China's national carbon market eyes allowing institutional investors to trade

Shanghai Environment Energy Exchange, which temporarily manages China's nationwide carbon trading, is working closely with related authorities to enable qualified institutional investors to participate in China's carbon market, according to a statement made by Lai Xiaoming, chairman of the exchange, on its official WeChat account late Aug. 16.

China's carbon market is a compliance market, and only allows companies in the power sector to trade their emission allowances. The environment ministry previously said institutional investors and individuals will be allowed to trade "when the time is ripe."

The involvement of institutional investors is a key step for China's carbon market development, as they have more trading experience and a better sense of carbon price signals, which will help bring vibrancy to the carbon market, Lai said in comments about policies that were work-in-progress, but did not give more details.

Before its launch, China's national carbon market operated eight pilot exchanges in different provinces or cities. The Shanghai exchange was one of the pilots and subsequently appointed by the environment ministry to manage the national market temporarily before a national carbon regulator is established.

Lai said the development of the national carbon trading agency is still in progress but did not disclose the expected time for completion. He said in the Shanghai pilot market, institutional investors have contributed over two-thirds of trade volumes in the past eight years.

In terms of the long-term development plan, Lai highlighted China's aim to establish a multi-layer regime covering the spot market, futures market, and other derivatives, which caters to different market participants, and helps dilute market risks.

He said such a multi-layered regime also helps to better reflect supply and demand in both the near term and long term as well as formulate a reasonable carbon price, which conveys clearer signals for capital investments and technology adoptions associated with carbon emission avoidance and reduction.

Boosting liquidity is crucial for China's carbon market. The daily trading volume has nosedived after a hectic opening day, and current participants are mainly government-owned power utilities and oil majors with in-house power generation capacities.

A total of 7.03 million mt of CO2 have been traded in China's carbon market since its launch on July 16. However, nearly 60% of the volumes were traded on the opening day, official data showed.

Furthermore, unlike some big state-owned players with carbon asset management capabilities in place, Lai said there are still many companies that lack such skills. He said such companies may have never traded carbon before and remain hesitant to take the first step in carbon trading.

He said another work-in-progress for the Shanghai exchange is to organize trainings for such companies to build up awareness and capability for carbon asset management.