Lai Xiaoming, Chairman of Shanghai Environmental Exchange: Early expansion of the national carbon market will promote market price discovery

The national carbon market officially launched online trading on July 16, 2021, which has been three years since.

As the world's largest carbon market covering greenhouse gas emissions, as of the end of June this year, the cumulative transaction volume of carbon emission quotas in the national carbon market was 460 million tons, with a cumulative transaction volume of 26.8 billion yuan. The trading price of carbon emission quotas also exceeded for the first time this year. 100 yuan per ton.

The national carbon market operates in a twin-city model, with Hubei Province and Shanghai City responsible for the operation of the registration and trading systems respectively. Among them, the Shanghai Environmental Energy Exchange (hereinafter referred to as the Shanghai Environmental Exchange) has undertaken specific work such as opening, operation and maintenance of accounts in the national carbon emissions trading system.

Recently, Lai Xiaoming, chairman of the Shanghai Environmental Exchange, answered questions from reporters on topics such as the trading operations of the national carbon market in the past three years, the progress of system construction and the next development goals.

Question: It has been three years since the national carbon market was launched. How to evaluate the overall performance of the national carbon market in the past three years?

Lai Xiaoming: The national carbon emissions trading market takes the power generation industry as a breakthrough and launched trading on July 16, 2021. It has successfully completed two compliance cycles, covering annual carbon dioxide emissions of approximately 5.1 billion tons, and is included in key emission units. 2257 homes, is the world's largest carbon market covering greenhouse gas emissions. Over the past three years, the Shanghai Environment and Energy Exchange has served as the acting operation and maintenance organization of the national carbon emissions trading system designated by the Ministry of Ecology and Environment, effectively maintained the safe and orderly operation of transactions and solidly promoted carbon market support and guarantee work such as mechanism construction and capacity building.

Judging from the performance of the trading market, the overall market operation is stable, the role of the price discovery mechanism is initially evident, and the trading situation is in line with the basic positioning at this stage, which is specifically reflected in the following aspects:

First, the transaction scale is gradually expanding. As of the end of June this year, the cumulative transaction volume of national carbon market quotas was 460 million tons, with a cumulative transaction volume of 26.8 billion yuan. The transaction volume last year was 212 million tons, an increase of 19% from 2021.

Second, transaction prices rose steadily. The quota price has increased from 48 yuan per ton at the start to around 90 yuan per ton in the recent past, an increase of about 88%.

Third, the enthusiasm of corporate transactions has steadily increased. Compared with the first performance cycle, the number of companies participating in transactions in the second performance cycle increased by 32%.

The fourth is the carbon emission performance management of market service enterprises. Last year, companies mainly concentrated on transactions from September to November before performance, and transactions still focused on performance management.

Question: The quota price in the national carbon market has increased year by year. This year, it once exceeded 100 yuan per ton. How do you view the increase in carbon prices?

Lai Xiaoming: The carbon market uses price signals to guide the optimal allocation of carbon emission reduction resources, provides flexible options for enterprises to reduce carbon emission, and drives investment in green and low-carbon industries while reducing the cost of emission reduction for the whole society. Therefore, carbon price signals are very important.

Carbon prices are mainly determined by market supply and demand. Market supply and demand will be affected by factors such as policy information, economic operations, and technological progress.

Since the launch of online trading in the national carbon emissions trading market, quota prices have generally remained stable and rising. Since 2024, with the promulgation of the "Interim Regulations on the Administration of Carbon Emissions Trading" and the orderly advancement of the expansion of the national carbon market, long-term confidence of the market has been boosted, and the market value of carbon emission quotas has been gradually recognized and accepted. On April 24, the closing price of quotas exceeded 100 yuan/ton for the first time, and the recent closing price was about 90 yuan/ton.

The moderate increase in carbon prices reflects the market nature of carbon prices. Subsequently, under the guidance of the competent authorities, the Shanghai Environmental Exchange will continue to improve the trading mechanism, enhance market vitality, and ensure healthy, stable and orderly operation of the market.

Lai Xiaoming, Chairman of Shanghai Environmental Energy Exchange, Photo source: Shanghai Environmental Energy Exchange

Question: The news that the national carbon market is about to be included in new industries such as electrolytic aluminum has attracted widespread attention. Is the time ripe to expand the national carbon market? What preparations is the Shanghai Environmental Energy Exchange making for this?

