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Our reporter Li Deshangyu and trainee reporter Lei Ye, Southern Finance Omnimedia reporters Lu Taoran and Guo Xiaojie report from Wuhan

It has been three years since the national carbon emission trading market was officially opened.

Data from the National Carbon Emission Rights Registration and Settlement System (China Carbon Registration) show that since the launch of the national carbon market on July 16, 2021, as of July 15, 2024, the national carbon market carbon emission quota has accumulated transactions of more than 460 million tons, with a cumulative transaction amount of nearly 27 billion yuan. The overall operation is stable, promoting the green transformation of power generation companies.

In the three years since the launch of the carbon market, as more emission reduction technologies and measures have been fully applied, the overall emission reduction costs of the national power industry have been reduced by about 35 billion yuan. The price of carbon per ton has risen from more than 40 yuan at the beginning of the opening to around 90 yuan, with the historical highest value exceeding 100 yuan.

"This year, the country will further expand the industry coverage of the national carbon market, and it is expected that the steel, cement, and electrolytic aluminum industries will also be included in the national carbon market." On July 21, the 2024 China Carbon Market Conference was held in Wuhan. Zhu Guohui, general manager of Carbon Emission Rights Registration and Settlement (Wuhan) Co., Ltd., said in an interview with the media including 21st Century Business Herald.

Talking about the future changes in the carbon market, Zhu Guohui said that the expansion of industries will gradually increase in the future. Participants and trading objects will also increase, such as financial institutions and compliant investors. The transaction price will change significantly, showing a slow upward trend.

In recent years, the construction of the national carbon market has gradually accelerated. In January this year, the national certified emission reduction (CCER) market was officially restarted. Prior to this, the Ministry of Ecology and Environment announced the first batch of methodologies, and the National Certification and Accreditation Administration released the first batch of CCER certification and verification agencies.

Many industry insiders interviewed by 21st Century Business Herald said that although the national carbon market has achieved an increase in trading volume, carbon price and other aspects, the carbon market has not fully met market expectations. It is still necessary to further address the issues of carbon market activity, expansion, CCER methodology, and carbon finance development.

The steel, cement, and electrolytic aluminum industries are about to expand

The national carbon emission trading market started with the power generation industry and launched online trading in July 2021. It now includes 2,257 key emission units, covering annual carbon dioxide emissions of approximately 5.1 billion tons, accounting for more than 40% of the country's carbon dioxide emissions, making it the world's largest market covering greenhouse gas emissions.

Data from China Carbon Certification Center shows that the second compliance cycle of the national carbon emission trading market increased by 19% in volume and 89% in turnover compared with the first compliance cycle. The number of participating companies also increased by 50%, and the price of carbon quotas also increased from 48 yuan/ton at the start to around 90 yuan/ton, an increase of about 87%. In April this year, the carbon price in my country's carbon market exceeded 100 yuan for the first time. National carbon trading data shows that on July 19, the highest price in the national carbon market was 89.17 yuan/ton.

Since the power industry started to participate in the carbon market three years ago, both the carbon market transaction volume and carbon price have increased. In less than three years, my country's carbon price once exceeded 100 yuan/ton. However, many industry insiders said that the carbon market has not yet achieved the expected results.

Lin Boqiang, director of the China Energy Policy Research Institute of Xiamen University, said in an interview with 21st Century Business Herald that it is obviously insufficient for the national carbon market to have only the power industry, and power generation companies cannot effectively transfer the carbon costs from upstream to downstream. This function may not be fully demonstrated at this stage. Next, we must think about how to reasonably include other industries to achieve the transfer of carbon costs to downstream.

This year, the Ministry of Ecology and Environment also released several draft documents for soliciting opinions, including "Guidelines for Accounting and Reporting of Greenhouse Gas Emissions by Enterprises for Aluminum Smelting Industry" and "Guidelines for Accounting and Reporting of Greenhouse Gas Emissions by Enterprises for Cement Clinker Production". There are also many speculations in the market about the next industry to be included in the carbon market.

