Give full play to the role of the market mechanism to accelerate the creation of a more effective, dynamic and internationally influential carbon market

Recently, the State Council promulgated the "Interim Regulations on the Administration of Carbon Emission Trading" (hereinafter referred to as the "Regulations"), for the first time in the form of administrative regulations to clarify the carbon emission market trading system, is the legal basis to guide the operation and management of China's carbon market, in the development of the carbon market is a milestone, in order to give full play to the role of the carbon emission trading market-oriented mechanism, further build a scientific, standardized and orderly carbon emission trading system, and constantly expand the breadth and depth of the carbon market, accelerate the creation of a more effective, more dynamic, The carbon market, which has a more international influence, provides a legal guarantee.

1. Background and significance of the introduction

Carbon emission trading is a major institutional innovation that uses market mechanisms to control and reduce greenhouse gas emissions, promote green and low-carbon economic and social development, and is also an important policy tool to achieve the goal of carbon peak and carbon neutrality. The CPC Central Committee and the State Council attach great importance to the construction of the carbon market. The national carbon emission trading market was launched on July 16, 2021, and is currently running smoothly and orderly. The Ministry of Justice and the Ministry of Ecology and Environment have actively carried out legislative work, and promoted the promulgation of the Regulations on the basis of combining the operation practice of the national carbon market, summarizing the experience of local carbon market construction, and learning from foreign legislation.

The first is to implement the decisions and arrangements of the CPC Central Committee and the State Council, and lay a solid legal foundation for carbon emission trading-related activities. The implementation of the decisions and arrangements of the CPC Central Committee and the State Council is a concrete implementation of the spirit of the report of the 20th National Congress of the Communist Party of China on "improving the carbon emission market trading system" and the "Opinions of the CPC Central Committee and the State Council on Comprehensively Promoting the Construction of a Beautiful China" on "building a more effective, dynamic and internationally influential carbon market". The promulgation of the "Regulations" provides a legal basis for carbon emission trading-related activities, and provides institutional guidelines for further improving the market trading system, protecting the rights and interests of trading entities, and regulating the behavior of the trading market.

The second is to adapt to the market development situation, conform to the construction idea of a unified market, and promote the active opening of the carbon market. The "Regulations" coordinate the overall and partial, domestic and international, and accurately grasp the situation of climate change at home and abroad, as well as the actual situation of China's greenhouse gas emission control and economic and social development. The Regulations fully reflect the positioning of the national carbon market as a policy tool for controlling and reducing greenhouse gas emissions, reflect the characteristics and control requirements of China's carbon emissions, conform to the construction idea of a unified market, and provide a legal basis for the subsequent further expansion of the coverage of the national carbon market, and the enrichment of trading entities, trading products and trading methods.

The third is to strengthen the responsibility of market entities, comprehensively strengthen the risk supervision of carbon emission trading activities, and maintain the healthy development of the carbon market. The Regulations strengthen the main responsibilities of the government, enterprises, registration institutions and trading institutions, technical service institutions and other parties, comprehensively strengthen the supervision of carbon emission trading entities, trading activities and carbon market risks, and give full play to the role of an effective market and a promising government. At the same time, the promulgation of the "Regulations" also plays an important role in promoting enterprises to build carbon emission management systems, better play the power of market mechanisms, market entities and institutions, promote the formation of a green and low-carbon consensus in the whole society, and promote the steady and long-term development of the national carbon market.

2. Key interpretations of relevant regulations on market transactions

(1) Clarify the core elements of trading, and gradually enhance the vitality of the market on the basis of adhering to the overall positioning of the carbon market as a policy tool for controlling and reducing greenhouse gas emissions.

The first is to define the spot attributes of carbon market trading products. Article 6 of the Regulations stipulates that the products traded for carbon emission allowances include carbon emission allowances and other spot trading products approved by the State Council. China's carbon market is still in the early stage of development, and the trading products are mainly spot allowances, and the quotas are issued by the competent department of ecology and environment to key emitting enterprises, and key emitting enterprises can buy and sell through the national carbon emission trading system after obtaining quotas. In the future, in combination with the relevant requirements of carbon emission management, other spot trading products around carbon emission rights will be included in the national carbon market for centralized and unified trading after approval by the State Council.

Second, it is clarified that the trading entities include key emitting enterprises and other entities. The Regulations make it clear that key emitting entities and other entities that meet the relevant national regulations can participate in carbon emission trading. The conditions for determining key emitting enterprises shall be formulated by the Ministry of Ecology and Environment in conjunction with the relevant departments of the State Council, and the provincial-level competent departments of ecology and environment shall formulate a directory in conjunction with the relevant departments at the same level。 Key emitting enterprises are the main control objects of carbon emissions, and bear the responsibility of clearing and performing the contract. In addition, in order to ensure the fairness of the market, the Regulations specifically specify that the staff of the competent department of ecology and environment, other departments responsible for the supervision and management of carbon emission trading and related activities, registration institutions, trading institutions and technical service institutions (hereinafter referred to as prohibited persons) shall not participate in carbon emission trading.