Lai Xiaoming: China's carbon emissions are mainly concentrated in eight key industries, including power generation, steel, building materials, nonferrous metals, petrochemicals, chemicals, papermaking, and aviation. These eight industries are also industries originally planned to cover by the national carbon market, accounting for about 75% of domestic carbon dioxide emissions. At present, the national carbon emissions trading market only includes the power generation industry.

In March this year, Premier Li Qiang of the State Council made it clear when deploying the government work tasks for 2024 in the "Government Work Report" that it was necessary to "expand the coverage of the national carbon market industry." In the three years since the national carbon market has been in operation, we have clearly felt from the trading market that the overall transaction needs and trading preferences among companies in a single power generation industry are relatively similar, and market activity needs to be improved.

Including more high-emission industries into the national carbon emissions trading market as soon as possible can diversify the business entities in the market and better promote market price discovery.

In order to lay a solid foundation for the expansion work, the Ministry of Ecology and Environment organizes and carries out annual carbon emission accounting report verification work on the above-mentioned key industries nationwide every year. At the same time, it continues to carry out special research on expansion, and conducts special research on quota allocation methods and accounting reporting methods for key industries. Report methods, accounting requirements guidelines, implementation paths for expansion, etc., have carried out special research, evaluation and demonstration, the drafting of relevant technical documents has been basically completed, and the conditions for expansion are relatively mature.

As a trading institution, the Shanghai Environmental Exchange is also actively cooperating with the Ministry of Ecology and Environment to continue to promote the expansion work. On the basis of ensuring the smooth operation of the national carbon market, it is doing a good job in institutional research, system preparation, and trading account opening related to expanding the coverage of industries., consulting services and other work. Actively implement the arrangements of the competent authorities, improve the transaction-related systems, rules and systems, do a good job in operation, maintenance and management of the trading system, and support the competent authorities in many places to carry out carbon trading capacity building and training in other industries such as petrochemicals and chemicals.

In addition, the Shanghai Environmental Exchange successfully held the first national carbon market simulation trading competition in the second half of last year, attracting more than 300 companies from the power generation, petrochemical, chemical, building materials, steel, nonferrous metals, papermaking and civil aviation industries to participate, providing a national carbon market expansion provides important reference value and technical support.

Question: Some analysts pointed out that emphasizing performance and neglecting trading is still the main feature of the current domestic carbon market. What new measures do you think should be taken to further increase the activity of the national carbon market?

Lai Xiaoming: At present, the national carbon market conducts spot trading of quotas among key emission units in the power generation industry. The main purpose of the trading entities is to complete payment and performance, which is in line with the positioning of the national carbon market as a policy tool to control greenhouse gas emissions and the initial stage of construction. Sexual characteristics are also basically similar to the characteristics of the same type of carbon spot markets in the world in the early stages of development.

2023 is the second performance cycle of the national carbon emissions trading market, which is the year for the payment of carbon emission quotas in 2021 and 2022. The quota allocation method for the second performance cycle maintains the continuity and stability of the policy as a whole. At the same time, adjustments and optimizations are made based on the actual situation of the power generation industry. On December 31, 2023, the second performance cycle ended smoothly, and the performance completion rate exceeded 99%. From the perspective of market performance, compared with the first performance cycle, the second performance cycle still improved in terms of corporate participation and market balance.

The main way for the national carbon market to increase the trading scale and activity is currently mainly to increase diversity and market flexibility. For example, we hope that participating enterprises will not only include existing key emission units and other non-performing entities, but also financial institutions and other non-performing entities.

The introduction of non-performing entities will help transform market transaction power: in addition to the single performance-based power, non-performing power with investment value orientation will be developed, allowing market participants to obtain benefits by participating in the market.

Also, as mentioned before, expanding the coverage of the compliance industry and increasing industry diversity can effectively enhance market activity, and we are actively promoting this regard. In addition, in terms of enriching trading mechanisms, it is necessary to speed up research and launch quota auctions and establish market adjustment mechanisms. In short, it is necessary to enrich trading varieties, trading entities, and trading methods, stimulate market vitality, and achieve the effectiveness of market mechanisms.

