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Climate Change

China's national carbon trading market eyes June debut in Shanghai

Exchange anticipated to have up to 10,000 participants by 2025

China was responsible for 30% of the carbon dioxide emissions worldwide in 2019.   © Reuters

SHANGHAI -- China will launch a nationwide carbon trading market in Shanghai by June, officials said, in what could be a major step forward in President Xi Jinping's ambitious goal to transform the world's biggest greenhouse gas emitter into a net-zero emissions country by 2060.

China has relied on coal-fired electricity to fuel much of its industrial boom, leading to rampant pollution. Carbon trading markets, in theory, offer a solution by forcing the biggest polluters to buy credits from others who run cleaner operations, creating an incentive to cut carbon emissions.

The country has tested carbon credit trading at a local level since 2013. Such pilot markets have been set up in places like Beijing and Hubei Province, as well as in Shanghai.

This time, Shanghai will host a unified national trading system overseen by the Shanghai United Assets and Equity Exchange and the Shanghai Environment and Energy Exchange -- two operators affiliated with the city government.

"If preparations go according to plan, I would like to start trades in June," said an executive at the Shanghai United Assets and Equity Exchange. Although the exact instruments to be incorporated are still being considered, the transactions are expected to include spot trading and futures.

Last month, the government implemented a set of interim rules for carbon emissions trading management that apply to 2,225 power companies. Each are assigned their own emissions cap, and firms that exceed their limits can purchase credits from peers with low emissions. The goal is to push corporate China to reduce greenhouse gas emissions.

The 2,225 companies are anticipated to be the first group to participate in the national carbon trading scheme. The government plans to include seven other sectors to the contingent by 2025, including steel, construction material and petrochemicals.

"There will be 5 billion tons worth of carbon credits, and participating enterprises will number between 8,000 and 10,000," said a person from the Shanghai Environment and Energy Exchange.

The world's biggest carbon trading market run in the European Union has an annual trading volume estimated at roughly 2 billion tons.

China spewed 9.8 billion tons of carbon dioxide into the atmosphere in 2019, amounting to nearly 30% of the worldwide total.

A wind farm in Gansu Province: China's President Xi Jinping has announced a goal of achieving net-zero carbon dioxide emissions by 2060.   © Reuters

"We aim to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060," Chinese President Xi Jinping told the United Nations in September.

Premier Li Keqiang elaborated on those goals when he delivered the government work report during this month's National People's Congress, the country's top decision-making body.

"We will draw up an action plan for carbon emissions to peak by 2030," said Li, who added that the national carbon trading market will be part of the initiative.

It appears the embrace of carbon trading contains a foreign policy aspect. During the meetings between top U.S. and Chinese diplomats in the U.S. state of Alaska last week, the two sides were sharply at odds over the treatment of the Uyghur Muslims, as well as on Hong Kong and Taiwan.

On the other hand, climate change was one of the few topics they were able to compromise on. China will present itself as seriously engaged in lowering the carbon footprint by setting up the national carbon exchange.

"I expect the national trading volume will quickly rise to 200 million tons a year," said Lai Xiaoming, chairman of the Shanghai Environment and Energy Exchange. A bigger volume boosts liquidity, which raises the likelihood that carbon credits will be incorporated in futures and other derivatives, as well as in investment funds targeting institutional and retail investors alike.

There have been instances where wide divergences in prices have opened up between test markets. It is anticipated that the nationalization of the carbon credit market will stabilize price movements.

One of the main issues in determining the success of the market will be how authorities will deal with speculative transactions. Just like Western nations, China is propping up the economy by opening up the money spigot.

Part of that liquidity has fueled speculation in the real estate and equity markets. Carbon credits could end up being part of the equation.

Authorities may potentially counter speculative trades by guiding low-value transactions. One trick would be to grant carbon credits in generous volumes, but that would sabotage the effectiveness of curbing emissions.

Market watchers speculate that a carbon credit will initially trade at about 50 yuan ($7.64) on average, which is a far cry from prices on the European futures market, where values exceed 40 euros ($47).

Steps will have to be taken to ensure faith in carbon trading. Previously, authorities were often reluctant to fine polluters due to the impact it would have on the local economy and jobs. The government faces a choice of pivoting toward market mechanisms or sticking with a compliance regime marked by guidance and discretion.

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