The development of carbon price and carbon market is an important part of carbon neutrality

Lin Boqiang (Chief Scientist of Jiageng Innovation Lab / Dean of China Energy Policy Research Institute, Xiamen University)

The carbon market is an important part of China's "dual carbon" goal, the expected goal of the system is to actively implement market-oriented means under the framework of the top-level design of government policies, take carbon prices as market signals, force enterprises, industries and regions with high carbon emission costs to gradually update technical equipment, optimize energy structure and industrial layout, and create a good low-carbon development environment under the premise of reasonable cost control.

Since the launch of the national carbon market, considerable achievements have been made, but the shortcomings are also obvious. In terms of compliance, price level and participation, the carbon market has shown a stable and positive trend in the past two years, and the role of the price discovery mechanism has been demonstrated. At the same time, the level of carbon asset management and the awareness of energy conservation and emission reduction of enterprises have gradually improved. In the past two years, the carbon market trading system has gradually improved, and participation has gradually increased, and both buyers and sellers have been able to benefit from it. More and more enterprises are beginning to allocate corresponding carbon trading personnel and pay attention to the advance allocation of carbon assets. From this point of view, the feasibility of the overall system construction and top-level design of the carbon market has passed the preliminary practical test.

However, the trading volume of the carbon market in 2022 is significantly lower than that in the half of the year after the launch of the national carbon market in 2021. Since the carbon market is still in its infancy, this stage is often the most unstable and the most exposed problems, there will be a "tidal effect" in terms of trading volume, and it is prone to concentrated trading when approaching the compliance period. In view of this phenomenon, we should return to a result-oriented and rational view of this problem: as long as the carbon market can achieve the purpose of emission reduction and the compliance is good, the initial fluctuation of trading volume in the market is not a big problem.

In addition, the current carbon market also has insufficient trading volume and weak willingness to trade. There are two main reasons for this. On the one hand, at this stage, the carbon financial products traded in China's carbon market only have spot contracts, single products, and poor liquidity, resulting in low investor enthusiasm and the need to introduce more diversified financial derivatives in the future. On the other hand, China's carbon price is currently about 60 yuan per ton, and under the mechanism of the "dual carbon" goal, the carbon price will inevitably rise in the future. The current low carbon price has stimulated the willingness of enterprises in need of transformation to deploy carbon assets in advance. Since enterprises need to fulfill the contract and form the expectation that the carbon price will rise in the future, they want to complete the strategic layout of carbon assets in advance, so as to accumulate future carbon asset dividends in advance. As a result, many companies with carbon allowances are less willing to sell them.

As more and more financial institutions participate in the carbon trading market, the problems exposed in terms of trading volume urgently need to be paid attention to. First of all, for a well-functioning carbon market, the participation of the financial industry is indispensable, and its participation is conducive to assessing and helping market players control and hedge the risks of the current operation of the carbon market. Secondly, in terms of the particularity of the industry, financial institutions can play the role of green capital drainage, concentrate and redistribute social resources in favor of green industries, and actively promote the development of the whole society's carbon neutrality process. At the same time, from the perspective of carbon market development, the active participation of financial institutions is also conducive to green finance to help the development of carbon trading. For example, when a large number of futures companies play an important role in trading activities, it is conducive to the development of diversified carbon financial products and trading tools, which will accelerate the construction of the carbon market, improve market activity, attract more types of investors, and help investors lay out carbon assets in advance and establish a carbon risk management mechanism. In addition, in the long run, the participation of financial institutions can also help investors form long-term expectations and promote the formation of an effective carbon price.

Based on the current situation, we put forward several suggestions for the further development of China's carbon market:

First, in the early stage of the carbon market, we should pay more attention to the top-level design of the carbon market, the improvement of laws and regulations, the quality of data, and the performance of participating enterprises than to the fluctuation of trading volume. At present, there is still a lot of room for improvement in the allocation of carbon emission quotas and carbon accounting mechanisms.

Second, we should accelerate the construction of a scientific and comprehensive carbon accounting system. There are three main dimensions for measuring greenhouse gas emissions, the first is top-down, macro accounting according to provincial inventories, followed by accounting for enterprise boundaries, and finally accounting for product boundaries. At present, the difficulties of carbon accounting mainly lie in the diversity of emission sources, the uncertainty of emission factors and the lack of data. In addition, differences in measurement methods between different accounting institutions can also cause errors. China's carbon emission accounting system started late, so it is necessary to continuously explore and build China's carbon emission accounting system based on the international carbon emission accounting system. It should attach importance to data quality as the core, unify accounting standards, clarify accounting rules, strictly review the qualifications of accounting institutions, improve relevant data information and statistical caliber, establish a unified basic database, establish and improve detailed rules and laws and regulations for various work processes, and introduce third-party spot checks and supervision mechanisms.

Third, the carbon market needs to be further expanded. The question of which sectors should be included in the carbon market is now a comprehensive question. We need to fully consider factors such as the carbon emissions of the industry, the cost of reducing emissions, the cost of carbon market access, the allocation of allowances, and the quality of carbon emission data. In addition, we also need to take into account the current situation in China. The cost of the power generation industry should be externalized through carbon trading, and which industries have lower carbon emission reduction costs than the power generation industry, which can not only pay for the carbon cost of the power generation industry, but also roughly meet our above comprehensive considerations, then these industries can be used as candidates for the next step of expanding the carbon market. Combined with the current reality, cement, steel, electrolytic aluminum and other industries are relatively mature conditions for entering the carbon market.

Fourth, China's carbon trading market needs to be expanded and improved, and it is also necessary to deepen the reform of the electricity market so that electricity prices truly reflect market supply and demand and emission reduction costs. The ultimate goal of the reform of the electricity market system and mechanism is to effectively support the sustainable development of the power system. The power system under the constraint of carbon neutrality needs to build a pricing and compensation mechanism suitable for different attributes of electricity, and at the same time rationalize the benefit distribution mechanism of each link of the electricity market. Carbon pricing makes power generation enterprises face great cost pressure, and it is necessary to transmit carbon costs to the electricity consumption side through the terminal electricity price to achieve the initial design goal of carbon trading, so as to form a benign interaction between electricity price and carbon price on the basis of the interaction between the carbon market and the electricity market.

(Editor: Lu Yueling)