49May 8-9, the U.S.-China Working Group on Enhanced Climate Action for the 2020s held a meeting in Washington D.C., USA. The meeting reviewed the temperature control targets of the Paris Agreement. In full consideration of the different national circumstances and pathways of both sides, they welcomed the call for the Global Stocktake decision at the 28th Conference of the Parties (COP28) to the United Nations Framework Convention on Climate Change (UNFCCC), which urges countries to submit economy-wide, all-greenhouse-gas-inclusive Nationally Determined Contributions (NDCs) for 2035 aligned with the 1.5°C temperature control target on schedule. Both sides also expressed willingness to engage in technical and policy exchanges.
As one of the primary tools for countries to address climate change, carbon finance can serve and guide activities aimed at limiting greenhouse gas emissions. With the continuous development of global carbon trading, the number of participants in carbon trading markets is increasing, and the scope of carbon finance is expanding. The California carbon market is a representative local carbon trading market in the U.S. and is one of the first carbon markets globally to achieve cross-border linking. It serves as a crucial policy tool for controlling greenhouse gas emissions in the region. After more than a decade of development, the coverage of the California carbon market has continued to expand, market elements have become increasingly complete, and the binding force of emission reduction has steadily increased, providing strong support for promoting green and low-carbon transitions in California and other areas. This article provides a comprehensive introduction to the construction of the California carbon market and its impact on the local steel industry, offering reference for China's development.
Overall Steady, Cross-Border Carbon Trading Cooperation Shows Progress
Compared to the establishment of carbon trading mechanisms at the national level, the construction and implementation of the California carbon market pay attention to local carbon emission characteristics and reduction goals while adopting innovative practices in areas such as quota allocation and the use of market revenues, effectively utilizing market mechanisms to optimize the allocation of emission reduction resources. Thanks to designs such as total emission targets, the development of the California carbon market follows a phased and steady advancement strategy. The intensity of market total emission targets gradually increases, supporting California's goal to reduce greenhouse gas emissions by 85% below 1990 levels by 2045 and achieve carbon neutrality across the economy by 2045. Currently, the California carbon market basically covers direct emissions from major emission sources in the region, with the industry coverage gradually expanding to sectors such as electricity, natural gas, refining, manufacturing, and transportation, becoming an important policy to "push" key emission sectors towards low-carbon transitions. Notably, the California carbon market has made significant progress in the area of cross-border carbon trading cooperation. It linked with the carbon markets of Quebec and Ontario, Canada, in 2014 and 2018, respectively, focusing on optimizing the allocation of emission reduction resources and expanding market size at the regional level, and establishing a cross-regional carbon market implementation framework, providing useful experience for other countries and regions.
In terms of market operations, the introduction of trading products and trading entities in the California carbon market is generally stable, with the primary market characterized by quota auctions. At present, most of the allowances in the California carbon market are distributed through auctions, creatively establishing a delegated auction mechanism to allocate quotas to sectors such as the power industry, and optimizing industry benchmark design based on carbon intensity and carbon leakage risks, distributing some free quotas to manufacturers to avoid strong impacts on the international competitiveness of related industries due to the carbon trading mechanism. Regarding market transaction prices, the California carbon market effectively considers the balance between economic development and emission reduction constraints, establishing a floor-price ceiling system for auctions, ensuring the stability of market transaction prices, preventing price fluctuations from significantly impacting the emission reduction costs of controlled entities, and effectively guiding the formation of relatively stable market expectations, providing favorable conditions for increasing the participation and activity of controlled entities. In recent years, although geopolitical conflicts and energy market fluctuations have had some impact on liquidity, the California carbon market has generally maintained a stable operating trend, demonstrating the effectiveness of its market design and management framework.
Based on the revenue from the paid allocation of the California carbon market, more than $28 billion in market revenue has been injected into policy tools such as the California Greenhouse Gas Reduction Fund and the California Climate Investments Plan, supporting the construction of low-carbon transition projects, implementation of emission reduction activities, and improvement of low-income groups in the region. Many of these projects have effectively promoted the research and application of clean technology patents locally, driving the green and low-carbon transformation of the socio-economy, thereby building a virtuous cycle of emission reduction and development in the region.
The Carbon Market Primarily Promotes Carbon Reduction in the Local Steel Industry
The United States is one of the countries with the lowest energy intensity and carbon emission intensity per ton of steel in the world, and the industry's emission volume accounts for a relatively low proportion of the country's total greenhouse gas emissions. The U.S. leads the world in scrap steel recycling, and electric arc furnace steelmaking is the mainstream technology route. This makes it more reliant on zero-carbon power and hydrogen and other low-carbon energy sources for the steel industry to reduce carbon emissions, a characteristic also evident in California.
At present, the majority of the annual allowance total in the California carbon market flows to energy sectors such as electricity and natural gas, with a lower proportion allocated to industries like steel and other manufacturing sectors, highlighting the industry's emission structure and characteristics. At the same time, influenced by factors such as production costs and industrial relocation, steel industry activities in California are primarily focused on processing, with fewer high-emission steel production processes. This has led to the inclusion of the steel industry in the metal processing and manufacturing category rather than managing it as a separate industry when determining industry boundaries. According to data from the California Air Resources Board (CARB), the total amount of allowances issued to steel companies in California in 2024 is only 2.5 million tons. It is clear that the advanced technology paths and relatively clean industrial chain division in California have resulted in lower carbon emissions from the steel industry compared to counterparts in developing countries, thus alleviating the overall pressure on the California carbon market's control measures.