Professor Zhao Junhua of the Chinese University of Hong Kong (Shenzhen) said in an interview with 21st Century Business Herald that the carbon market is very likely to expand in the next one or two years, which means that companies in industries such as steel, cement, and electrolytic aluminum are expected to enter the carbon market in the next batch. For these companies, it is urgent to make relevant preparations now. Companies should actively learn the various market rules of the national carbon market, form professional teams, and include internal carbon emission reduction management work in their daily agenda. Only in this way, when these companies truly enter the carbon market, can they gain greater competitive advantages with their solid performance in carbon emission reduction.

Jin Xin, general manager of Shihe Carbon (Beijing) Technology Co., Ltd., said in an interview that the principle of incorporating new industries into the carbon market is to mature an industry, incorporate an industry, and gradually expand the market coverage. The conditions for maturity include the quota allocation plan and the degree of impact on enterprises. It is worth noting that under the pressure of economic downturn, enterprises generally have poor profits. If they are forcibly included, it will also have a certain impact on enterprises. He believes that in addition to the scientific and fair allocation of quotas, relevant policies for expanding the carbon market should also be implemented within the scope that enterprises can afford.

The national carbon market will have a total quota gap of about 50 million tons in 2023 and 2024.

Recently, the Ministry of Ecology and Environment issued the "2023 and 2024 National Carbon Emission Trading Power Industry Quota Total and Allocation Plan (Draft for Comments)" (hereinafter referred to as the "Plan"). The national carbon market has officially entered the third compliance cycle.

A reporter from 21st Century Business Herald found that the Plan has been adjusted and optimized while maintaining the continuity and stability of the system. The Plan continues the overall framework of the second compliance cycle allocation plan, and all quotas for 2023 and 2024 will be allocated free of charge. The quota based on power supply will be adjusted to the quota based on power generation. In addition, indirect emissions are no longer included in the control, and the compliance cycle is changed from two years to one year.

Many industry insiders interviewed by 21st Century Business Herald reporters agreed that the "Plan" has made some adjustments to some of its contents, making the operation of the carbon market more efficient. Quotas based on power generation are easier to determine, and indirect emissions account for a relatively small proportion of carbon emissions from power generation companies. Indirect emissions are no longer included in the control, which reduces the workload of companies in emission accounting. In addition, the shortening of the compliance cycle reflects the more refined work of the regulatory authorities.

The quota allocation system is an important basic system of the national carbon market and a cornerstone for ensuring the healthy, stable and orderly operation of the carbon market and achieving policy goals.

The overall framework of this "Plan" remains consistent with the past, but in terms of specific content, the "Plan" has made some major adjustments and optimizations based on the practice of the first two compliance cycles. Liao Yuan, general manager of CECEP Ecological Products, said in an interview with a reporter from 21st Century Business Herald that overall, the first two compliance cycles of the national carbon market focused on improving the carbon emission data management capabilities of enterprises and consolidating the data foundation of the carbon market. Based on the experience of the first two compliance cycles, this "Plan" simplifies the emission and quota accounting and introduces a new mechanism to encourage trading. This puts higher requirements on the carbon asset trading operation capabilities of enterprises, and will also encourage enterprises to gradually transform and upgrade from carbon emission management to comprehensive carbon asset strategic planning and management.

In the Plan, all quotas are still allocated free of charge. Wu Hongjie, deputy secretary-general of the China Carbon Neutrality 50 Forum, said in an interview with a reporter from 21st Century Business Herald that the national carbon market quota paid allocation system has yet to be established. There are precedents for reference in local carbon markets. Beijing, Wuhan, and Shenzhen carbon markets have more than ten years of experience in exploring the quota paid allocation mechanism. Most mature carbon markets in the world have already carried out a combination of free and paid allocation practices. He believes that the timely introduction of paid allocation and the gradual increase in the proportion of paid allocation can promote the willingness of enterprises to reduce carbon emissions and increase the intensity of emission reduction technology innovation.

The benchmark value is the core of the quota allocation plan. 21st Century Business Herald reporters noticed that compared with the published benchmark value for 2022, the benchmark values ​​for carbon emissions in 2023 and 2024 have declined to a certain extent. The preparation instructions for the "Plan" pointed out that on the one hand, the "Plan" adjusted the quota from being based on power supply to being based on power generation. The power generation is larger than the power supply, resulting in a smaller benchmark value; on the other hand, indirect emissions are no longer included in the quota control scope, and the benchmark value is also relatively lowered.

