The two departments jointly issued a document! Standing at 80 yuan / ton for 7 consecutive trading days, why did the carbon price rise sharply?
The price of the carbon emission allowance (CEA) listing agreement in the national carbon market has recently increased significantly. According to data released by the Shanghai Environment and Energy Exchange, on October 20, the closing price of the CEA listing agreement in the national carbon market was 81.67 yuan / ton, which has stood at the 80 yuan / ton mark for seven consecutive trading days. This price is nearly double the opening price of the national carbon market of 48 yuan / ton. It is understood that the national carbon market has been running smoothly for more than two years. Among them, in 2021 and 2022, the highest transaction price of CEA in the national carbon market was 62.29 yuan / ton and 61.60 yuan / ton respectively. In the first half of this year, the highest transaction price of CEA was only 60 yuan / ton. Since mid-July this year, CEA trading prices have begun to rise sharply. On August 15, the CEA closing price exceeded 70 yuan / ton for the first time. At present, yesterday's closing price has risen by 16.67% compared with August 15.
On October 19, the Ministry of Ecology and Environment and the State Administration for Market Regulation jointly issued the Administrative Measures for Voluntary Greenhouse Gas Emission Reduction Trading (Trial) to regulate voluntary greenhouse gas emission reduction trading and related activities nationwide.
The supply of carbon allowances has tightened and carbon prices have risen
Regarding the recent continuous rise in carbon prices, Li Jing, Sustainability Services Partner of EY Greater China, believes that it is mainly due to the tightening of carbon allowance supply and rising demand for carbon allowances due to the imminent implementation of the second compliance cycle. It is understood that in mid-July, the Ministry of Ecology and Environment issued the Notice on the Settlement of Carbon Emission Quotas in the National Carbon Emission Trading Market for 2021 and 2022 (hereinafter referred to as the "Notice"), requiring 95% of key emitting enterprises in the administrative region to complete compliance by November 15, 2023, and all key emitting enterprises to complete compliance by December 31, 2023.
"Compared with the previous compliance cycle, the current compliance time is about a month earlier. Based on the experience of the previous compliance cycle, some enterprises with insufficient quotas chose to purchase the required carbon allowances three months before the compliance period, so the demand for carbon allowances has recently surged. The baseline of the second compliance cycle has been tightened compared with the previous compliance cycle, resulting in a quota gap for more emission control enterprises, which has led to a further increase in market demand. Li Jing analyzed that the fluctuation of supply and demand has jointly affected the performance of carbon prices, and this round of rise is a market response with strong support from seasonal factors and policy factors.
"Looking back at the trading situation of the first compliance cycle of the national carbon market, in the two months before the first compliance period deadline (December 31, 2021), CEA trading volume accounted for 89% of the total trading volume of the first compliance period, and the CEA closing price also increased by more than 30% in the month before the compliance deadline. Lu Political Commissar, chief economist of Industrial Bank, said that at present, China's carbon market is still mainly driven by compliance, and with the full implementation of the second compliance period, the performance demand of emission control enterprises has increased significantly, and the national carbon market has once again ushered in a sharp increase in trading volume.
From the supply side, Political Commissar Lu believes that with the tightening of quota supply and limited supply of CCER, enterprises are generally reluctant to sell. "According to the Implementation Plan for Setting and Distributing the Total Amount of National Carbon Emission Trading Allowances in 2021 and 2022 (Power Generation Industry), the benchmark value of quota allocation for power generation enterprises in the second compliance period has been lowered, and the issuance of quotas has been tightened. According to the aforementioned Circular, the relevant requirements for quota carryover are clarified, and both the quota in the first compliance period and the quota in the second compliance period can be carried forward to the second compliance period for use or trading. Political Commissar Lu said that under the expectation that 100% of the quotas can be carried forward, and the existing quota stock is limited and the expected further reduction of future quotas, key emitting enterprises will cherish their quotas more and choose to sell them out of consideration for future compliance.
