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China’s carbon emissions trading pilots point to eventual diversification at the national level

Written by 36Kr Global Research, AJ Cortese Published on     5 mins read

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Local pilot ETS programs in Hubei and Shanghai provide insights into what an inclusive national carbon trading setup might entail.

On September 3, 2021, China’s emissions trading system (ETS) processed a total transaction volume of 520 tons of carbon at an average price of RMB 44.67 (USD 6.94) per ton. Considered an active day in China’s fledgling ETS, the scale of market activity pales in comparison to the European Union’s more mature ETS, which recorded carbon prices of EUR 60 (USD 9.32) per ton during the same period with an average daily transaction volume of nearly 40 million tons in 2020.

In the first part of this report, we explored the Chinese ETS’s first two months of operations, which were defined by a relatively inactive market where transaction volume and prices have fallen. But before China rolled out its national ETS this year, the government has been running localized pilot ETS programs in eight major cities since 2011. These pilot projects are more inclusive than the initial stages of the national ETS. They have exhibited the demonstrable impact that carbon emissions trading can have on participating companies by affecting their business performance.

Incentivizing the use of green technologies and reduced energy consumption

China’s ETS provides financial benefits to participating companies that emit less carbon than their allocated quota while penalizing those that emit more. But a firm’s progress in improving its operational efficiency will ultimately determine whether the ETS has a positive or negative impact on its business.

One ETS participant, Gezhouba Group, is a core subsidiary of China Energy Construction Group, a Fortune 500 firm with main businesses in construction and water conservancy engineering. Eight of the company’s subsidiaries, including Gezhouba Group, were included in Hubei’s provincial carbon trading market. From 2014 to 2019, Gezhouba Group’s emissions output exceeded its allotted quota by 1.05 million tons, meaning the company had to purchase an additional RMB 75.33 million (USD 11.7 million) worth of emissions allowances to maintain compliance.

In 2015, Hubei’s pilot ETS launched the Chinese Certified Emission Reduction (CCER) program, which is China’s system for approving and creating carbon offset credits generated from the voluntary emissions reduction projects, designed to improve environmental conditions for residents in poor rural areas. Factoring in the social value they provide, CCER credits are cheaper than surplus credits from government-allocated quotas, selling for RMB 25 (USD 3.90) per ton compared to RMB 30 (4.70) per ton. To meet its compliance needs at a lower cost, Gezhouba Group purchased 5,000 tons worth of CCER carbon offset credits in a transaction that accounted for 17.5% of the total value of CCER projects. In 2019, Gezhouba Group purchased nearly 600,000 tons of CCER credits worth about RMB 15 million (USD 2.33 million). The CCER program creates a mutually beneficial scenario where companies that exceeded their carbon output can incur fewer costs to become compliant, while financially supporting emissions reduction efforts in vulnerable areas.

More recently, Gezhouba Group has upgraded its core operational technology in recent years to reduce its own carbon emissions. The firm has established energy management systems, applied low-nitrogen burners, implemented kiln sealing technology, and installed a high-temperature air conditioning system, reducing the firm’s energy consumption.

The use of these greener technologies means Gezhouba doesn’t need to purchase additional carbon emissions credits. In the past four years, the per-unit coal consumption of the Gezhouba Group’s cement production has dropped by more than 15 kg. It consumes 7% less power and has reduced carbon emissions by 850,000 tons per year. The emissions reductions from Gezhouba’s cement production alone are equivalent to planting 2,333 hectares of forest. At the same time, Gezhouba Group’s use of industrial solid waste such as phosphogypsum, phosphorous slag, steel slag, electric furnace slag, and fly ash, account for over 1 million tons of waste annually, reducing carbon emissions by more than 300,000 tons per year.

Transferring carbon credits to the customer

Many of the participants in China’s ETS, both at the national and local pilot level, have been massive state-owned enterprises in industrial sectors that are far removed from their end users. But China’s ETS has shown that smaller companies using renewable energy technologies, like Shanghai-based EV company Nio, can voluntarily apply for inclusion in the program and pass these benefits on to their customers.

In January 2021, EV startup Nio launched its “Blue Point” program to provide Nio users with the material benefits of their low-carbon driving, turning individual emissions reductions into points that can be redeemed for rewards via the Nio app. As the first initiative of its kind from an automaker, “Blue Point” is the result of cooperation between Nio, the China Classification Society Certification Company (CCSC), and the Shanghai Environmental Energy Exchange.

One Nio driver named Rivers saved 4,840 kilograms worth of carbon emissions over three years. Source: Nio

After obtaining the user’s consent, Nio will collect users’ driving data, including total mileage, energy consumption, and other related information, to calculate the individual’s carbon emissions savings. The savings are then certified by the China Classification Society Quality Certification Company and sold as carbon emission credits on the Shanghai Environmental Energy Exchange. Income generated from the sale will be returned to the user in the form of rewards points, which can be redeemed for gifts in the Nio app. Since the delivery of the first Nio ES8 in June 2018, Nio drivers have covered more than 1.65 billion kilometers of low-carbon driving, reducing carbon emissions by around 109,000 tons.

Increasing the diversity of ETS participants

The examples of Gezhouba Group and Nio show how participation in ETS projects can impact companies in a number of ways beyond incurring additional operational costs. Participants can actually generate financial returns and social value from emissions trading, while they are incentivized to implement or use greener technologies to reduce overall emissions output.

Institutional investors are another group set to play a key role in boosting the trading volume on carbon trading markets, as shown in Shanghai’s pilot program, where investors have developed a number of financial products including carbon quota pledges, carbon allowance loans, and repurchases. For example, a company could use carbon credits as collateral for a bank loan. Transactions involving these products have accounted for over 66% of the Shanghai ETS’s trading volume.

For now, China’s national ETS is restricted to power companies, excluding companies in other sectors like Nio and Gezhouba, as well as institutional investors. In an effort to stabilize this new market during the early stages of China’s national ETS, transaction prices will be dictated by the emissions quotas doled out to power companies by regulators.

With an eye toward including more market participants and increasing the national ETS’s trading volume, the Shanghai Environmental Energy Exchange is actively formulating regulations to allow the inclusion of qualified institutional investors. The main challenge facing policymakers will be to create a more inclusive ETS while limiting speculative behavior that could increase market risks.

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