According to the disclosure, according to the 2023 benchmark value proposed in the Plan, the industry will have a quota gap rate of about 0.5% in 2023. The 2024 power generation and heating benchmark values ​​of all types of units will drop by about 0.5% compared with the 2023 benchmark values. Liao Yuan, general manager of CECEP Ecological Products, told the 21st Century Business Herald reporter that considering that the actual carbon emission intensity of the power generation industry in 2023 will drop by about 0.6% compared with 2022, the quota gap rate in 2024 is expected to be the same as that in 2023.

Liao Yuan further pointed out that if we refer to the scale of the second compliance cycle covering more than 5 billion tons of annual emissions, the quota gap rate of 0.5% in 2023 is equivalent to a quota gap of about 25 million tons, and the quota gap in 2023 and 2024 is about 50 million tons in total.

In addition, the Plan introduces a new quota carryover policy, which allows market players to retain quotas for use in subsequent years, in order to encourage companies with surplus quotas to sell their quotas and release quota supply. Wu Hongjie said that due to the impact of contract compliance requirements, some power plants are reluctant to sell their quotas, and the introduction of this policy is aimed at promoting the liquidity and trading activity of the national carbon market.

Voluntary carbon market moves forward cautiously

Last year, the Ministry of Ecology and Environment announced four project methodologies, including afforestation carbon sink, grid-connected solar thermal power generation, grid-connected offshore wind power generation, and mangrove forest construction. Recently, the National Certification and Accreditation Administration released the first batch of CCER certification and verification agencies.

Li Nuyun, director of the Zhongguancun Green Carbon Sink Research Institute, said that the carbon market is an important regulatory tool for achieving the "dual carbon" goals, and carbon sinks can be traded in the national carbon market as part of the offsetting mechanism.

What other areas are expected to participate in voluntary emission reduction trading in the future? Li Nuyun said that it is impossible to release many methodologies in a short period of time. The climate authorities will revise them in a timely manner based on factors such as economic and social development, industrial structure adjustment, industry development stage, and climate change response policies, and incorporate them into the national standard system when conditions are ripe.

She told the 21st Century Business Herald reporter that there are 15 internationally recognized emission reduction project areas that have been inherited from the Clean Development Mechanism (CDM). The first batch of four methodologies announced now only include two of them, namely the first category "energy industry" and the fourteenth category "afforestation and reforestation", with two methodologies published for each category. Next, the Ministry of Ecology and Environment will gradually evaluate and select methodologies for other fields, and gradually expand the scope of inclusion in accordance with the principle of publishing one by one as it matures.

Wu Hua, secretary general of the Institute of Cultural New Economy of Shanghai University, believes that taking afforestation carbon sink as an example, it is mainly based on the public welfare forests added in 2015. Under the constraints of the additionality clause, the area of ​​forest land that can be included in the accounting scope is relatively small. "For example, a county-wide forest area of ​​1.9 million mu is mainly virgin forest, and only about 100,000 mu of it can be developed using the CCER methodology," she said.

Wu Hua believes that the current relatively cautious pace of the Ministry of Ecology and Environment in publishing methodology is a good thing. She explained that if the number of projects is too large in a short period of time, the review speed of experts and third-party review agencies cannot keep up, and data fraud may occur without being detected.

In this regard, Li Nuyun said that the voluntary carbon market is currently facing a crisis of trust. Due to the lack of clear data and transparency, and the lack of supervision on the issuance and monitoring of carbon credits, some carbon offset projects are considered to be "greenwashing" tools for enterprises. "If we want to continue to play the role of the voluntary carbon market in carbon emission reduction, then scientifically formulating methodologies, strengthening management, increasing transparency, and pioneering innovation are the key issues to be addressed in the future."

Wu Hua said that CCER plays an important and positive role in promoting my country's "dual carbon" goals and is essentially a domestic carbon pricing platform. "At present, many companies have launched their own carbon inventories. Carbon pricing is very important in the next stage."