Question: You pointed out earlier that while continuing to develop and improve the national carbon market, we should promptly do a good job in relevant basic work, optimize carbon financial instruments, and strengthen the coordination between the carbon market and the financial market and capital market. May I ask what new progress has been made in this regard and what specific plans are there for the next step?

Lai Xiaoming: The healthy and orderly development of carbon finance will help more effectively discover reasonable carbon prices, improve the carbon pricing mechanism, and promote emission control companies incorporated into the carbon market to achieve carbon emission reduction targets in a cost-effective manner. At present, as an important policy tool to control greenhouse gas emissions, the carbon market has gradually become a path to realize green ecological values, which is of great significance to green and low-carbon technology, investment, and industrial development. Building a large-scale, healthy, prosperous, active and effective carbon market is not only a requirement for carbon emission reduction, but also a requirement for the development of green finance.

Since the opening of the Shanghai pilot carbon market in 2013, the Shanghai Environmental Exchange has continuously deepened its exploration of the supporting role of carbon finance in the low-carbon transformation of the real economy, and has successively launched innovative products and businesses such as carbon borrowing, carbon funds, carbon trusts, carbon pledges, carbon insurance, and carbon repurchase., carbon index. Among them, carbon pledge effectively revitalized nearly 8 million tons of carbon assets, and the financing amount exceeded 130 million yuan. Cooperated with Shanghai Clearing House to launch Shanghai carbon quota forward, with a cumulative transaction volume exceeding 180 million yuan.

Recently, Chen Jining, Secretary of the Shanghai Municipal Party Committee, emphasized at a meeting of the Municipal Party Committee for Comprehensively Deepening Reforms that improving the carbon emission rights market trading system is an important strategic deployment made by the 20th National Congress of the Communist Party of China. It is necessary to focus on the needs of green and low-carbon transformation, further clarify development positioning, and strengthen top-level design to better test the system and explore new ways for the country.

In the next step, the Shanghai Environmental Exchange will give full play to the role of Shanghai's pilot carbon market in accordance with the relevant national strategic deployment, focus on Shanghai's "four major functions" construction requirements and "five centers" development goals, and provide a "pilot test" for national carbon finance. At the same time, give full play to the guiding, basic and service functions of the platform, promote system construction, and cultivate market ecology. Deeply integrate the development of the carbon market with the construction of Shanghai's international financial center to better support the implementation and large-scale application of green financial products and services, and promote Shanghai to build an international green financial hub.

Question: On May 1 this year, the Interim Regulations on the Administration of Carbon Emissions Trading (hereinafter referred to as the "Regulations") were officially implemented. What impact will the introduction of this new regulation have on the next stage of development of the national carbon market?

Lai Xiaoming: The "Regulations" clarify the carbon emissions trading system for the first time in the form of administrative regulations. They are the legal basis for guiding the operation and management of China's carbon market. They are a milestone in the development of the carbon market. In order to give full play to the role of the market-oriented mechanism for carbon emissions trading, further build a scientific, standardized and orderly carbon emissions trading system, continuously expand the breadth and depth of the carbon market, and accelerate the creation of a more effective, more dynamic, The carbon market with more international influence provides legal protection.

For the trading market, the importance and impact are mainly reflected in these aspects: First, it defines the spot attributes of carbon market trading products, clarifies that trading entities include key emission units and other entities, and establishes agreement transfer and one-way trading methods. The main trading method gradually enhances market vitality on the basis of adhering to the overall positioning of the carbon market as a policy tool to control and reduce greenhouse gas emissions. The second is to enrich the market transaction mechanism, provide an institutional foundation for the subsequent introduction of paid distribution, market regulation, etc., and improve policy flexibility. The third is to work together to improve the effectiveness of carbon market trading supervision, incorporate illegal and illegal activities such as prohibiting industry restrictions on personnel from participating in trading, manipulating the market, and disrupting market order into supervision, and comprehensively strengthen risk prevention and management of carbon emission trading activities.

