As of January 2023, a total of 28 carbon trading systems around the world have been put into effect, and more than 20 are under development or design. The carbon market already covers about 17% of the world's greenhouse gas emissions,1 3 percent of the population and 55% of the GDP, and the implementation area has gradually expanded from developed to developing countries.
In recent years, the whole process system of China's carbon market has been basically established, the carbon discovery mechanism has been initially formed, the quality of carbon emission data has been greatly improved, and the incentive and restraint mechanism for carbon emission reduction has begun to appear, promoting green, low-carbon and high-quality development, and enhancing the green and low-carbon awareness of the whole society. For the future development of China's carbon market, we look forward to the following six aspects.
First, the national carbon market is expected to further expand the sectoral coverage.
At present, only the carbon markets of China and Indonesia are only included in the power generation industry, and the trading entities are relatively single, and the process flow and products of the enterprises under management have strong homogeneity, which is not conducive to the formation of emission reduction incentive mechanism and the discovery of reasonable carbon price. Gradually expanding the coverage of carbon market industries is an important way to improve the carbon market, and the abundance of industry entities is conducive to expanding the overall influence of the carbon market, consolidating the emission reduction responsibilities of different industries, improving the activity of market transactions, and promoting the discovery of reasonable carbon prices.
Based on the comprehensive analysis of the volume of greenhouse gas emissions from different industries, the basis of data quality, the maturity of MRV and quota allocation methods, and the marginal emission reduction costs of each industry, it is expected that the national carbon market will take the lead in including the three industries of cement, electrolytic aluminum and civil aviation during the 14th Five-Year Plan period, the number of enterprises covered by the carbon market will expand from the current more than 2,200 to more than 3,500, and the annual carbon dioxide emissions will increase from 5 billion tons to about 6.4 billion tons, and the proportion of covered emissions in the national carbon dioxide emissions will increase from 42% This is up to 53%. The liquidity of quotas is expected to increase significantly, with the average transaction price of quotas expected to exceed 105 yuan tonnes, and the average CCER transaction price expected to exceed 80 yuan tonnes.
By the end of 2030, the number of enterprises covered by the national carbon market will expand to about 5,500, and the annual carbon dioxide emissions will exceed 8.6 billion tons, accounting for about 74% of the country's carbon dioxide emissions. The average transaction price of quota is expected to exceed 200 yuan ton, and the average transaction price of CCER is expected to rise to 150 yuan ton. With the further expansion of the coverage of the national carbon market, the influence of the carbon market will be significantly enhanced.
Second, it is expected that the quota allocation mechanism will be further optimized, and the "ex post allocation" of quotas will be transformed into "ex ante allocation", and paid allocation will be introduced by 2025 and the form of fund use will be improved.
After the quota allocation plan is determined, it will have a great impact on enterprises, and the society will pay close attention. The current lag between the release of the national carbon market allowance allocation plan and the issuance date of the allowance has lowered the long-term expectation of enterprises to formulate allowance trading plans. It is expected that the national carbon market will completely change the mechanism of retrospective allocation of allowances "after the fact" by 2025, and establish a quota allocation mechanism for the next 3-5 years from 2024 to enhance the anticipation of allowance allocation.
In addition, the national carbon market ranked first.
1. All quotas for the second compliance cycle will be issued free of charge, and a paid allocation mechanism has not yet been introduced. Mature carbon markets at home and abroad have introduced the paid allocation mechanism earlier, and gradually increased the proportion of paid allocation. Paid allocation of allowances is the embodiment of the basic principle of "polluter pays", and the introduction of partial paid allocation on the basis of free distribution of allowances is conducive to promoting the formation of a reasonable carbon price in the carbon market and increasing the activity of secondary market transactions. It is expected that the national carbon market will first introduce a paid auction mechanism for allowances in the power generation industry from 2024, with an initial auction ratio of 5%-8%, and gradually increase the proportion of such a quota. At the same time, we will improve the supporting system standards, clarify the key points such as the form of quota auctions, transaction rules, access rules, implementation platforms, and auction frequencies, and gradually establish a first-class library to use the auction proceeds to support enterprise carbon emission reduction, carbon market regulation and carbon market construction.
Third, it is expected that the compliance mechanism will be further adjusted, and the quota advance mechanism may be abolished. In 2024, it is expected to clarify the provisions for the carry-over of surplus allowances, providing long-term expectations for the management of carbon assets by enterprises.
In order to reduce the performance pressure of enterprises with quota shortages, the quota allocation plans for 2021 and 2022 innovatively propose quota advance policies. As a temporary relief policy, the advance payment mechanism effectively reduces the performance pressure of enterprises and ensures the implementation of the mandatory compliance policy of the carbon market. However, the advance policy is difficult to operate in practice, which is not conducive to promoting enterprises' independent emission reduction, and the practice of "eating more than you can eat" should not be retained as a long-term mechanism. Therefore, it is expected that in 2024 and beyond, the national carbon market will eliminate the allowance advance mechanism.