Third, the transaction method based on agreement transfer and one-way bidding has been established. According to the Regulations, the national carbon emission trading institution is responsible for organizing and carrying out centralized and unified trading of carbon emission rights, that is, all trading activities shall be organized by the trading institution and carried out through the national carbon emission trading system. At the same time, Article 15 of the Regulations makes it clear that carbon emission trading can take the form of agreement transfer, one-way bidding or other spot trading methods that comply with relevant national regulations. Among them, transfer by agreement refers to the transaction method in which the parties to the transaction reach an agreement through negotiation and confirm the transaction. One-way auction is a transaction in which one party submits an application for buying and selling, and multiple counterparties quote and conclude the transaction according to the regulations. The spot trading method established by the "Regulations" is not only in line with the trading habits and trading needs of relevant entities in the carbon market at this stage, but also an important choice to adapt to the characteristics of the carbon spot market.

(2) The market trading mechanism has been enriched, and the policy flexibility has been improved through the system of paid distribution and market regulation.

The first is the introduction of paid distribution on the basis of free distribution. The "Regulations" clarify the idea and direction of the allocation of allowances in the national carbon market, implement free allocation of allowances, and gradually implement a combination of free allocation and paid allocation according to the relevant requirements of the state. On the one hand, free distribution is the core allocation idea of the national carbon market. On the other hand, the national carbon market will gradually introduce paid allocation in the future. The introduction of the paid distribution mechanism can further enhance the low-carbon development awareness of enterprises that "carbon emissions have costs and carbon reduction has benefits", and the primary market formed through paid distribution can provide the most basic liquidity and performance guarantees, and the price of the primary market can also form a reference and linkage with the secondary market, further exerting the function of carbon pricing.

Second, it provides a policy basis for the establishment of a market regulation mechanism. Article 9 of the Regulations proposes that the need for market regulation should be included as one of the factors in the formulation of quota allocation plans. The conventional adjustment mechanism of domestic and foreign carbon markets generally regulates the supply, demand or price of allowances in the market by formulating certain trigger conditions, such as open market operations (auctions, buybacks, etc.), and adjusting the requirements for the offset use of emission reductions. Since the launch of the national carbon market, the overall operation of the market has been stable and orderly, and the carbon price level basically reflects the cost of emission reduction in China.

(3) Work together to improve the efficiency of carbon market trading supervision, and comprehensively strengthen the risk prevention and management of carbon emission trading activities。

First, the supervision and management system has been clarified. It stipulates that the competent department of ecology and environment of the State Council shall be responsible for the supervision and management of national carbon emission trading and related activities, and the relevant departments of the State Council shall be responsible for the relevant supervision and management work in accordance with their duties and division of labor。 The competent department of ecology and environment under the State Council shall establish a national carbon emission trading market management platform, strengthen the supervision of the whole process of carbon emission trading and related activities, and share information with relevant departments。 The national carbon emission allowance registration agency is responsible for the registration of carbon emission rights trading products, providing trading and settlement services, and the national carbon emission allowance trading agency is responsible for organizing and carrying out centralized and unified trading of carbon emission rights, and the two institutions shall establish a risk prevention and control and information disclosure system。

Second, we have comprehensively strengthened the supervision of carbon trading entities, carbon trading activities and carbon market risks. The "Regulations" fully include illegal activities such as prohibiting persons from participating in trading, manipulating the market, and disrupting market order into the supervision of transactions. Methods of market manipulation and disruption of market order include, but are not limited to, fraud, malicious collusion, dissemination of false information, etc. The relevant penalties reflect the seriousness of the carbon market, and also play a protective role in the normal purchase of allowances in accordance with the regulations to complete the payment.

The third is to implement the requirements of a unified large market, and make it clear that no new local carbon markets will be built. In order to coordinate the relationship between the national carbon market and the local carbon market, and implement the requirements of a unified market, the Regulations clarify the future development direction of the local carbon market. The local carbon market established before the implementation of the Regulations shall refer to the relevant provisions of the Regulations, improve the relevant management system, and strengthen supervision。 After the implementation of the Regulations, no new local carbon markets will be established. The national ETS and the local ETSs that are currently operating operate independently of each other. In addition, in order to avoid duplication of management, key emitting enterprises that have been included in the national carbon market will no longer participate in local carbon market transactions of the same types of greenhouse gases and the same industries.

3. Summary

The rule of law is the cornerstone of the market, playing a role in consolidating the fundamentals, stabilizing expectations and benefiting the long-term. As the basic administrative regulations of China's carbon market, the promulgation of the "Regulations" marks that the important position of the market-oriented mechanism of carbon emission trading in China's response to climate change and promoting carbon peak and carbon neutrality has been legally confirmed, providing a basic guarantee for the next step to improve the carbon emission market trading system, and providing a legal basis for expanding the breadth and depth of the carbon market, preventing and controlling market risks, and protecting the rights and interests of market entities, which is an important milestone in the construction of China's carbon emission trading system. It is foreseeable that with the formal implementation of the "Regulations", China's carbon market will usher in a huge opportunity for innovation and development, the trading rules will be more complete and clear, the trading subjects will be more extensive and diverse, the trading products will be more abundant and diverse, the trading methods will be more flexible and convenient, the risk control will be more comprehensive and effective, the information disclosure will be more open and transparent, and the market operation will be more dynamic.

(The author is Lai Xiaoming, chairman of Shanghai Environment and Energy Exchange)