A national carbon trade program has been a hot topic as soon as China decided to launch it in 2016. Following the publication of the Interim Measure for Management of Carbon Emission Trade (Interim Measure) in December 2014, discussions about the “national cap,” the quantity of exchanges and carbon finance are at the forefront.

National cap

Article 8 of the Interim Measure clarifies that the carbon trade office of the State Council is responsible for distributing allowances to each province, based on the consideration of emission volume, economic developments, industrial structure, energy structure and the important emission entities—making it a challenge to determine a national cap at the current stage, while considering the basic situation of each province. For example, Shanxi is a big energy-producing and energy-consuming province which has only achieved 62 percent of its energy conservation and emission reduction target of the Twelfth Five-Year Plan, while cities like Shenzhen, which lack  manufacturing and heavy industries, have lower carbon emissions (per unit) than Shanxi.

Allowance allocation

Allowance allocation is the key element of the carbon trade program—by determining the reduction cost and performance cost of each control unit. In a pilot project of seven provinces, baseline methodology has been used by five pilots (Chongqing and Shenzhen are excluded), resulting in various valuable experiences, which can be extrapolated to a national level. It seems likely that baseline methodology will be introduced to a national level.

The quantity of exchanges

How many exchanges will survive when the national carbon trade program is effective? As far as we know, there are seven exchanges in China—Beijing, Tianjin, Shanghai, Shenzhen, Guangzhou, Wuhan and Chongqing. However, the Chinese market has been questioning whether China really needs so many exchanges. I am afraid that the answer is no. One interesting thing, is that a couple of exchanges have been considering future merges and acquisitions. For example, Beijing and Tianjin, Shenzhen and Guangzhou— those exchanges would be the first example of M&A.

Enhance of market liquidity

Lack of liquidity is a major problem in the current Chinese carbon trading program. To enhance liquidity, agencies like banks, securities companies and trust companies should be encouraged to participate in the carbon trade program from different sides. Although the Interim Measure does not state that the authorities encourage capital markets to join in the big game, the Chinese market still believes that more agencies will be allowed to participate in the program in order to better achieve emission reduction and enhancement of liquidity.

Aside from the Interim Measure, there is no clear policy or regulation related to the aforementioned topics. However, based on the current experiences of the seven pilot provinces, our discussion herein is a reasonable estimation.