Wu Hua said that according to statistics from the World Bank, as of April 2024, a total of 75 carbon pricing tools have been implemented worldwide (39 of which are carbon tax tools and 36 are ETS, divided by jurisdiction). These tools cover a total of 13 billion tons of carbon emissions, equivalent to 24% of global emissions.

In the short term, Wu Hua said that mutual recognition between domestic and international carbon markets is difficult to achieve. She explained that the carbon tariffs set by the EU are a new form of trade barriers, the purpose of which is to increase the production costs of enterprises and use market advantages to raise the environmental protection and carbon emission costs of enterprises to the same level as the EU.

In terms of carbon prices, although the carbon price in my country's carbon market once exceeded 100 yuan, it is still relatively low compared to international carbon prices. Wu Hua believes that the gap between domestic and international carbon prices is relatively large, and the EU's carbon price is almost 8 times that of domestic carbon prices. The reason is that the carbon and carbon assets calculated based on the methodology can help companies "go overseas" to solve problems, and the breadth of the content covered is different, and the carbon prices formed are also high and low. In the future, as the international community strengthens its consensus on carbon neutrality and solving global climate problems, carbon prices will gradually rise.

From the perspective of the development of domestic and international voluntary carbon markets, Li Nuyun explained with data that the total transaction volume of the global voluntary carbon market reached more than 2 billion US dollars in 2021. Compared with the transaction volume of 850 billion US dollars in the mandatory market in the same year, the scale of the voluntary carbon market is relatively small, especially in 2023, which dropped by 61% compared with 2022.

However, most market observers predict that as companies step up their commitment to address climate change and carbon neutrality and net zero emissions, the corresponding demand for carbon credits will increase, driving the growth of the voluntary carbon market. Boston Consulting Group and McKinsey estimate that by 2030, the voluntary carbon market could reach $10 billion to $50 billion.

Carbon finance innovation still requires patience

With the increasing maturity of the carbon market, coupled with the restart of CCER in 2024, and the joint promotion of both mandatory and voluntary carbon market mechanisms, innovative carbon finance products have been launched and implemented across the country in recent years.

Liu Huixin, executive director of the Climate Finance Research Center of the International Institute of Green Finance at the Central University of Finance and Economics, told the 21st Century Business Herald that in the three years since the launch of the national carbon market, carbon finance has shown many highlights in terms of standards and norms, product innovation, and diversified entities.

On the one hand, carbon finance standards and norms are further strengthened. With the release of the "Carbon Financial Products" by the China Securities Regulatory Commission and the "China Carbon Derivatives Trading Definition Document (2023 Edition)" compiled by experts from all walks of life organized by the National Association of Financial Market Institutional Investors, the concept and understanding of carbon financial products have been significantly strengthened. In addition, pilot carbon markets in various places have successively issued relevant regulations on carbon emission repurchase business, forward business and quota pledge registration, and the standardization of carbon financial innovation has continued to be optimized.

On the other hand, the dimensions of carbon financial products are further enriched. In the past three years, financial institutions have actively participated in the innovation of carbon financial products. Innovative cases of carbon asset mortgage loans, mainly carbon quota mortgage loans, have emerged in various provinces and cities across the country. As the construction of the carbon market matures, all parties have also recognized the credit enhancement effect of carbon asset mortgage loans. At the same time, the interbank market has also innovated a number of carbon market-related debt financing instruments, some of which link the face interest rate with the income from carbon quota trading, and some link the interest rate with CCER emission reductions. The cases of carbon bond product innovation are becoming increasingly rich.

Third, various financial industry players such as banks, securities, trusts, insurance, and funds have increased their attention to carbon finance and have innovated corresponding products. Carbon finance will gradually play a more important role in meeting the low-carbon transformation of the real economy.

The power industry and the cement, electrolytic aluminum and steel industries that are expected to be included in the national carbon market in the future are all high-carbon emission industries, which also provides more ammunition for subsequent transitional financial innovations.

