Rational look at carbon prices series ①| Divorce from green industrial development and simply "bullish" carbon prices? Irrational!
The trend of carbon prices in the national carbon market has attracted much attention. The "National Carbon Market Development Report (2024)" recently released by the Ministry of Ecology and Environment also recorded the important node event of "carbon prices exceeding 100".
Liu Jie, general manager of the Shanghai Environment and Energy Exchange (hereinafter referred to as the Shanghai Environmental and Energy Exchange), told reporters: "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 reduces the reduction of emissions in the whole society. While reducing costs, it also drives investment in green and low-carbon industries, so carbon price signals are very important."
What factors affect carbon prices? At present, some market entities are "bullish" on carbon prices for a long time. Why do industry insiders think this is irrational? The reporter conducted an in-depth interview on this.
What factors are driving the fluctuations in carbon prices?
Observing the fluctuations of carbon prices, we can clearly see that it is closely related to policies, market expectations, etc. Liu Jie introduced that in the three years since the national carbon market was launched, the overall market operation has been stable and orderly, and the transaction price has been stable and rising, with the daily closing price in the range of 41 yuan/ton to 104 yuan/ton. Since 2024, with the promulgation of the Interim Regulations on the Administration of Carbon Emissions Trading (hereinafter referred to as the "Regulations") 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, the closing price of quotas exceeded 100 yuan/ton for the first time on April 24 this year.
Wei Wang, executive director of the Industrial Innovation Center for Comprehensive Environmental Management of Jiangsu Province, told reporters: "Carbon prices are organically combined with various factors such as industry, policy, finance, and economy. The promulgation of the "Regulations" and the orderly advancement of the expansion of the national carbon market have become key factors driving this increase in carbon prices. On the one hand, market demand for quotas may increase; on the other hand, regulations such as the expected tightening of quota allocation policies and severe punishment of illegal quota settlement will have an impact, causing quota prices and transaction volumes to rise."
In addition to policies and market expectations, what other factors are affecting fluctuations in carbon prices?
Liu Jie said: "From a macro and long-term perspective, carbon prices are determined by economic operation, technological progress, and overall conditions and trends of industry development. From a micro and short-term perspective, carbon prices are mainly determined by the supply and demand of quotas. For example, the total amount of quotas issued, the proportion of paid issuance, payment and performance policies, market regulation measures, etc., will all have an impact on quota supply and demand in the market, thereby causing changes in carbon prices."
Quota allocation is an important factor affecting carbon prices. So, what is the actual situation?
The reporter noted that as far as the practice of the national carbon market is concerned, whether it is the first two performance cycles of the national carbon market that have been cleared or the third performance cycle that has not yet been cleared, quota allocation runs through the concept of "basic balance of profits and losses."
For example, the "National Carbon Market Development Report (2024)" shows that the quotas issued in the national carbon market in 2021 and 2022 are 5.096 billion tons and 5.104 billion tons respectively. The verified actual emissions (quotas to be paid) are 5.094 billion tons and 5.091 billion tons respectively, with a surplus of 1.47 million tons and 12.98 million tons respectively, accounting for 0.03% and 0.25% of the total quotas issued. In the second performance cycle, quota allocation profits and losses are basically balanced, in line with policy expectations.
Although the industry has gradually tightened expectations for the issuance of free quotas, Yan Gang, deputy director of the Environmental Planning Institute of the Ministry of Ecology and Environment, told reporters that according to the "2023 and 2024 National Carbon Emissions" reviewed and approved in principle by the executive meeting of the Ministry of Ecology and Environment not long ago, the total amount of quotas and allocation plan for the power generation industry."(hereinafter referred to as the "Plan"), the benchmark value of quota allocation in 2023 is designed based on the industry-wide quota gap rate of 0.5%. Overall, the gap rate remains at a low level. The benchmark value for 2024 will drop by 0.5% from 2023, which is basically consistent with the average decline rate of carbon emission intensity of the power generation industry in the national carbon market in the past three years.
Carbon price fluctuations are normal, but should not be too high or too low
Since the opening of the national carbon market, carbon prices have shown a slight fluctuation and steady upward trend. The closing price of the comprehensive price in the second performance cycle (2021 and 2022) in the national carbon market fluctuates between 50 yuan/ton and 82 yuan/ton. In the third performance cycle (2023 and 2024), after the closing price exceeded 100 yuan, the recent closing price is about 90 yuan/ton, which is about 88% higher than the price of 48 yuan/ton at the start.