The allowance carry-over mechanism is an important part of the carbon market quota management, and the carry-over regulations will have an impact on the supply and demand of carbon market allowances and quotas** in the future. Regardless of whether the quota is carried forward or not, a clear policy signal needs to be released as soon as possible. The national carbon market has not yet clarified the carry-over method and use period of surplus allowances, resulting in a lack of long-term and stable policy expectations for enterprises, which is not conducive to the overall planning of emission reduction plans and trading arrangements, and the market has a wait-and-see mood. Mature carbon markets at home and abroad have introduced policies for carrying over surplus allowances, which have been continuously optimized and adjusted in practice. Therefore, it is expected that in 2024, the national carbon market will introduce provisions on the carry-over of surplus allowances, clarify the conditions and duration of surplus allowances, and formulate supporting management policies.
Fourth, it is expected that carbon market management regulations will be issued in 2024, fraud will face higher penalties, and other industry accounting, verification, and quota allocation methods will be gradually introduced or revised.
At present, the highest-level basis for the operation of the national carbon market is the Ministry of Ecology and Environment's regulations "Measures for the Administration of Carbon Emission Trading (Trial)", which is relatively limited, and the penalties for violations are insufficient and lack a legal basis. The issuance of the Interim Regulations on the Administration of Carbon Emission Trading will help make up for the lack of laws and regulations in the national carbon market and increase the penalties for violations of laws and regulations. At the regular press conference of the Ministry of Ecology and Environment in November 2023, the relevant person in charge said that the introduction of the regulations has reached the final stage. It is expected that the Interim Regulations on the Administration of Carbon Emission Trading will be issued in 2024 as the highest-level administrative regulation for the construction of the national carbon market to ensure the healthy operation of the carbon market. The regulations will increase the penalties for subjective data falsification and illegal transactions of carbon market participants, increase the penalties for failing to perform in full within the specified time as required, and increase the penalties for fraud, malicious collusion, dissemination of false information and other violations by third-party technical service providers in the carbon market.
At the same time, on October 18, 2023, the Ministry of Ecology and Environment issued the Notice on Doing a Good Job in the Reporting and Verification of Greenhouse Gas Emissions of Enterprises in Some Key Industries from 2023 to 2025, which clarified the key work requirements for the reporting and verification of greenhouse gas emissions of enterprises in key industries such as building materials, iron and steel, and nonferrous metals from 2023 to 2025, and provided instructions for the accounting and reporting of greenhouse gas emissions of enterprises in the cement, electrolytic aluminum and steel industries for filling in the emission data of enterprises in 2022. As the work of expanding the coverage of the national carbon market accelerates, it is expected that the accounting guidelines and verification guidelines for other industries such as cement, electrolytic aluminum, steel, petrochemical and chemical industries will be further revised from 2024 to 2025, and the industry quota allocation method will also be gradually introduced to ensure the orderly development of the carbon market expansion work.
Fifth, it is expected that the demand for CCER will further increase, and a number of methodologies will be released in 2024, and the upper limit of CCER offset quota settlement will remain at 5%.
CCER is an important external supplementary mechanism of the carbon market, which enriches the trading products and makes up for the problem that industries that have made important contributions to carbon reduction and sink increase, such as renewable energy, forestry carbon sink, methane utilization, energy conservation and efficiency improvement, cannot obtain economic returns for emission reduction through market mechanisms. With the resumption of CCER methodologies and project approvals, it is expected that more methodologies will be revised and published in 2024, and related projects such as biomass energy (waste-to-energy incineration, straw incineration power generation, etc.), methane utilization, and methane emission reduction are expected to benefit earlier.
At the same time, the inclusion of more industries and trading entities in the carbon market is expected to increase the purchase demand for CCER, which will promote the development of CCER trading. CCER** is expected to trend upwards as carbon prices rise. At present, key emitting enterprises can use CCER to offset the payment of allowances, and the offset ratio shall not exceed 5% of the carbon emission allowances that should be paid. In order to ensure the scarcity of allowances in the national carbon market and give full play to the emission reduction effect of the carbon market, it is expected that the CCER offset ratio will remain at 5% in the future.
Sixth, it is expected that China will accelerate the connection between the national carbon market and the international carbon market, promote the mutual recognition and exchange of technologies, methods, standards and data, and enhance the international influence of China's carbon market.
Addressing climate change is a common global challenge, and it is expected that China will further accelerate policy coordination with the international carbon trading system, continuously improve carbon pricing capabilities, and increase participation and competitiveness in the global carbon trading system. In terms of the standard system, it is expected to accelerate the pilot monitoring of corporate carbon emissions, promote the integration of relevant technologies, methods and standards such as the MRV system and quota allocation methods with the international carbon market, and promote mutual recognition and interoperability of data.
In terms of carbon credits, it is expected that China's relevant parties will strengthen the tracking and research on the development trend of the international carbon credit market, actively learn from international rules and experience, and continuously improve China's voluntary greenhouse gas emission reduction management mechanism. It will carry out risk analysis and management rules research on CCER cross-border transactions, improve the international recognition of CCER, promote CCER's participation in international transactions, and form a connection with overseas carbon markets.
The author is a professor at the Energy and Environmental Policy Research Center of Beijing Institute of Technology.
This article is an excerpt from "Effectiveness and Prospects of China's Carbon Market", and the full text can be found in China Economic Report Magazine, Issue 1, 2024.
China News Service.