Zhao Junhua told the 21st Century Business Herald reporter that the entry of industries such as steel into the national carbon market will provide impetus for the development of transition finance. On the one hand, the national carbon market requires these high-carbon emission companies to fulfill their obligations. On the other hand, overseas green trade barriers such as the EU carbon tariff will also be implemented one after another, which will provide new impetus for companies to promote low-carbon transformation. Transition finance is a means for high-carbon companies to transform to low-carbon. Only when companies have the motivation to transform can transition finance develop.

In addition to traditional product innovations related to credit and bonds, financial product innovations related to derivatives such as carbon futures have also attracted much attention from financial industry insiders. Many industry insiders said that currently more than 80% of carbon trading in the EU is carried out in the form of futures, and carbon futures have become an important tool for price discovery in a mature large-scale carbon market. If the linkage between carbon futures and spot can be achieved in the future, it will bring more innovation opportunities to carbon finance.

However, the current interim regulations on national carbon market trading management still only focus on spot trading, and my country has not yet formed institutional norms for the innovation of carbon financial products, including carbon financial derivatives.

Zhao Junhua believes that whether derivatives such as carbon futures can be listed still needs to be observed whether more industries can be included in the national carbon market and more companies can participate in the carbon spot market in the next 2 to 3 years.

Liu Huixin also said that referring to the international mature carbon market development experience, good market expectations and stable carbon prices are the prerequisites for the stable development of carbon finance. In addition, my country's carbon market still needs to be gradually optimized in terms of coverage of emission control industries, types of trading entities, trading activity, carbon prices or quota adjustment measures, etc., and gradually form a carbon pricing mechanism that meets market supply and demand under a sound mechanism design. Therefore, we still need to be patient for the innovation of derivatives such as carbon futures.

The total carbon emissions of power generation companies may continue to rise

According to the "China Electricity Industry Annual Development Report 2024", my country's wind power and solar power generation, non-fossil energy power generation installed capacity, and new energy new installed capacity are all showing a rapid growth trend.

By the end of 2023, the installed capacity of non-fossil energy power generation will reach 1,575.41 million kilowatts, a year-on-year increase of 24.1%, and the proportion of total installed capacity will exceed 50% for the first time, reaching 53.9%. In 2023, the total installed capacity of non-fossil energy power generation in infrastructure will reach 307.62 million kilowatts, a year-on-year increase of 96.2%, accounting for 83.0% of the total new installed power generation capacity.

According to the public data of ESG reports of power generation companies, the 21st Century Business Herald found that the total carbon emissions of many listed power generation companies that are required to disclose information are still rising year-on-year. At the same time, in recent years, the carbon emission intensity of the power generation industry has been declining year by year. In 2023, the actual carbon emission intensity of the power generation industry will drop by about 0.6% compared with 2022.

Wu Hongjie said that the so-called carbon emission intensity refers to the carbon dioxide emissions generated per unit of gross domestic product, which is the value obtained by dividing the carbon emissions by the economic GDP. The smaller the carbon emission intensity, the higher the level of green development of the enterprise.

For example, the carbon emissions of the power plant last year were 1 ton, while this year's emissions are 2 tons. It is true that carbon emissions are increasing, but from the perspective of corresponding economic benefits, the economic benefits corresponding to each ton of carbon emissions last year were 1 yuan, while this year the corresponding value is 3 yuan. This significant decrease in carbon emission intensity indicates that the company's low-carbon green development level has significantly improved.

The total carbon emissions refer to the total amount of carbon dioxide produced in a certain period and region. Wu Hongjie said that China is currently pursuing a reduction in carbon emission intensity, rather than an absolute reduction in total carbon emissions. A reduction in total carbon emissions will affect the development of an enterprise to some extent. While paying attention to the year-on-year increase in the total carbon emissions of listed power generation companies, we should also look at whether the carbon emission intensity of the company has decreased.

Lin Boqiang said that the decline in carbon emission intensity may also mean an increase in clean energy such as wind power and photovoltaics, and carbon emission intensity will often decrease accordingly. Whether the total carbon emissions will increase depends mainly on the development of the power system. Before the carbon peak target is achieved in 2030, the carbon emissions of many thermal power companies will continue to rise rather than fall.