The trading scope and participants in China's national carbon emission trading system may further increase as market ramps up to help attain the country's green targets, industry experts said.

 

Lai Xiaoming, chairman of the Shanghai Environment and Energy Exchange, said non-ferrous smelting, cement and steel industries are likely to be allowed in carbon trading by the end of this year. Efforts have been advanced to introduce institutional investors to take part in carbon trading.

 

Inaugurated on July 16, China's national carbon emission trading system adopts a dual-city mechanism, under which the Shanghai Environment and Energy Exchange oversees the building of the trading system while the China Hubei Emission Exchange in Wuhan, Hubei province, deals with applications. The initial participants are the 2,162 electricity companies registered with the Hubei exchange. As of Saturday, the system had been online for 100 days.

 

Trading activity has increased noticeably. As of Oct 20, nearly 18.9 million tons of carbon emission allowances (CEA) have been traded since the national trading system went operational. The accumulated trading value of CEAs approached 853 million yuan ($133 million). The daily trading volume of the CEA topped over 9.16 million tons on Sept 30, hitting a record high.

 

Chen Zhibin, chief analyst of Beijing-based carbon neutrality solutions provider SinoCarbon Innovation& Investment, said companies are required to settle their carbon emission allowances for the year 2019 and 2020 before the year ends. The carbon emission quota should be cleared before the New Year. The unused quota can be traded in the market.

 

As China's first compliance period for carbon emission allocation is scheduled to be due at the end of 2021, carbon trading is expected to show higher activity in the fourth quarter, said Chen.

 

The Ministry of Ecology and Environment announced on Jan 5 the CEA allocation plan and the list of companies under special scrutiny for carbon emissions. This marks the beginning of China's first compliance period, which is planned to be due on Dec 31.

 

The compliance period refers to the time at the end of which an emitter subject to the country's regulation regarding the cap-and-trade system for greenhouse gas emission allowances must submit to the government all the carbon emission quota that the emitter reported for the period. The compliance period is usually set at one year according to international carbon trading practice.

 

While carbon trading has already heated up in China, Judy Li, Asia-Pacific partner for climate change and sustainability services at market consultancy EY, suggested that individual and institutional investors should be supported to take part in carbon trading. The carbon market will be more vibrant by having more participants. Active carbon trading will also lay the groundwork for innovation in carbon products, she said.

 

James Chang, managing partner of regional economic clusters and south markets at PwC China, said setting up a multi-level carbon trading mechanism is an important way to expand the scale of carbon assets and facilitate the transformation of companies to low carbon emissions.

 

The carbon trading market should show higher liquidity, according to PwC experts. To that end, trading rules should be optimized so that carbon assets can bear more financial characteristics.

 

The allocation of carbon emission quotas should be moderately tightened and paid carbon emission quotas introduced as soon as possible. The carbon trading market should be more legally regulated. Meanwhile, more businesses should be developed, such as taking carbon emission rights as collateral, repurchase of carbon emission rights, carbon funds and carbon trust, said PwC experts.

 

Shanghai, where the national carbon trading system sits, has moved forward. In a guideline released on Oct 19 which aims at helping the city realize carbon neutrality at a faster pace, the municipal government said pilot projects will be conducted under which financial institutions should make compulsory disclosures of environmental information. Public companies are likely to be required to provide information on carbon emissions, the guideline said.

 

A Green stocks index is encouraged to be introduced in Shanghai. Indexes for green bonds, ESG and carbon prices are also welcomed. More exchange traded fund products based on green indexes should be launched, the guideline said.