This is an exclusive opinion column jointly launched by Carbonstop & Carbonstop Research Institute, featuring interviews with experts from various fields in the carbon industry, as well as ordinary people who care about the carbon neutrality issue, to discover the most valuable insights and knowledge experiences.
Today, we have interviewed Mr. He Jinfeng, Chairman of Sichuan United Environment Exchange, to discuss the current status and development trends of carbon asset trading. The article is presented in a Q&A format.
Carbonstop: From pilot trading to national carbon trading, carbon exchanges are an important component of the carbon market. Could you please specifically introduce the role, functions, and significance of the exchange in the carbon market?
He Jinfeng: Thank you very much for the invitation from Carbonstop. We and Carbonstop are "carbon partners" who started our ventures in the carbon market in the same year, and we have been paying attention to each other. I would like to extend my congratulations to Carbonstop on its extraordinary achievements over the past 11 years! Today, I am very pleased to share some insights with friends who are concerned or involved in the carbon market.
I agree with what you said, "Carbon exchanges are an important part of the carbon market," but how important are they?
In the past, when entering and leaving the Capital Airport, I often saw a public service advertisement for animal protection, which roughly meant that if transactions cannot be realized, a market cannot be formed. The carbon market is no exception.
The market is so large, and transactions must be completed on a specific platform, and the institution responsible for building and operating the trading platform is the carbon exchange. To be more specific, let's start with the concept of the carbon market.
The abstract carbon market refers to the sum of all exchange relationships formed by mechanisms, technologies, services, facilities, and equipment related to greenhouse gas emissions such as carbon dioxide. In this market, in addition to the buyers and sellers of carbon assets, there are also third-party consulting, auditing, and certification institutions, as well as investment, legal, and accounting service providers, and of course, indispensable trading institutions.
The concrete carbon market usually refers to the carbon exchange and the carbon trading platform it develops and operates. The trading of carbon assets can only be completed at the carbon exchange. Although consulting, auditing, and certification services may not be traded within the exchange, their service results are intermediate products of carbon assets, and the end product is still the carbon asset.
Let's talk about the role positioning of the exchange in the carbon market. Extending from the concept of the carbon market, it is not difficult to understand that the carbon market is not a linear industrial chain relationship, but rather a multi-dimensional market ecosystem relationship.
Although the exchange is not the main part of the market, it is an important infrastructure and a key hub in the carbon market, especially for the narrow definition of carbon asset trading. To ensure clear ownership, orderly circulation, and safe and efficient transactions, they can only be completed at the exchange.
This is because carbon assets are digital assets, and the authenticity, completeness, accuracy, validity, traceability, immutability, and security of data are all critical. Therefore, the state and local governments strictly control the quality and quantity of carbon exchanges according to high standards and strict requirements.
Setting up a carbon exchange is not a simple matter; it requires applying for two qualifications from the state.
The first is to obtain the qualification of a general trading institution. According to relevant regulations, institutions whose names contain the three characters "exchange" follow the principle of "total control, reasonable layout, and cautious approval." After obtaining written consent from the inter-ministerial joint meeting led by the CSRC, they must then be approved for establishment by the provincial government, with a relatively high difficulty coefficient.
To my knowledge, in the past decade, apart from the Beijing Stock Exchange and the Guangzhou Futures Exchange, no other "exchanges" have been approved, only a few "trading centers."
The second is to obtain the qualification to trade carbon assets, i.e., to become a carbon trading institution. So far, there are only 9 institutions nationwide that have been reviewed and filed by the national climate change authorities together with multiple departments, and have the qualification of carbon trading institutions. Among them, 7 are institutions in the pilot markets designated by the state (Beijing, Tianjin, Shanghai, Chongqing, Hubei, Guangdong, Shenzhen), and 2 are voluntary emission reduction trading institutions (Sichuan, Fujian).
The scarcity of qualifications and strict control mean that the functions and roles of carbon trading institutions are important.What are the specific functions and roles, and what effects can they play? For general exchanges, the most important function is price discovery and investor discovery.
