Time to make the best of carbon trading

Since the Kyoto Protocol, the idea of trading carbon emission quotas has been generating high hopes for curbing greenhouse gas emissions. During the UN Climate Change Conference in Bonn, Germany, last month, China's special representative on climate change Xie Zhenhua said the country's carbon market is near completion and will be probably the world's largest.

As the world's largest energy consumer and carbon emitter, China has launched pilot trading systems for carbon emission quotas in seven provinces and cities since 2013, including Shenzhen, Shanghai and Beijing. China is now about to launch a nationwide carbon trading market equivalent to the United States' Environmental Protection Agency, which will expand to a variety of manufacturing and industrial fields, even as the Donald Trump-led US administration prepares to discard its electricity rule for the carbon sector. China's move could add a new dynamism to the global fight against climate change, especially after the withdrawal of the US from the 2015 Paris Agreement.

The capitalization of China's carbon market is estimated to reach 150 billion yuan ($23 billion) and its trading volume could be more than 600 billion yuan if "derivatives" such as futures are taken into account.

China's dedicated approach to build a uniform carbon market is in line with its obligation to reduce greenhouse gas emissions, although the lack of trading data, relevant laws and tested patterns means there is still a long way to go. And market efficiency could suffer a blow if enterprises feel more politically motivated to play along, and the trading costs keep rising when market liquidity is low.

To keep the emerging carbon market alive and prosperous, it is important to build a uniform, effective carbon trading platform. Previous pilot programs have indeed borne fruits in many aspects, but they are still not enough. As of now most of the deals have been closed between buyers and sellers in private, raising doubts over price-fixing.

Besides, equal attention should be paid to futures and spot trading, as the latter makes up the bulk of China's carbon trading. Given more options, enterprises could manifest extra motivation to pitch in. Involving "carbon sink", which describes the use of forests or other natural or manmade resources to remove carbon dioxide from the atmosphere, emission trading and renewable electricity certificates could be worth a try.

For China's carbon trading to be more effective and sustainable, multiple innovations are a must, as the central government is determined to expedite industrial transformation with the carbon market. For example, the possibility of introducing forward transaction (as opposed to spot transaction) and forward contract, a customized contract between two parties to buy or sell an asset at a specified price on a future date, should be thoroughly discussed.

While learning from the experiences of developed economies' trade in carbon, China needs to find its own path toward a sophisticated carbon market with Chinese characteristics.

A reliable, accessible data base and an efficient trading platform play an indispensable role in fixing the flaws in relevant laws, particularly the lack of uniform emission standards. On their part, enterprises should train their staff members in carbon emission trading so that they have more incentives and knowledge to participate in the carbon market.

The author is director of the China Institute for Studies in Energy Policy, Xiamen University.