market was established, enabling enterprises in various provinces and cities to carry out cross-regional carbon trading.
Second, the pattern of the carbon market in China
The construction of the mainland carbon market began with the pilot carbon market. In October 2011, in accordance with the requirements of the 12th Five-Year Plan to "gradually establish a carbon emission trading market", China launched a pilot carbon emission trading program in Beijing, Tianjin, Shanghai, Chongqing, Hubei, Guangdong, Shenzhen and Fujian.
On July 16, 2021, the national carbon emission trading market was launched for trading, marking the transition of China's carbon trading market from a pilot construction to the construction of a unified national carbon market. The first batch of 2,162 thermal power companies and captive power plants to be included in the carbon market issued about 4.5 billion tonnes of allowances, accounting for about 35.1% of the country's total emissions in 2022.
On January 5, 2024, the executive meeting of the State Council deliberated and passed the Interim Regulations on the Administration of Carbon Emission Trading (Draft), with the legislative level of "administrative regulations", which constitutes the basis and program for the formulation of relevant regulations on carbon trading, and has become the mainland carbon trading program document.
(Fig. 1 Development of the carbon market in China)
In addition, after the first batch of power sector transactions are launched, companies in the eight key industries will gradually be included in the national carbon market from the pilot market, and the industries that are not included will continue to trade in the regional market.
3. How does the carbon market work?
1. Operating mechanism
The operating mechanism of the carbon market can be summarized into three parts: allowance allocation, carbon trading and quota surrender. First of all, the administrative department or organization shall set the total amount of carbon emissions in a certain period according to the current situation of energy use and production output value of the emission control enterprise, and allocate the corresponding carbon emission quota to the emission control enterprise; then, the enterprise can trade the carbon quota according to its own emission needs; at the end of the cycle, the enterprise needs to hand over the same amount of carbon allowance as its own emissions, otherwise it will face fines and other penalties. In addition, companies can purchase CERs to offset some of the surrender requirements, but the offsetting is usually not high.
In carbon trading, if a company or organization's carbon emissions fall below the allowance they allotted, they can sell their unused allowances to other companies or organizations, who use the allowances to compensate for their own excess emissions.
(Fig. 2 Operational mechanism of carbon trading)
2. Market type
The carbon trading market is mainly composed of two main types: the regulatory compliance market and the voluntary market. The core trading object of the regulatory compliance market is emission allowances, that is, participants buy and sell greenhouse gas emission permits in the market. In the voluntary market, carbon credits are used primarily to incentivize individuals and businesses that have taken substantial action to reduce, avoid, or limit greenhouse gas emissions.
According to the process in the operating mechanism, the carbon market can also be divided into a primary market and a secondary market. The primary market mainly completes the setting of total amounts, the allocation of carbon allowances and the filing of certified emission reductions, while the secondary market mainly carries out the trading of carbon allowances and certified emission reductions. In addition, the carbon market usually includes a service market that provides various emission reduction services (such as consulting services and trading services) for enterprises, but the primary market and the secondary market are the core of the carbon market.
(Fig. 3 Types of carbon trading markets)
3. Participants
(1) Regulatory Authorities
The competent department of ecology and environment under the State Council, together with the market supervision and administration department of the State Council, the People's Bank of China and other units, shall establish a national carbon emission trading market management platform to supervise and manage the national carbon emission registration institutions and trading institutions.
(2) Market participants
The key greenhouse gas emitting enterprises included in the national carbon emission trading market and other entities that comply with relevant national regulations shall be determined according to the annual list of key emitting enterprises in each administrative region。
(3) Registration Authority
Hubei Carbon Emission Trading Center Co., Ltd. is responsible for the specific work of opening accounts in the national carbon emission allowance registration system and providing transaction settlement.
(4) Trading institutions
The Shanghai United Equity Exchange is responsible for the construction, operation and maintenance of the national carbon market trading center and the national carbon emission trading system.
(5) Verification agencies
Provincial-level departments in charge of ecology and environment may, through government procurement of services, entrust technical service institutions to carry out verification. The verification technical service institution shall be responsible for the authenticity, completeness and accuracy of the verification results.
Fourth, how can enterprises participate in carbon trading
1. Preparation before trading
Normally, emission control companies first need to decide whether to buy, sell or retain carbon allowances by judging the surplus and deficit of allowances. If an enterprise decides to participate in carbon trading, it needs to ensure that the accounts required for the transaction, i.e., the quota registration account, the trading account, and the fund depository account, have been opened and can operate normally. If you need to participate in CCER transactions, you should also open a national registry account.
After the above basic conditions are determined, a trading strategy needs to be developed. The trading strategy should include at least the volume, expected price, counterparty, etc. If you want to buy quotas, you should also include the expected funding requirements.
2. In-trade operations
There are two main modes of operation of carbon trading: listing transaction and agreement transfer.
Listing transaction refers to the way in which an enterprise declares its quota purchase or sales intention in the trading system, and the system matches a transaction with a qualified counterparty.
Transfer by agreement refers to the way in which the enterprise determines the counterparty (institution or other enterprise) in advance through over-the-counter negotiation such as inquiry and bidding, and reaches an agreement, and confirms the transaction after signing the contract in advance.
