Price push

Concerning to its supply and demand structures, energy mix and financial structure, China has been attaching more importance to carbon emissions.

According to statistics, the developed countries peaked carbon dioxide emissions only when their per capita GDP reached $30,000 to $40,000. However, China's per capita GDP only exceeded $10,000 last year. It is estimated that if the economy maintains a growth rate of 5-6 percent, China's carbon dioxide emissions will peak around 2030, when its per capita GDP is expected to exceed $20,000, far less than that of developed countries. China's carbon neutrality goal is thus confronted with the challenge of its economic transition.

Another challenge for China is its energy transition. Developed countries all experienced a transition from coal to oil and gas, and then to new energies such as wind and solar power, while China's own energy structure is rich in coal, poor in oil and low in gas. Last year, China's energy consumption was the largest in the world, with 5 billion metric tons of standard coal consumed. Its carbon emissions, accordingly, were the largest too, amounting to 10 billion tons. China's energy structure also has a very high rate of dependency on foreign oil and natural gas, 73 percent and 43 percent respectively.

As the world's largest carbon emitter－China emitted 10 billion tons of carbon dioxide last year－taking 30 to 40 years to achieve carbon neutrality is definitely a huge challenge.

The world is currently undergoing a third industrial revolution featuring new energy, biotechnology and IT technology. The two previous industrial revolutions shared the similarity that each industrial revolution resulted from the coordinated development of energy innovation, industrial innovation and financial innovation.

China's photovoltaic industry has the competitive advantage of an entire industrial chain. In the past three years, China has invested in and constructed 60 percent of the world's new wind, hydro and photovoltaic power facilities. In terms of energy transmission, China's four-vertical and six-horizontal UHV grids form a long-distance, large-capacity, low-loss UHV grid system that can transmit new energy from North China, Northeast China, and Northwest China to the most developed and core areas of China's economy, that is, East China and South China, at a lower cost. Meanwhile, China's new energy vehicles and energy storage industries are developing by leaps and bounds.

China's vast market, abundant new energy resources, mature industrial chain and world-class companies are promoting the development of its new energy industries. Moreover, the carbon market and green financial market are also facilitating the third industrial revolution in the country.

According to calculations by multiple institutions, China's carbon neutrality requires investment of more than 100 trillion yuan ($15.7 trillion). It, thus, needs to have an incentive mechanism to guide investment, stabilize expectations and realize price finding. The answer is the carbon market.

From 2005 to 2012, China's carbon market was mainly focused on the CDM(Clean Development Mechanism) market. From 2013 to the end of 2020, carbon emissions trading pilots were conducted in Beijing, Tianjin, Shanghai, Guangdong province, Hubei province, Shenzhen in Guangdong province, and later in Fujian province. Since 2021, the power industry nationwide has pioneered a unified carbon market. As of Dec 31, 2021, the cumulative trading volume of Chinese Emission Allowances (CEA) was 179 million tons, the cumulative trading turnover was 7.661 billion yuan, and the average price was 42.79 yuan. In 2020, the European Union's carbon market had a trading volume of 8.1 billion tons, a turnover of 201 billion euros ($227.5 billion), with a transaction price of 24 euros and a turnover rate of 400 percent. Today its highest price has exceeded 80 euros. China's carbon market has yet to be improved in terms of transaction volume, transaction price, liquidity, or investment and financing functions.

The 2021 United Nations Climate Change Conference held in Glasgow reached an important consensus on establishing a globally unified market mechanism for sustainable development. Once such a system is established, it will attract substantial amounts of capital, technology, investors and practitioners to participate in the global carbon market.

However, developed economies such as the EU and the United States are planning to advance the carbon border adjustment mechanism, commonly known as carbon tariffs. The EU plans to levy carbon tariffs from Jan 1, 2025. Once they are officially launched, the EU will lay taxes on the carbon content of imported goods. This move is supported and will probably be echoed by the US.

The scale of China's carbon market will then gradually expand from the power industry to seven other industries－petrochemicals, chemicals, building materials, steel, nonferrous metals, papermaking, and aviation－with the quota possibly expanding from the current 4.5 billion tons to 7-8 billion tons. According to the current carbon price, the total assets of China's carbon market may reach 400-500 billion yuan in the future. The market entities in China's carbon market will become more diversified, because only with market entities with different risk appetites, diverse expectations, and various sources of information, can we discover fair market prices.

At the end of 2021, in the international carbon trading market, the transaction settlement price of UK Allowance Futures was 87.71 euros and that of European Union Allowances Futures was 80.11 euros. In the long run, there will be a free international flow of carbon emission rights due to the global externalities of climate change. And the carbon price in China will converge with that in the international carbon market. In the future, the scale, price, liquidity, and investment and financing functions of China's carbon market can all help China to seize the great historic opportunities of the third industrial revolution and the energy revolution, promoting China's long-term economic growth.

The author is general manager of Beijing Green Exchange and secretary general of Beijing Green Finance Association.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.

Contact the editor at editor@chinawatch.cn