The most fundamental and important function of a carbon exchange is to price carbon assets, allocate carbon emission resources, and manage risks. To better perform these functions, the carbon exchange has a lot of work to do, with a long way to go.
First, it is necessary to build the infrastructure. This mainly involves setting up the trading platform, including the physical trading venue, the information-based trading system, the registration and settlement system, as well as official websites, WeChat public accounts, and other information media.
Second, it is necessary to establish and improve the trading rules and systems. Taking into account the general policy regulations for the supervision of trading venues, special provisions for the management of carbon emission trading, and the need to fully leverage the decisive role of the market in resource allocation, as well as the better role of the government, under the existing policy and legal framework, a series of trading rules for the carbon exchange are formulated, continuously developing and enriching trading products, constantly improving and optimizing trading methods, and continuously strengthening the disclosure of trading information.
Third, it is necessary to strengthen capacity building and market cultivation. The carbon market is just beginning, and this is a highly specialized emerging market. All participants in the market need to enhance their capabilities. Only by continuously conducting capacity-building activities to make more institutions and individuals aware of the urgency of climate change, the scarcity of carbon emission resources, and the value of carbon assets, can the carbon exchange attract more market entities to participate in the carbon market.
The purpose of cultivating the market is to establish a thriving carbon market. Only in a market where supply and demand are both strong, through full competition, can a balanced price be formed, which is the effective pricing of carbon assets, and can become the valuation basis for financial institutions to recognize as underlying assets and for carbon asset pledge financing.
Fourth, it is necessary to strengthen risk management, especially to prevent systemic risks. Risk management is the lifeline of the exchange. In terms of trading rules and systems, it is necessary to guard against legal and policy risks. In terms of the trading system, it is necessary to guard against communication, information, and cybersecurity technical risks. In terms of trading entities, it is necessary to implement appropriate investor regulations, encourage rational investment, and guard against excessive speculative behavior. In terms of trading mechanisms, the goal should be the continuous, healthy, stable, and efficient operation of the market, guarding against large fluctuations in carbon asset prices and significant volatility in the carbon market.
In summary, the carbon exchange is the infrastructure that provides fair and impartial intermediary services in the carbon market, playing a pivotal role. All kinds of transaction participants in the carbon market are directly or indirectly connected to the carbon exchange, and all trading activities in the market are directly or indirectly centered around the carbon exchange.
In my personal view, the success or failure of the construction of the carbon exchange is directly related to the success or failure of the construction of the carbon market, and there is a positive correlation between the two.
Carbonstop: Currently, the carbon market can be divided into mandatory reduction markets and voluntary reduction markets. Could you introduce the differences and connections between these two markets?
He Jinfeng: Regarding the domestic carbon market, from the perspective of market mechanisms, it can be divided into mandatory reduction markets and voluntary reduction markets; from the perspective of administrative divisions, it can be divided into national markets and regional markets. Relatively speaking, the differences and connections between mandatory reduction markets and voluntary reduction markets are more complex.
About the differences between mandatory reduction markets and voluntary reduction markets.
First, the market mechanisms are different.
Mandatory reduction market is a regulatory market, or a forced market, with the basic principle of "total control, quota management, market adjustment." The purpose is to force key greenhouse gas emitting units (referred to as controlled emission enterprises in the market) to reduce emissions through technology and measures by constraining carbon emission quotas, balancing the reduction costs of key emitting units at different development levels, to achieve the goal of both reaching the reduction target and lowering the overall social cost of reduction. This is a policy-driven market.
Voluntary reduction market is an incentive market, or a guided market, with the basic principle of "voluntary reduction, quantification through verification, and market monetization." The purpose is to encourage relevant units to actively implement reductions based on specific reduction methodologies and form tradable certified emission reductions. To a certain extent, this is a benefit-driven market.
Second, the trading subjects are different.
Mandatory reduction market The primary trading subject or product is mainly carbon emission allowances, reflecting more the attributes of carbon emission rights. In the primary market, it is an administrative allocation of resources and has the characteristics of public resources. Having a certain amount of allowances means having the right to emit a certain amount. Since allowances can be traded, the right to emit can also be monetized and become a right. Whether the trading income can enter the profit center is related to compliance strategies, investment strategies, and reduction costs.