Political Commissar Lu said that the current CCER is waiting to be restarted, and the number of CCERS retained in the market is limited, which is difficult to meet the needs of enterprises using CCER to complete quota offset compliance. "Due to the suspension of CCER for many years, only more than 10 million tons of CCER remain on the market. Although there is market news that CCER may be officially restarted in October this year, due to the close deadline for the second compliance period after the restart, it will not be possible to complete the issuance of new emission reductions, and it will be difficult for key emitters to purchase sufficient CCER from the market to complete the quota offset settlement during the second compliance period. Political Commissar Lu believes that not only is the supply of CCER insufficient during the second compliance period, but the number of CCER supplied in the market may still be limited in the coming period. As the Administrative Measures for Voluntary Greenhouse Gas Emission Reduction Trading (Trial) (Draft for Comments) puts forward new requirements for the start time of emission reduction projects and the time when emission reductions are credited. In this context, in the short term, there will be fewer potential CCER developable projects and fewer emission reductions that can be issued. In addition, considering the maturity of emission reduction methodology, avoiding problems such as irregular projects before the suspension of CCER, and emission reduction filings that are much greater than the offset speed, it is expected that the Ministry of Ecology and Environment may include emission reduction project types in batches in the future, while the first batch of projects in the future may only have forestry carbon sinks (including bamboo forests), mangrove restoration, grid-connected offshore wind power, grid-connected solar thermal power generation and other project types.
Carbon prices are likely to remain high in the short term
"In the short term, carbon prices will remain high until the end of the compliance period, especially as the compliance deadline approaches, and may usher in another wave of increases, but the momentum for a sustained sharp increase may not be as strong as the first compliance period. Political Commissar Lu believes that before the end of the compliance period, there are still a large number of compliance needs for emission control enterprises. In the last two months of the first compliance period, the total trading volume of the national carbon market reached 130 million tons, while the total trading volume in July and August after the start of the second compliance period was only 16.4 million tons. Based on the current institutional arrangements, the national carbon market is still a seller's market, so carbon prices will remain high until the end of the compliance period, with the possibility of further increases.
In the long run, Tang Huijun, senior analyst of carbon power at CSC Futures, believes that at present, the allocation of quotas in the national carbon market is generally tightened, and the benchmark value of the second compliance period is lower than the overall balance value. In addition, the inclusion of cement, steel and electrolytic aluminum in the national carbon market has been steadily advancing, considering factors such as overcapacity and gaps in local pilot implementation, the allocation of quotas in the above three industries will only tighten, and there is still room for carbon prices to rise in the future.
Liu Hongming, director of carbon markets at EDF's Beijing representative office, also said that China's carbon price is still on the rise. With the steady progress of China's work to achieve the "dual carbon" goal and the implementation of the carbon emission dual control policy, the emission reduction requirements for enterprises will be strengthened in the future, and the carbon price will show an upward trend. According to the "2022 China Carbon Price Survey Report" supported by EDF, China's carbon price will rise to 87 yuan/ton in 2025 and 130 yuan/ton by 2030.
However, compared with European and American countries and regions, China's carbon price is still at a low level. Relevant data show that in the first quarter of this year, the EU's carbon price has exceeded 100 euros / ton, which is converted to about 700 yuan / ton. In this regard, Liu Hongming said that due to the different development stages, emission reduction actions and carbon market maturity of different countries, carbon prices cannot be simply compared. "Since 2005, the EU's carbon market has been operating for 18 years and four operating stages, while China's carbon market is in the second compliance cycle of the compliance year, still in the early stage of development, in order to ensure its long-term stable operation, the initial carbon price should not be too high." Liu Hongming believes that at present, China's carbon market only includes the power generation industry, and all quotas are distributed free of charge, and market participants and products need to be further enriched, so the price of the carbon market at this stage does not reflect a completely reasonable carbon price. In addition, the carbon market is considered to be a low-cost means of emission reduction, and its core purpose is to promote the whole society to promote emission reduction and achieve carbon neutrality in a low-cost way, rather than simply carbon trading, so the carbon price does not fully reflect a country's emission reduction efforts.
It is understood that carbon prices are formed through market transactions. Industry insiders analyzed that from the micro and short-term situation, the carbon price is mainly determined by the supply and demand of quotas; from the macro and long-term perspective, the carbon price is determined by the overall situation and trend of economic operation and industry development. Therefore, it is normal for carbon prices to fluctuate, but sharp fluctuations, too high and too low, are not conducive to the long-term stable operation of the carbon market.
