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China's carbon market may cover 2-3 more sectors in 2022: exchange official

Highlights

Institutional investors likely to be enrolled in carbon trading: official

Steel, building materials, refining and petrochemical among likely sectors

China's carbon market is likely to cover two or three more sectors as early as 2022, Lai Xiaoming, Chairman of the Shanghai Environment and Energy Exchange said in a speech late Nov. 30 at an industry event.

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Currently, only power generation is covered in China's national compliance emission trading scheme. While it was known that the national carbon market would be rolled out in at least eight more sectors, this is the first instance of an official stating publicly that it could happen as early as 2022.

The statement implies a faster-than-expected rollout of China's carbon market, which has implications for the sectors that could include any of the eight sectors identified so far -- refining and petrochemicals, chemicals, building materials, steel, nonferrous metals, aviation and paper.

"We need to deepen the communication with the companies enrolled and to be enrolled in the compliance emission trading scheme, so as to help them build up carbon asset management capability and facilitate their participation in carbon trading," SEEE's Lai said at the 2021 Global Science & Technology Innovation Conference held in Shanghai on Nov 30.

The speech transcript was released by government-backed think tank China Carbon Neutrality Committee on its official social media account on Dec 1. SEEE hosts the online trading platform for China's national compliance emission trading scheme.

Lai also said institutional investors are expected to be enrolled for emission allowance trading as the next step in China's carbon market, without specifying a clear timeline.

Institutional investors and carbon derivatives are expected to significantly enhance market liquidity, and higher demand is likely to increase the carbon price.

"Currently, only spot trades of emission allowances are available in our national carbon market. In terms of the market size, China has already been on a leading position," Lai said.

"However, we need to enhance product innovation, proactively preparing for trading of carbon derivatives. For instance, in the EU Emission Trading System, a highly financialized carbon market, over 90% trades are for carbon derivatives," he said.

China Emission Allowance was priced at Yuan 42.97/mtCO2e (approximately $6.74/mtCO2e) on Dec 1, SEEE data showed. EU Emission Allowance prices on Nov. 30 hit a record high of €75.17/mtCO2e (approximately $85.09/mtCO2e), according to S&P Global Platts assessments.

The power sector accounts for about 40% of the nation's CO2 emissions. According to the environment ministry's arrangement earlier this year, the seven sectors lined up for carbon trading jointly account for another 40% of China's CO2 emissions, and will be enrolled no later than 2025.

China emitted around 9.9 billion mt of CO2 in 2020, which accounts for 30% of global CO2 emissions, according to a report by China's think tank SinoCarbon dated Nov 18. Among the seven sectors to be enrolled, 15.20% of China's CO2 emissions was from steel, 13.16% from building materials, 8.16% from refining, petrochemical, and chemicals, 1.17% from non-ferrous metals, 0.71% from aviation and 0.65% from paper, SinoCarbon said.

Steel, building materials, refining and petrochemical and non-ferrous metals are more likely to be enrolled early, because the groundwork for laying out sector-level emission accounting approaches and allowance allocation methods are already in progress, according to local media reports.