It is foreseeable that with the formal implementation of the "Regulations", China's carbon market will usher in huge opportunities for innovative development, trading rules will be more complete and clear, trading entities will be more extensive and diverse, trading products will be more diverse, and trading methods will be more flexible and convenient, risk control will be more comprehensive and effective, information disclosure will be more open and transparent, and market operation will be more dynamic.

Question: As an emerging market, do you think there are still shortcomings in the national carbon market that need to be improved and need to be further resolved?

Lai Xiaoming: In the past three years since the construction and operation of the national carbon emissions trading market, the overall operation has been stable. As a new thing still in its infancy, compared with the mature carbon markets in developed countries, the national carbon market is currently facing problems such as single industry coverage, single transaction elements, imperfect market adjustment mechanisms, and insufficient market activity. Further construction and improvement are needed.

First, we will continue to strengthen top-level design, fully implement the relevant requirements of the Regulations, and further improve relevant policy supporting systems. The second is to steadily expand industry coverage in accordance with the principle of "mature one, cover one". The third is to enrich market functions, gradually introduce paid distribution, continuously enrich trading varieties, trading entities, and trading methods, establish market regulation mechanisms, and stimulate market vitality. The fourth is to strengthen market transaction supervision to ensure the healthy, stable and orderly operation of the carbon market.

Question: Carbon market operations in the European Union and other regions have been relatively mature for many years. What development experiences should we learn from them to help improve the maturity of the national carbon market?

Lai Xiaoming: The carbon market is an important policy tool and a complex systematic project. Some developed countries such as the European Union have established carbon markets earlier, larger in scale, and have wide coverage. They have accumulated rich experience and learned some lessons in terms of market frameworks, regulatory foundations, trading systems, and regulatory mechanisms. Of course, we should also note that different countries have different stages of economic development and different positioning of the carbon market.

The national carbon market has just begun. In the next step, under the guidance of the competent authorities, the Shanghai Environmental Exchange will continue to adhere to the basic positioning of the carbon market as a policy tool to control greenhouse gas emissions, combine China's actual situation and economic transformation and development needs, and learn from international mature carbon market development experience.

For example, after nearly 20 years of development, the EU carbon market has now achieved multi-industry coverage. Nearly half of quotas are issued through auctions. The trading products include diversified derivative products such as quota spot and quota futures. In addition to emission companies, the trading entities are also various financial institutions such as securities firms and banks. The Market Stability Reserve Mechanism (MSR) has played a good role in coping with demand-side shocks and quota overloads. These are worth our study and reference.

Q: The national voluntary greenhouse gas emission reduction trading market was officially launched this year. How should the national carbon market form a positive interaction with it and jointly promote the implementation of dual carbon goals?

Lai Xiaoming: The national carbon market is composed of the national carbon emissions trading market (mandatory carbon market) and the national voluntary greenhouse gas emission reduction trading market (voluntary carbon market). The two carbon markets, mandatory and voluntary, have their own focuses and operate independently., they complement each other and are interconnected, and together constitute the national carbon market system.

The voluntary emission reduction trading market is to encourage various entities to voluntarily take additional greenhouse gas emission reduction actions. After the emission reduction effects are quantified and verified by scientific methods, they are sold through the market, so as to obtain corresponding emission reduction contributions. The two markets achieve interconnection through a quota settlement and offset mechanism.

The "Regulations" stipulate that enterprises included in the national carbon emissions trading market can purchase certified greenhouse gas emission reductions to pay their carbon emission quotas in accordance with relevant national regulations. The connection between the mandatory carbon market and the voluntary carbon market will better form policy synergy, further stimulate the driving force of green and low-carbon innovation, and guide all parties in society to jointly participate in carbon reduction, thereby promoting the implementation of the national dual carbon goals.

In addition, in addition to the national voluntary greenhouse gas emission reduction trading market, the Shanghai Environmental Exchange is also actively cooperating with the Shanghai City Ecological Environment Bureau to build a local voluntary emission reduction market with a carbon inclusive system as the core, exploring and implementing a number of high-quality emission reduction scenarios and projects with demonstration and promotion value, establishing a personal carbon reduction incentive mechanism, and guiding the establishment of green living and green consumption methods for the whole society. Actively give full play to the "two-wheel" driving role of the mandatory quota market and the voluntary emission reduction market in promoting green and low-carbon development.