Carbon trading: Market mechanisms to tackle pollution
- By Liu Yi
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E-mail China Today, April 10, 2014
How the Market Operates
The over 490 companies participating in carbon trading in the Beijing market account for about 40 percent of total carbon dioxide emissions in the capital. According to Beijing regulations, if a company's direct and indirect carbon dioxide emissions exceed 10,000 tons a year, it must meet its obligations to control carbon emissions. These companies, referred to as regulated organizations, comprise the main body for carbon emissions trading. Those with complex energy consumption of over 2,000 tons of standard coal can voluntarily participate in the market, and are known as voluntary organizations.
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The carbon trade hall at Beijing Environment Exchange. |
The whole process of carbon emission trading includes five steps -- emissions data reporting, third-party verification, quota allocation, trading, and implementation. Every year, a company must report its emissions data of the previous year to the Beijing Municipal Commission of Development and Reform, and receive independent verification from third-party organizations. The commission then allocates an annual quota for carbon emissions. After receiving its electronic-certificate quota, the company may buy or sell quotas in the market, with the quota cleared every year.
"Our carbon trading center is responsible for the 'trading' step," said Wang Yang, director of the Carbon Trading Center of the Beijing Environment Exchange (CBEEX). In the hall of CBEEX, successful trading information is repeatedly displayed on a giant screen. The trading parties, via a computer installed with a digital trading platform system, can directly trade by entering purchase prices and emission quantities, all accomplished quite conveniently.
This handy trading process is backed with a precise but bulky information system. To build a carbon market, most important is genuine, accurate and comprehensive data on carbon emission. The NDRC told China Today that the preparation for all the five pilot markets took several years. On the one hand, they had to carefully calculate the total control targets for greenhouse gases by 2015; on the other hand, they called for bidding to select independent third-party organizations to conduct comprehensive and in-depth examinations on trading companies, and collected a large amount of reliable firsthand basic data. The unified standards used in data collection and emissions calculation buttress companies' trust in the carbon transaction, so they more readily accept the data.
Another key link is quota allocation, which not only relates to company costs of production, but also to the level of the carbon price. Thus far, there are two popular allocation methods used across the world – benchmarking and grandfathering. The benchmarking quotas are allocated according to the benchmark emissions of an industry, while the grandfathering allocation is based on historical level of emissions. The five pilot markets have adopted the two methods and demonstrate much flexibility in operation.
For example, Shanghai adopts benchmarking for electricity, aviation, airport and harbor companies, and grandfathering for other industries and public construction. Beijing uses grandfathering for existing facilities, namely their average annual emissions from 2009 to 2012, while benchmarking is used for new projects. "If a company performs well in emission reduction, the quota will be surplus, and they could sell it in the market and acquire capital." Wang said. During the annual clearance, if a company is found to be surpassing its quota and not purchasing new quotas, it would probably be fined three to five times the average price in the carbon market.
In the last four months, Wang discovered a phenomenon: the more dynamic aspect of the market is the voluntary organizations, which benefit from price fluctuations. Qian Guoqiang believes that carbon trading has a financial nature, and moderate speculation is normal only if the supervision works effectively. "One of the benefits around speculation lies in that it can introduce large amounts of money into the market, while reducing risk by spreading one person's risk to every stakeholder," he explained. "If the investors and companies can make money in the carbon market, they will get ahead. It is such an environment that the carbon trading market aims to create."
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