Liu Jie told reporters: "The national carbon market gathers transaction information of market entities to form an open and transparent market-based carbon quota price signal, encourages key emission units whose emission reduction costs are lower than the quota price to reduce emissions more, and sells surplus quotas to obtain economic incentives. Key emission units whose actual emissions are more than the initially allocated quota, or whose emission reduction costs are higher than the quota price, will complete the payment of quotas by purchasing quotas, thereby effectively reducing the overall cost of key emission units to achieve emission reduction targets. At present, the national carbon market has successfully completed two compliance cycles, and the quota price has generally remained stable and rising, which is in line with the positioning of the national carbon market as a policy tool to control greenhouse gas emissions and the phased characteristics of the initial stage of construction. It is also similar to the same type of carbon spot in the world. The characteristics of market prices changing with the compliance cycle are basically similar."
How to view carbon price fluctuations? Liu Jie said: "Carbon prices are formed through market transactions, so fluctuations in carbon prices are normal, but violent fluctuations, too high or too low, are not conducive to the long-term stable operation of the carbon market. Too low a carbon price will dampen the enthusiasm of companies to reduce emissions; too high a carbon price will cause some high-carbon companies to be overloaded. Therefore, a reasonable carbon price can not only demonstrate my country's determination and strength to achieve the goal of carbon peak and carbon neutrality, but also provide effective price incentive signals for carbon emission reduction companies."
Industry insiders believe that when discussing carbon prices, we must first consider whose price is this price? The real carbon price should be anchored in the social and economic system. The market price of one ton of carbon dioxide emitted by enterprises is an essential issue, and the role of the market must be emphasized. Second, who will discover the carbon price? It was not discovered by the government or enterprises. It should be gradually discovered by the market through dynamic adjustment. This process cannot be accomplished overnight. It must be slowly approaching a reasonable emission price through dynamic coupling.
How to rationally view carbon prices? High-quality development of the industry and rising carbon prices complement each other
In terms of carbon prices in the national carbon market, some market entities have shown a long-term "bullish" mentality. From a general perspective, there is a high probability that carbon prices will continue to rise in the future, but why do industry insiders think that long-term "bullish" is irrational?
Wei Wang told reporters: "What the government wants to promote is to increase the value of green development, not to increase the space for carbon prices to rise. The two cannot be equated. If the industry cannot develop with high quality, simply pushing up prices may cause the industry to 'down'. At present, there is still a big gap between our carbon price and the carbon price of the EU carbon emissions trading system. But if we only focus on carbon prices and push our carbon prices to 100 euros/ton now, many companies will have no room for development. At present, many people have only seen one end, that is, carbon prices are indeed on the rise, but they may not pay attention to the other end, that is, what practices and effectiveness are the whole society's efforts to cultivate new productivity and green development momentum, and have not paid more attention to whether the industry has more development opportunities. High-quality development of the industry and rising carbon prices complement each other. If the two cannot be of the same frequency, it is an irrational and unscientific behavior to simply 'bullish' carbon prices for green development that is divorced from the industry. It can be said that without the support of high-quality development of the industry, there would be no room for rising carbon prices."
Currently, the market has different sentiments regarding carbon prices. In addition to "I have been 'bullish' for a long time, so I am reluctant to sell and don't want to sell", there are also "I want to speculate on carbon prices" and so on.
In this regard, industry insiders believe that this is unscientific. Regarding the speculation of carbon prices, we can find that no matter how much speculation is made, carbon prices will only fluctuate within a limited space. In response to the situation of reluctance to sell, the government is also providing effective guidance and formulating corresponding policies to reverse this situation.
Wei Wang said: "The mistake of these behaviors is that carbon assets are used as speculative objects. In fact, what should really be used as investment objects is the bargaining power of green development rights. What the government wants to promote is the high-quality development of the industry, and the establishment of a national carbon market is an effective starting point. What the government hopes is not to speculate on high-carbon prices, but to vigorously develop new productivity, and then reward and compensate enterprises or other market entities that improve their green development capabilities through CCER, green warrants and other methods. In other words, the more opportunities for green development, the greater the room for carbon prices to rise. Conversely, rising carbon prices drive not the carbon price itself, but the increased momentum of green development and the rising price of green development rights. Lucid waters and lush mountains are invaluable assets, and the two are organically unified."
