On July 7, the national carbon emissions trading market was finally officially opened in the eyes of everyone, marking a substantial step forward in the process of China’s great cause of carbon neutrality. From the CDM mechanism to the provincial carbon emissions trading pilot, nearly two decades of exploration, from questioning controversy to awakening consciousness, finally ushered in this moment of inheriting the past and enlightening the future. The national carbon market has just completed one week of trading, and in this article, we will interpret the performance of the carbon market in the first week from a professional perspective, analyze and predict the existing problems and future development trends. (Source: Singularity Energy Author: Wang Kang)
1. Observation of the national carbon trading market for one week
On July 7, the opening day of the national carbon trading market, 16.410 million tons of quota listing agreement were traded, with a turnover of 2 million yuan, and the closing price was 1.51 yuan / ton, up 23.6% from the opening price, and the highest price in the session was 73.52 yuan/ ton. The closing price of the day was slightly higher than the industry consensus forecast of 8-30 yuan, and the trading volume on the first day was also higher than expected, and the performance on the first day was generally encouraged by the industry.
However, the trading volume on the first day mainly came from the control and emission control enterprises to grab the door, from the second trading day, although the quota price continued to rise, the transaction volume fell seriously compared with the first day of trading, as shown in the following figure and table.
Table 1 List of the first week of the national carbon emission trading market
Figure 2 Trading quota in the first week of the national carbon market
According to the current trend, the price of allowances is expected to remain stable and rising due to the expected appreciation of carbon allowances, but their trading liquidity remains low. If calculated according to the average daily trading volume of 30,4 tons (the average trading volume in the next 2 days is 2 times), the annual transaction turnover rate is only about <>%, and the volume may be increased when the performance period comes, but the annual turnover rate is still not optimistic.
Second, the main problems that exist
Based on the construction process of the national carbon emission trading market and the performance of the first week of the market, the current carbon market may have the following problems:
First, the current way of issuing allowances makes it difficult for carbon market trading to balance price stability and continuous liquidity. At present, quotas are issued free of charge, and the total amount of quotas is generally sufficient, under the cap-trade mechanism, because the cost of obtaining quotas is zero, once the supply is oversupply, the carbon price can easily fall to the floor price; However, if the carbon price is stabilized through anticipatory management or other measures, it will inevitably curb its trading volume, that is, it will be invaluable. While everyone applauded the continuous rise in carbon prices, what is more worthy of attention is the hidden concern of insufficient liquidity, the serious lack of trading volume, and the lack of support for carbon prices.
Second, the participating entities and trading varieties are single. At present, the participants in the national carbon market are limited to emission control enterprises, and professional carbon asset companies, financial institutions and individual investors have not obtained tickets to the carbon trading market for the time being, although the risk of speculation is reduced, but it is not conducive to the expansion of capital scale and market activity. The arrangement of the participants shows that the main function of the current carbon market lies in the performance of emission control enterprises, and long-term liquidity cannot be supported by outside. At the same time, the trading varieties are only quota spots, without the entry of futures, options, forwards, swaps and other derivatives, and lack of more effective price discovery tools and risk hedging means.
Third, the construction of a monitoring and verification system for carbon emissions has a long way to go. Carbon assets are virtual assets based on carbon emission data, and the carbon market is more abstract than other markets, and the authenticity, completeness and accuracy of corporate carbon emission data are the cornerstone of the credibility of the carbon market. The difficulty of verifying energy data and the imperfect social credit system have seriously plagued the development of contract energy management, and Erdos High-tech Materials Company has falsely reported carbon emission data and other problems, which is one of the reasons for the postponement of the opening of the national carbon market, it can be imagined that with the construction of building materials, cement, chemical industry and other industries with more diversified energy use, more complex production processes and more diverse process emissions into the market, the improvement of the MRV system will also be a major difficulty to be overcome in the construction of the carbon market.
Fourth, the relevant policies of CCER assets are not clear. Although the offset ratio of CCER assets entering the carbon market is limited, it has obvious effect on transmitting price signals for reflecting the environmental value of carbon emission reduction projects, which is closely watched by new energy, distributed energy, forestry carbon sinks and other relevant parties, and is also the entrance for more entities to participate in the carbon market. However, the opening hours of CCER, the existence of existing and unissued projects, the offset ratio and the scope of supported projects are still unclear and controversial, which limits the carbon market to promote the transformation of energy and electricity on a larger scale.
