Fubon Bank (China) Research Team: China's Carbon Market with a Potential to Grow into a One Trillion RMB Market

SHANGHAI, Nov. 9, 2021 /PRNewswire/ -- The recent rare major floods in China, Germany, Japan and USA once again warned people to take active actions to deal with climate change and promote the sustainable development of human mankind. Last year, China proposed to peak carbon dioxide emissions in 2030 and reach carbon neutrality by 2060, and is committed to achieving carbon emission reduction through a market-based mechanism. In July this year, China officially launched online trading on the national carbon emission rights market.

The carbon market is expected to surpass the international commodity market and has great development prospects. For China, as the process of carbon emitting peak and carbon neutralization continues to advance, the scale of China's carbon market has a potential to grow into a one trillion RMB market in the long run.

China's carbon market has greater room for development

China's national carbon market trading started in the power generation industry, and there is a broader space for development in the future. The development of China's carbon market is based on the size of carbon reductions and ultimately depends on the efforts in achieving the goals of peaking carbon dioxide emissions and carbon neutrality..

In 2020, China's carbon emissions reached 9.899 billion tons. The Institute of Climate Change and Sustainable Development of Tsinghua University predicts that, through energy saving and energy structure optimization, the carbon dioxide emission intensity per GDP unit will be reduced by 19% to 20% and, by 2030, China's net carbon emissions will peak at 10.5 billion tons; The World Resources Institute and CICC estimate that China's peak carbon emission in 2030 will be 10.9 billion tons and 10.8 billion tons, respectively. The three estimates are not very much different. In conclusion, China's carbon market has a huge space for development.

The carbon price, which is closely related to the size of the carbon market, is determined by such factors as the declination in the total amount of carbon allowance, the auction mechanism, and the market stability reserve mechanism (MSR). Based on the carbon price of US$18/ton of carbon dioxide equivalent, which is the median of various major global carbon exchanging markets, the Chinese carbon market will be at least a trillion RMB market in the future. If people look at the trading of the derivatives in the European carbon market, the size of China's carbon market is expected to even grow exponentially.

China's carbon price has great potential to rise

At present, China's carbon price is still lower than the median of the global carbon market. As of November 4, the national carbon emission allowances (CEA) has a total of 22.14 million tons of cumulative transaction, with a cumulative transaction volume of 988.81 million RMB at a price of approx. 44.66 RMB/ton.

However, comparing with the international price, the EU's carbon price is around US$60/ton, and there is a large gap between China's carbon price and the EU's by several folds. In other words, China's carbon price has great potential to rise in the future.

In terms of trends, as predicted by the Institute of Climate Change and Sustainable Development of Tsinghua University, China's carbon price will rise to US$13/ton by 2030, and it will reach US$327/ton by 2060. According to the experience of the EU-ETs in different stages, carbon price starts to rise in the second half of the third stage, that is, when the total amount of CEA gradually reduces and the proportion of allowance auctions increases. This is when the carbon price started to show an upward trend, especially since 2021 the EU carbon price has risen tremendously.

From the perspective of costs, Soochow Securities' research shows that, in the eight major emission controlled industries of power generation, aviation, steel, building materials, papermaking, petrochemical, chemical and non-ferrous metals, if the initial allowance is provided free and the carbon reduction ratio is 25%, and if calculated based on the carbon price is 323 RMB/tCO2e (the fourth stage price of EU-ETs), the cost of carbon reduction in China's power industry accounted for more than 13% of revenue, followed by steel and building material industries that accounted for more than 2% of revenue and other industries are below 1%, which is relatively controllable. In other words, except for the power industry, China's other carbon-emission-controlled industries can tolerate a much higher carbon price than the current level, which also reduces the resistance to the rise of carbon prices driven by changes of supply and demand of CEA in the market.