Voluntary reduction market The primary trading subject or product is mainly certified emission reductions, reflecting more the attributes of carbon credit products and property rights. In the primary market, although issued or authorized by the government, this is a confirmation of the project's reduction outcomes, with the characteristics of property rights. Obtaining certified emission reductions represents that the project has achieved a certain equivalent of greenhouse gas reduction. Certified emission reductions require additional reductions, and compared to the main products of the project, they are typically additional by-products, with trading income belonging to the profit center.
Third, the market structures are different.
The mandatory reduction market includes the narrow definition of the national carbon market, which is the national carbon emission quota trading market where Shanghai is responsible for trading and Hubei is responsible for registration. It also includes seven regional pilot markets designated by the state, as well as the Fujian market that has established a quota trading system. The national carbon market trades in Shanghai, with quota registration, transaction fund settlement, and carbon asset delivery completed in Wuhan, Hubei. Each regional market generally centralizes registration, trading, and settlement at local carbon trading institutions.
The voluntary reduction market is actually divided into a national market and regional markets. Whether from the perspective of top-level design, management mechanisms for greenhouse gas voluntary reduction transactions, or the market boundaries of China Certified Emission Reduction (CCER) circulation, it all falls under the broad category of the national market.
The difference lies in the current "1+9" market structure, which means there is a unified national registration system, and nine voluntary reduction trading institutions each establish their own trading and settlement systems. After the trading institutions are registered, the state opens interfaces to the registration system, allowing the connection between the trading, settlement systems, and the registration system.
A unified registration system facilitates orderly circulation of CCERs among different markets and ensures clear ownership, while decentralized trading and settlement systems promote the diversification of trading mechanisms.
Comparison leads to choice, and with a variety of explorations and innovations, the optimization and improvement of the carbon market can be continuously advanced. Accordingly, some regions have established certified reduction trading mechanisms under the carbon普惠mechanism, such as PHCER in Guangdong, FFCER in Fujian, forestry carbon sinks in Beijing, CDCER in Sichuan, and CQCER in Chongqing, all of which fall within the scope of the voluntary reduction market.
Fourth, the trading entities are different.
Currently, only key emitting units can directly participate in the national market, more specifically, only the 2,162 thermal power enterprises or self-owned power plants included in the market last year; other organizations and individuals cannot yet participate in the national carbon market trading.
The trading entities in the pilot markets are relatively more diverse, including key emitting units (or controlled emission enterprises) in the pilot areas, investment institutions (including carbon asset management companies, general investment institutions, carbon funds, and other multi-role investors), individual investors, and financial institutions. However, the rules of the pilot markets are not uniform, and some markets do not allow participation by individuals.
The trading entities in the CCER market are very similar to those in the pilot markets, being more diverse overall. Key emitting units in the national and pilot markets, voluntary reduction project owners, investment institutions, individual investors, and financial institutions can all participate in trading, but there are differences specific to each market.
About the connections between the mandatory reduction market and the voluntary reduction market.
First, both the mandatory reduction market and the voluntary reduction market are organic components of a multi-tiered carbon market. As early as September 2014, the National Climate Change Response Plan (2014-2020) further arranged and deployed the construction of the carbon market, explicitly proposing to promote voluntary reduction trading activities, deepen the pilot projects of carbon emission rights trading, and accelerate the establishment of a national carbon emission trading market.
In fact, the national climate change authority issued and implemented the Interim Measures for the Administration of Voluntary Greenhouse Gas Emission Reduction Trading in June 2012, based on which the CCER market was established, and the seven pilot markets started trading successively between June 2013 and June 2014.
The CCER market and the seven pilot markets are the pioneers and trailblazers of China's carbon market, and the national carbon emission trading market was established on the basis of summarizing the experiences and lessons learned from the CCER market and the pilot markets.
Second, the voluntary reduction market and the mandatory reduction market have established a close direct connection through the offset mechanism. According to the relevant regulations of the national carbon market and the pilot markets, 1 unit of CCER (equivalent to 1 ton of CO2 equivalent greenhouse gas reduction verified by the state) can offset 1 ton of national carbon emission quotas in the national carbon market or 1 ton of local carbon emission quotas in the pilot markets.