Third, characteristics and trend analysis
Based on the above observations and problem analysis, we judge that the national carbon emission allowance market will show the following characteristics and trends:
(1) The construction of the national carbon market is a complex system project
The first is to consider the balance between economic development and the environment. As a developing country, China’s economic development task is still very heavy, and the time left for us after reaching the peak to neutralization is only 30 years, and the arduousness of the task is much higher than that of Western developed countries. Balancing the relationship between development and carbon neutrality and controlling the total amount of peaking as soon as possible can provide favorable conditions for subsequent neutralization, and “loosening first and then tightening” is very likely to leave difficulties and risks for the future.
The second is to consider the imbalance between regional development and industrial development. The degree of economic and social development and resource endowment in different regions of China vary greatly, and the orderly peaking and neutralization in various places according to different conditions is in line with China’s actual situation, testing the operation mechanism of the national carbon market. Similarly, different industries have different ability to bear carbon prices, and how to promote the balanced development of various industries through quota issuance and carbon pricing mechanisms is also a key issue to consider.
The third is the complexity of the price mechanism. From a macro and long-term perspective, carbon prices are determined by the macroeconomy, the overall development of the industry, and the progress of low-carbon technologies, and in theory, carbon prices should be equal to the average cost of energy conservation and emission reduction in the whole society. However, from a micro and near-term perspective, under the cap and trade mechanism, carbon prices are determined by the supply and demand of carbon assets, and international experience shows that if the cap-and-trade method is not reasonable, it will cause large fluctuations in carbon prices.
The fourth is the complexity of the data system. Energy data is the most important data source of carbon accounting, because different energy supply entities are relatively independent, the government, public institutions, enterprises on the grasp of energy data is not complete and accurate, full-caliber energy data collection, sorting is very difficult, historical carbon emission database is missing, it is difficult to support the total quota determination and enterprise quota allocation and government macro-control, the formation of a sound carbon emission monitoring system requires long-term efforts.
(2) The national carbon market will be in a long period of improvement
In the context of the country’s continuous reduction of energy and electricity costs to reduce the burden on enterprises, it is expected that the space for channeling carbon prices to enterprises is also limited, which determines that China’s carbon prices will not be too high, so the main role of the carbon market before carbon peaking is still mainly to improve the market mechanism. The game between the government and enterprises, the central and local governments, will lead to loose allocation of quotas, the distribution method will still be mainly free, and the average carbon price will run at a low level (it is expected that the carbon price will remain in the range of 50-80 yuan / ton for most of the future period, and the compliance period may briefly rise to 100 yuan / ton, but it is still low relative to the European carbon market and energy transition demand). Or it shows the characteristics of high carbon price but serious lack of liquidity.
In this case, the effect of the carbon market in promoting the sustainable energy transition is not obvious, although the current allowance price is higher than the previous forecast, but the overall price is still low compared with other carbon market prices such as Europe and the United States, which is equivalent to the carbon cost per kWh of coal power added to 0.04 yuan/kWh (according to the emission of thermal power per kWh of 800g).Carbon dioxide (carbon dioxide), which seems to have a certain impact, but this part of the carbon cost will only be added to the excess quota, which has a certain role in promoting incremental transformation, but the role of stock transformation depends on the continuous tightening of quotas.
At the same time, poor liquidity will affect the valuation of carbon assets in the financial market, because illiquid assets have poor liquidity and will be discounted in value assessment, thus affecting the development of the carbon market. Poor liquidity is also not conducive to the development and trading of CCER assets, if the annual carbon market turnover rate is lower than the allowable CCER offset discount, it means that CCER cannot fully enter the carbon market to exert its value, and its price will be severely suppressed, affecting the development of related projects.
(3) The expansion of the national carbon market and the improvement of products will be carried out simultaneously
Over time, the national carbon market will gradually overcome its weaknesses. In the next 2-3 years, the eight major industries will be included in an orderly manner, the total quota is expected to expand to 80-90 billion tons per year, the number of included enterprises will reach 7-8,4000, and the total market assets will reach 5000-<> according to the current carbon price levelbillion. With the improvement of the carbon management system and professional talent team, carbon assets will no longer be used only for performance, and the demand for revitalizing existing carbon assets through financial innovation will be more vigorous, including financial services such as carbon forward, carbon swap, carbon option, carbon leasing, carbon bonds, carbon asset securitization and carbon funds.
CCER assets are expected to enter the carbon market by the end of the year, and the means of corporate compliance will be improved, and the mechanism for transmitting prices from the carbon market to new energy, integrated energy services and other industries will be improved. In the future, professional carbon asset companies, financial institutions and individual investors may enter the carbon trading market in an orderly manner, promoting more diversified participants in the carbon market, more obvious capital aggregation effects, and gradually active markets, thus forming a slow positive cycle.
Post time: Jul-19-2023