Steadily Guiding Low-Carbon Development in the Steel Industry. The California carbon market aims to achieve emission reduction targets at an affordable social cost level. The total emission targets and industry benchmarks established by the market provide clear policy guidance for the steel industry, constraining its emission behavior and clarifying its emission reduction priorities. Meanwhile, the establishment of upper and lower limits for market transaction prices ensures that the emission reduction costs of the steel industry fluctuate within a suitable range, avoiding the reluctance of steel companies to enter the market due to concerns about excessively high compliance costs, while ensuring the binding effect of carbon pricing, steadily guiding the low-carbon development of the steel industry.
Promoting Deep Decarbonization in the Industry from the Energy End. Considering the characteristics of the California steel industry, as the total emission target of the carbon market becomes tighter, the emission reduction pressure on the California energy sector continues to increase, promoting the low-carbonization of the energy structure in the region, thereby facilitating the clean and green development of electricity consumption in the steel industry, helping to reduce the carbon footprint of its products, and laying the foundation for it to gain international competitive advantages in this field.
Driving Structural Optimization in the Steel Industry. Given that the U.S. has not established a national carbon market, the implementation of the California carbon market adds additional pressure on steel companies to reduce emissions, prompting high-emission, inefficient steel companies to relocate outside the state, pushing the industry towards a more efficient and high-value-added direction, enhancing the sustainability of its economic system, and creating space for the development of low-carbon services.
Providing Financial Support for Low-Carbon Development in Steel and Other Manufacturing Sectors. In addition to promoting the flow of funds from high-carbon companies to low-carbon companies through the design of the carbon market, the California carbon market uses its auction revenue to establish relevant policy investment funds, providing financial support for electrification, low-carbon fuels, energy conservation and emission reduction in manufacturing, hydrogen utilization, and the research and development and construction of projects in low-carbon technologies such as carbon capture, utilization, and storage, reducing the cost of low-carbon technology R&D, accelerating the pace of industrial decarbonization, improving the financing conditions of relevant industries and enterprises, and sending clearer policy incentive signals.
Long-Term High-Quality Development Ability of Voluntary Emission Reduction Trading Systems Remains Controversial
It is worth noting that the development path of carbon trading and carbon finance in the U.S. has non-mandatory characteristics, with some U.S. carbon trading relying on voluntary emission reduction trading systems.
On October 7, 2023, California Governor Gavin Newsom signed the Voluntary Carbon Market Disclosures Act (VCMDA). This act clarifies the reporting and disclosure requirements for participants in the voluntary carbon offset (VCO) market operating in California and other commercial entities making certain climate-related claims about themselves or their products in California. This lack of government oversight or supervision can pose risks, such as credits generated through offset projects not truly reducing greenhouse gas emissions. Rachel Cleetus, policy director of the Union of Concerned Scientists, believes that voluntary carbon credit programs do not ensure significant reductions in emissions and compares U.S. carbon trading to "rearranging deck chairs on a sinking climate ship." Although the U.S. has been one of the main supporters of global carbon market construction, whether its carbon trading and carbon finance can achieve long-term high-quality development remains to be seen.
In this context, the construction of the California carbon market can provoke relevant reflections and offer us the following insights:
First, accelerate the use of carbon trading mechanisms to promote the low-carbon transition of the steel industry. It is recommended to take advantage of the opportunity to expand the industry coverage of the national carbon market, set baselines reflecting industry competitiveness, and quickly strengthen carbon emission reduction constraints in the steel industry, promoting the gradual reduction of its dependence on fossil fuels such as coal, steadily accelerating the structural adjustment of China's steel industry, achieving emission reduction targets while orderly phasing out backward capacity, and promoting the sustainable development of the steel industry.
Second, explore the establishment of incentive measures for the low-carbon development of the steel industry. It is suggested to try to use various carbon market revenues to form low-carbon investment funds and other financing policy tools after implementing paid allocation and other measures. Considering that traditional industries such as the steel industry face significant emission reduction pressures during the low-carbon transition in the short term, targeted support can be provided to reduce carbon technology and low-carbon project construction to lower their transition costs, and part of the carbon market revenue can be returned to these traditional industries to push them towards achieving emission reduction and structural adjustment goals.
Third, coordinate to enhance the international low-carbon competitiveness of the steel industry. Given the growing attention to the full life-cycle carbon footprint of steel products internationally, it is recommended to strengthen the synergy between the emission reduction of traditional industries such as steel and the low-carbon transition of the energy system, optimizing the production processes and technology routes of the steel industry while promoting the green and intelligent transformation of the energy structure, achieving systematic deep decarbonization of the steel industry, steadily advancing the development of "green steel" in China, and enhancing China's ability to respond to restrictions on steel exports by external parties under the guise of "low carbon."