Regardless of whether the transaction is listed or transferred by agreement, the transaction needs to be carried out through the exchange designated by the competent national authority, and the funds are settled using a special fund depository account. There are differences between the two methods in terms of counterparties, volume and price certainty, etc., and enterprises can choose according to their own needs.
3. Post-transaction processing
According to the experience of the pilot market, in order to reduce the risk, most carbon exchanges adopt the "T+n" trading turnover system, that is, after the completion of the transaction, the quota and funds need to wait for n working days before they can be unfrozen (the unfreezing of the allowance means that it can be reused for trading). If an enterprise buys a quota for performance, it needs to transfer the quota to the quota registration account before performing the contract.
In addition, after the completion of the transaction, the enterprise should also carry out accounting treatment, financial statement presentation and disclosure in accordance with the Interim Provisions on Accounting Treatment of Carbon Emission Trading issued by the Ministry of Finance.
5. The development status of the carbon market
1. Carbon trading management tends to be institutionalized, standardized and procedural
On January 25, 2024, the State Council promulgated the Interim Regulations on the Administration of Carbon Emission Trading, which stipulates that the Ministry of Ecology and Environment of the People's Republic of China is responsible for formulating technical specifications for national carbon trading, and that provincial-level departments are responsible for organizing and carrying out the allocation, clearance, supervision and management of carbon emission allowances, which will come into force on May 1. The "Regulations" were issued in the form of special administrative regulations, which provided a clear legal basis for the operation and management of the national carbon emission trading market, which was a milestone in the development of the carbon market and opened a new situation of the rule of law in carbon emission trading.
2. The MRV system has been further improved, and the requirements for enterprise data quality management are higher
MRV consists of three components: Monitoring, Reporting, and Verification, referred to as MRV system, which is the process of quantifying and ensuring data quality of greenhouse gas emissions such as carbon dioxide emissions from emission control enterprises.
On February 7, 2023, the Ministry of Ecology and Environment (MEE) issued the Notice on the Management of Greenhouse Gas Emissions Reporting of Enterprises in the Power Generation Industry from 2023 to 2025 in order to strengthen the daily supervision mechanism of carbon emission data quality, requiring that from 2023 onwards, a monthly certificate reporting system will be implemented for key emitting entities included in the national carbon market quota management, and data such as fuel consumption and product output and supporting materials will be uploaded through the management platform within 40 natural days after the end of each month. Through the revision of the accounting and verification guidelines, the level of refined data management has been greatly improved.
3. Four methodologies, including the restart of CCER and the release of afforestation carbon sinks
On October 19, 2023, the Ministry of Ecology and Environment (MEE) and the State Administration for Market Regulation (SAMR) jointly issued the Administrative Measures for Voluntary Greenhouse Gas Emission Reduction Trading (Trial), which systematically standardizes the overall framework and implementation process of CCER trading. On October 24, the Ministry of Ecology and Environment (MEE) released the first batch of four CCER project methodologies, including afforestation carbon sequestration, grid-connected solar thermal power generation, grid-connected offshore wind power and mangrove planting, marking the resumption of CCER trading, which had been suspended for six years.
6. The future development direction of the carbon market
1. The scale of the carbon market will continue to expand
It is expected that the national carbon market will take the lead in including the three industries of cement, electrolytic aluminum and civil aviation during the 14th Five-Year Plan period, the number of enterprises covered by the carbon market will increase from the current more than 2,200 to more than 3,500, the annual carbon dioxide emissions will increase from 5 billion tons to about 6.4 billion tons, and the average transaction price of CCER is expected to exceed 80 yuan/ton.
By the end of 2030, the number of enterprises covered by the national carbon market will increase to about 5,500, and the annual carbon dioxide emissions will exceed 8.6 billion tons, accounting for about 74% of the country's carbon dioxide emissions. The average transaction price of allowances is expected to exceed 200 yuan/ton, and the average transaction price of CCER is expected to rise to 150 yuan/ton, and the influence of the carbon market will be significantly improved.
2. The quota method is continuously optimized
At present, the release time of the national carbon market allowance allocation plan and the date of allowance issuance are relatively late, which reduces the long-term expectation of enterprises to formulate allowance trading plans. It is expected that the national carbon market will completely change the mechanism of retrospective "ex-post" allocation of allowances by 2025, and establish a quota allocation mechanism for the next 3~5 years from 2024 to enhance the predictability of quota allocation.
3. The carbon market trading products are diversifying
It is reported that Shanghai will gradually explore the field of carbon financial derivatives, such as quota pledge, carbon fund, carbon trust, as well as borrowing carbon business, carbon forward products and other financial product transactions, to promote the formation of a multi-level carbon market.
Conclusion: The smooth operation of the national carbon emission trading market is an important measure for the mainland to achieve the "double carbon" goal, since the opening of the carbon market, the carbon trading volume has exceeded 100 million tons, and the turnover has already exceeded 10 billion, which shows the importance of the incentive and regulation function of the carbon market. With the expansion of the carbon market, there will be more and more opportunities for individuals and enterprises to participate in the carbon market in the future and contribute to the "dual carbon" goal.
For more information, please feel free to send us a private message: AMT Qiyuan Carbon Management Team.
Recommended in the past
What is carbon tariff and how can enterprises deal with it calmly?
Carbon Practices | Do you really know how to do carbon data collection?
Carbon Vision | In the next five years, the state will focus on supporting three types of dual-carbon projects!