"Abnormal short-term fluctuations in carbon prices, too high or too low, are not conducive to sustainable economic progress towards carbon neutrality and the healthy development of carbon markets. Political Commissar Lu said that excessive carbon price increases in the short term will bring excessive cost pressure to emission control enterprises, especially during the economic downturn, and excessive carbon prices will further inhibit the production momentum of enterprises. Excessive declines in carbon prices will cause carbon markets to fail and lose their role in controlling corporate carbon emissions. Stabilizing the carbon price at an appropriate level can effectively promote enterprises to save energy and reduce emissions through technological innovation or the development of new energy, especially the current national carbon market only includes the power generation industry, the appropriate carbon price level will help promote the development of renewable energy power generation, especially to help improve the problem of large installed capacity of renewable energy and insufficient output.
The financial attributes of the carbon market should be accelerated
As the compliance period approaches, the national carbon market has also been active recently. In terms of trading volume, the volume of multiple trading days is in the millions of tons. Statistics released by the Shanghai Environment and Energy Exchange show that on October 19, the total trading volume of carbon emission allowances in the country was 6833960 tons, and the cumulative trading volume was 346 million tons. However, compared with the total amount of carbon allowances in China, the current carbon market still has a lot of room for improvement. According to data from the Ministry of Ecology and Environment, a total of 2,162 key emitters in the power generation industry were included in the first compliance cycle of the national carbon market, covering about 4.5 billion tons of greenhouse gas emissions per year.
In addition, from the first compliance period, there is a clear "tidal effect" in the carbon emission market, with trading volumes rising before the compliance deadline, with 75% of transactions occurring one month before the compliance deadline. In this regard, Tang Huijun explained that first, many companies lack conventional trading strategies and are not ready to continue trading. Second, between October and November, quota allocations were adjusted, which reduced the time for the control unit to prepare for compliance and complete the transaction to less than two months. In addition, only when quotas are in short supply, enterprises have purchase demand, and some enterprises with more quotas also have a reluctant to sell.
A number of industry insiders believe that China's carbon market needs to be gradually improved in the future, and trading activity can be improved by introducing third-party investment institutions, developing financial derivatives, and accelerating the construction of financial attributes in the carbon market.
"The diversification of carbon trading products and trading methods is conducive to enhancing market activity, which in turn is conducive to accelerating the marketization process of the national carbon market." Li Jing suggested that to increase the activity of the national carbon market, it is necessary to involve financial institutions and continue to expand the coverage of the industry. In addition, the proportion of paid carbon allowances can be gradually increased, and a roadmap for changes in carbon allowances can be given. "At present, the national carbon market implements a free allocation method in the management of carbon quotas, and if carbon allowances are always distributed to enterprises free of charge, it will not be able to highlight the guiding role of carbon price signals on the market. She believes that in the future, the carbon derivatives market will be gradually launched. On the basis of spot trading in the national carbon market at this stage, learn from the experience of the international carbon market, further increase the types of carbon financial products such as carbon forwards, carbon options, and carbon futures, and introduce more trading methods such as forward trading, rollover trading, and swap trading.
Political Commissar Lu also said that a carbon market regulation mechanism should be established to enrich the market trading varieties of carbon emissions. He suggested that carbon derivatives such as carbon futures should be carried out step by step, and from the development experience of mature international markets, the development of carbon derivatives such as carbon futures can greatly strengthen the price discovery function of the market and effectively enhance market activity. In addition, financial institutions such as commercial banks should be encouraged to participate in the carbon market, especially in the trading of carbon financial derivatives markets, which can not only strengthen the price discovery function, but also provide risk management services for emission control enterprises.
"There are many restrictions on financial institutions participating in the carbon market in the current carbon market, such as the banking industry only participates in the settlement business of carbon trading, and cannot participate in carbon spot or other carbon financial derivatives transactions. Political Commissar Lu believes that breaking the institutional restrictions on financial institutions participating in the carbon market at this stage will play a positive role in promoting the activity of the carbon market and the overall development of carbon finance. On the one hand, as intermediaries, financial institutions participating in the carbon market can become the "lubricant" of the market and smooth out price fluctuations. At present, since banks cannot directly participate in the carbon market and have no direct disposal of carbon emission rights as collateral, allowing commercial banks to participate in carbon trading, or at least allowing commercial banks to passively dispose of carbon emission rights pledged assets directly in the carbon market, will help promote the large-scale development of carbon emission rights pledge financing business.
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Responsible editor: Li Guolei Supervisor: Li Hongzhu