The establishment of the offset mechanism gives equal recognition to the value of the reduction outcomes formed by voluntary and mandatory reductions, meaning that whether it is passive reduction due to mandates or active reduction due to voluntariness, the value of an equal amount of reduced greenhouse gases is the same.
Third, the two markets balance supply and demand relationships with each other. Under the offset mechanism, the quota market brings rigid demand to the voluntary reduction market, and the use value of CCERs is thereby realized.
It has been proven that after the launch of the national carbon market last year, the liquidity and activity of the CCER market significantly increased. In turn, the CCER market provides necessary supply guarantees for the quota market, effectively addressing the issue of shortages and surpluses not being able to balance themselves in a mandatory market with moderately tight quotas.
Fourth, carbon emission quotas in the mandatory reduction market and carbon credits in the voluntary reduction market both possess scarcity in economic terms. Apart from demonstrating public welfare when used for voluntary cancellation in carbon neutrality mechanisms, CCERs, under the offset mechanism, exhibit the attribute of carbon emission rights just like quotas.
Carbonstop: Since the voluntary reduction market, which began to pause in 2017, is currently preparing for a restart, what preparations can emission reduction enterprises make before the restart? What types of projects are allowed to participate in the voluntary reduction market? Which types of projects will be given priority for inclusion? Will there be significant changes compared to the previous market (such as application processes, standards, etc.)? And what is its significance and role in the carbon market?
He Jinfeng: To be precise, the voluntary reduction market has never been paused; what was suspended in March 2017 was the related filing work. The content of the announcement by the National Development and Reform Commission at the time was quite clear, with several key points:
- "We are organizing the revision of the Interim Measures," which explains the reason and purpose of the suspension;
- "Suspension of the acceptance of applications for the filing of methodologies, projects, emission reductions, and verification and certification bodies for voluntary greenhouse gas emission reductions, as well as the filing of trading institutions," specifying what was suspended;
- "This does not affect the registration of already filed voluntary greenhouse gas reduction projects and emission reductions in the national registry, nor does it affect the participation of already filed Certified Emission Reductions (CCERs) in trading," indicating that the voluntary reduction mechanism and the market did not stop.
- From the suspension until now, calls and rumors about the restart of CCER filings have been constant, but for various reasons, the market has repeatedly welcomed new waves of calls and rumors without them becoming a reality.
- The abundance of rumors without realization not only indicates strong market expectations but also reflects, to some extent, that the voluntary reduction market, like the mandatory reduction market, is a complex systemic project.
- Around the time of the Sharm El Sheikh Climate Conference, information about the imminent restart of CCER filings once again became prevalent, and the Ministry of Ecology and Environment also clearly stated that "efforts will be accelerated to achieve practical results in the construction of the voluntary greenhouse gas reduction trading market." However, no specific restart date was provided.
- Therefore, we cannot speculate on the restart time, but we can analyze:
- On one hand, since the launch of the national market last year, the supply and demand contradiction of CCERs has become quite prominent, highlighting the urgency of restarting the CCER market. However, because the allocation of quotas for 2021 and 2022 has not yet taken place, the pressure for fulfilling CCER obligations has been alleviated, thus reducing the urgency of the restart somewhat.
On the other hand, the newly revised voluntary reduction trading management methods are currently...
Carbonstop: Recently, the carbon inclusive mechanism has received much attention, and various pilot markets have released plans for building carbon inclusive mechanisms. In your view, what is the significance of the carbon inclusive mechanism for the carbon market, and is there a feasibility for it to participate in carbon market transactions?
He Jinfeng: ...
Carbonstop: In the green certificate trading market, individuals can participate in purchasing and trading. Is it possible for individuals to also participate in the carbon trading market in the future?
He Jinfeng: ...
Carbonstop: Currently, whether in the pilot carbon markets or the national carbon market, the trading systems are for domestic carbon asset varieties. In the future, is it possible for domestic carbon assets to participate in the international carbon market?
He Jinfeng: ...
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