Help at the double

Policies to control both quantity of emissions and intensity of energy consumption are needed to help economy better adapt to climate change

In the more than three months since the establishment of the national carbon market, the trading price of carbon emissions rights has been roughly maintained at about 50 yuan ($7.81) per metric ton, with a total transaction amount of more than 1 billion yuan.

The whole carbon emissions market shows the remarkable characteristics of small trading quantity and low trading price. It is this feature that makes the energy consumption of emitters lack the necessary price elasticity, that is, the current transaction price and transaction quantity cannot really spur enterprises to reduce their emissions.

There are two types of policy tools for reducing carbon emissions. The price tool, such as the pricing in the carbon emissions trading market, which creates incentives for market entities thereby encouraging emitters to cut pollution through technological innovations. And the quantity tool, which curbs emissions of market entities via restrictive measures. The double control policy in China's energy sector is a typical quantity tool, which controls the total amount of energy consumption as well as its intensity (energy consumption per unit of GDP).

To peak carbon emissions before 2030 and achieve carbon neutrality before 2060 is a strategic decision made by the Chinese government in response to climate change and promoting the country's green transformation. The double control policy will help reshape market expectations, facilitate steady progress in reducing carbon emissions and drive the market to form new equilibrium and incentive and restriction mechanisms, thus helping the whole society and economy better adapt to climate change.

This kind of double control on energy consumption will have an effect on the economy in the short term, but in the long run, it will contribute to realizing the carbon peak and carbon neutrality goals.

First, as a quantity policy tool, the double control has an effect on price. Theoretically it is clear that the immediate outcomes of the double control will be a reduction in energy production and consumption. The production costs of high-emitting industries will rise in the short term.

But the price signals will be sent to middle and downstream companies, propelling the green transformation of the entire society: the ultimate goal of double control is emissions reduction, thus activities that contribute to the production and consumption of green and low-carbon energy will be greatly encouraged. And as the cost of renewables become more competitive compared with traditional energy sources, their production and consumption will receive a boost.

This will also drive up the prices of carbon emissions quota, rendering the price of energy more elastic and giving full play to the carbon market's role in cutting emissions.

Also, it will accelerate the development of the green finance market. Green finance is a typical market-oriented policy tool, which can provide necessary funds for the development of clean energy and the green transformation of the economy.

Green finance can impact the market in three ways: forming a new development driver to attract more capital into green and low-carbon sectors; surmounting the challenges posed by climate change by stopping financing high-emitting and energy-intensive industries; and defusing the risks arising from the process of green transformation.

In a nutshell, the double control on energy should be compatible with carbon market incentives. Incentive compatibility can be formed between price-based emissions reduction policy tools such as the carbon emissions trading market, green power market and green certificate market, and the double control on energy.

While the double control policy entails great challenges in the country's green and low-carbon transformation, it also underlines the importance of using market-oriented policy tools such as green finance and carbon finance in the country's emissions reduction efforts.

But if the price mechanism such as carbon emissions trading market still fails to play a role in effectively curbing emissions, the double control policy is likely to continue to maintain the current "high pressure "situation, so as to form a real hard constraint on emissions-intensive enterprises and industries.

The author is director of environment and economic research at Fudan University. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.