AA market-based policy tool for energy conservation and emission reduction, the carbon emissions trading system follows the cap-and-trade principle, with the government setting a cap on carbon emissions. carbon for one or more industries. For each tonne of greenhouse gas emitted by a company included in the carbon emissions trading system, one unit of carbon emission allowance is required. Companies can buy these allowances or trade them with other companies.
In October 2011, the central government launched local pilot carbon trading programs in Beijing, Tianjin, Shanghai, Chongqing, Hubei, Guangdong and Shenzhen. Ten years later, in July of this year, the National Carbon Market went live. However, due to factors such as a late start, uncertain political expectations, lack of transparency in the carbon allowance allocation mechanism, and an immature baseline data system, trading has been lackluster and prices are low.
Yet energy saving and emission reductions have become such inexorable trends that it makes sense for companies to view reductions as an opportunity and to strengthen their carbon trading and carbon asset management capacities in order to improve their green and low-carbon competitiveness.
Business entities. As part of the measures for the administration of carbon emissions trading (for trial implementation), “key emitters” as well as organizations and individuals that meet the carbon trading rules. ‘Relevant state can trade in the national carbon market.
The term “key emitter” designates a company that belongs to an industry covered by the national carbon emissions trading market and whose annual greenhouse gas emissions reach at least 26,000 tonnes of dioxide equivalent. of carbon. Currently, only the electricity industry is included in the trading system, with a total of 2,225 companies nationwide designated as key emitters.
Fixing of the ceiling and the allowance. The carbon emissions trading system limits the total allowances available for a specified period of time, thereby controlling the total emissions emitted by emitters and thereby promoting the achievement of carbon reduction targets.
Similar to the planned gradual development of the EU Emissions Trading System, China’s national carbon market has, due to its early days, tentatively adopted an upward-capping method, that is, that is to say that the quotas of each company are determined according to its actual production. in 2019-2020 and the total quotas for each administrative region at the provincial level are then added to obtain the national emissions cap. It seems likely that the top-down cap requirement will be phased in to align with the policy goal of peaking.
It is widely accepted that as work on reducing emissions progresses, allowances entering the carbon market and made available for trading will decrease and that the relevant authorities will maintain carbon price stability by tightly controlling and actively quotas.
The first batch of allowances was allocated free of charge to the companies concerned, with an execution period ranging from January 1 to December 31, 2021. In the future, with the gradual maturation of the market, paid allowances may be introduced.
Trade mechanisms. Following an announcement from the Shanghai Environment and Energy Exchange, trading mechanisms include transfer by agreement, one-way auctions, or other methods that comply with regulations. Over-the-counter transfer is divided into listed trading over-the-counter and bulk over-the-counter trading.
The maximum bid for a transaction through deal quoted exchanges must be less than 100,000 tonnes of carbon dioxide equivalent. A business entity makes a bid and completes a transaction by viewing the quote quotes in real time and, based on the principle of price priority, selects from among the five most favorable real time prices of the counterparty as the transaction price. The transaction price according to this method is determined at plus or minus 10% of the closing price of the previous trading day.
The minimum bid for any transaction through a wholesale by agreement should also not be less than 100,000 tonnes of carbon dioxide equivalent. A business entity can initiate a business bid, or conduct a dialogue and negotiate the price with a counterparty that initiated a bid, or enter into an agreement directly with the counterparty.
A deal is confirmed once the parties reach consensus through negotiations on things like deal price, deal quantity, etc. The transaction price according to this method is determined at plus or minus 30% of the closing price of the previous trading day.
China’s carbon emissions trading system provides only one-way auction function, that is, a business entity submits a sale request to the trading institution, the The commercial institution publishes an offer announcement, the eligible potential assignees submit their quotes in accordance with the regulations, and the agreement is reached through the commercial system at the specified time.
Business requirements. Each business entity can only open one business account and may request multiple operators and a corresponding account operating authority. A trading product that has been purchased cannot be resold on the same day. The clearing and settlement of carbon emission allowances is handled by the registration institution in accordance with regulations based on the results of the transaction provided by the trading institution. The original documents relating to a transaction and the relevant documents and information must be kept for at least 20 years.
It should be noted that the carbon trading market is a political instrument and the market is naturally subject to the intervention and regulation of government authorities. When abnormal fluctuations in the exchange prices trigger the regulation and protection mechanism, the Ministry of Ecology and Environment can take measures such as open manipulation of the market, adjustment of the use of reductions national certified voluntary emissions, etc., to promote good market development.
In a macro-policy context, companies should quickly get to work to establish a carbon asset management framework and systematically develop their carbon asset management capacities, including integrated management of carbon activities, unified emissions accounting development, orderly development of carbon assets and establishment of compliance to effectively avoid final settlement and enforcement risks.
Financial institutions have also moved from pilot projects to intensive participation, with the central bank rolling out a tool to help reduce carbon emissions on November 8, 2021. The scale of green credit continues to grow and several banks have launched national loans of carbon emission rights. Zhongrong Trust offered the first certified emissions reduction investment trust in China for carbon trading and quota buyback.
Pledges and transfers of quotas, as well as carbon funds, trusts and bonds are continuously developed and deployed by various financial institutions. All of this signals that the carbon market is gradually becoming an increasingly important component of the green financial system.
Zhao Shujie is a partner at East & Concord Partners. He can be reached on +86 10 6590 6639 or by e-mail at [email protected]