Carbon price 'must rise' to cut emissions

Oswald Chan and Wang Yuke

Carbon price 'must rise' to cut emissions

Despite a global carbon trading market starting to take shape, the carbon price is still too low to incentivize enterprises to cut carbon emissions, panelists said at Tuesday’s roundtable themed “Renewables & Climate Change: An Overview of Carbon Market”, co-hosted by China Daily and AvantFaire Investment Management Ltd.

The panelists added that governments and private companies need other tools such as financial incentives, governance structures, positive feedback and a global standard of evaluating carbon trading credits to build a vibrant, transparent and high integrity carbon trading market.

Incentives needed

While the world has embraced the carbon market and carbon exchanges, the progress made has been slow. It is estimated that the global carbon emissions from fossil fuels use will soar to over 60 billion metric tons by 2030, according to Erik Berglof, chief economist of the Asian Infrastructure Investment Bank.

“The carbon prices have been way too low, as low as they have essentially been zero, or you can even argue that has been a negative carbon price,” he said.

Incentives are needed to spur industries that are most responsible for carbon emissions to make a real change, and doing away with the fossil fuel subsidies is the first step, Berglof said. “If we do that, we can bring forward investments that reduce greenhouse gas emissions, carbon dioxide, and other greenhouse gases. Also, we need markets for offset. For example, to encourage fossil fuel companies to transition to carbon capture companies.”

China and the European Union have established their respective emissions trading systems in a bid to slash carbon emissions. China’s ETS market, which made its debut on July 16, is believed to be the world’s largest carbon trading market.

In China, the ETS program aims to slash carbon dioxide emissions by requiring covered entities to pay for emissions, and invest in technologies that will enhance fuel efficiency and reduce pollution.

In the early stage, the national ETS regulated 2,225 power operators and related entities for the year 2019-20, targeting those power plants with annual emissions of more than 26,000 tons of carbon dioxide equivalent in any period between 2013 and 2019. These power generators account for 40 percent of the nation’s carbon dioxide emissions and 20 percent of the global carbon dioxide output.

The ETS is expected to expand to cover seven other emission-intensive sectors: petrochemical, chemical, building materials, steel, nonferrous metal, paper and domestic aviation.

Ma Jun, founding director at the Institute of Public and Environmental Affairs, said he expects China’s ETS market to have a smooth start. “So the carbon price should not be too high, not too low, and there should not be too much fluctuations.

“For the pricing issue in China, what we know is that the current price is not enough to send the incentives for companies to cut their emissions seriously. So we know that it is too slow and needs to go up, and what should be the bottom line? We have to realize that our (the Chinese) carbon market is far from being mature, and the trading volume is very low.”

This sentiment was echoed by Catherine Chen, founder and CEO of AvantFaire Investment Management Ltd. She said the focus should be not so much on how much the pricing is being increased, but how fast it is being raised.

To motivate the enterprises, especially the private entities, to take a plunge from “a corporate governance or a corporate point of view”, they first need to understand why the carbon market is so important as well as their corporate responsibilities on emission-cutting objectives, Chen said. “We need to get across the message before exacting the price”, Chen added, saying the outcome she is looking for is that private enterprises and all other market participants have the intention to follow suit.

“It also requires a lot of positive feedback from the local policies to the local participants, as well as from the practitioners to the policies,” Chen said.

Stable price signal urged

Pascal Saint-Amans, director of the Centre for Tax Policy and Administration at the Organisation for Economic Co-operation and Development, highlighted the importance of a stable price signal in carbon pricing.

“What I think is important is the stability of the price signal. The involvement of business will depend on the stability of the price signal. If you have peaks at 100 euros ($118), then it goes down to 10 euros, and it is not stable, that will send the right signal to investors. The price signal is not yet there to push into the right direction of green investment and green recovery. So there is much more work to do,” Saint-Amans said.

Panelists said that other tools such as a good governance structure and a global standard are needed to create a vibrant, transparent and high integrity voluntary carbon market.

“The most important issue is for the government to try to build the right governance structure. If you do not have a proper governance structure, then you cannot have a functioning market to elicit greater and broader participation that leads to a major impact on emission trading,” Ma said.

Grace Hui, managing director, head of the Green and Sustainable Finance, Markets Division at Hong Kong Exchanges and Clearing Ltd, noted: “The different standards in the existing voluntary carbon markets make the carbon credits not fungible. So, as recommended by the TSVCM, the important thing is for there to be a standard, a global framework to determine the core carbon principles of a carbon credit that ensures high quality and high integrity standards across removal and avoidance or reduction credits. And we hope to be able to use standardized core carbon reference contracts together with additional attributes such as social co-benefits.”

Hui also highlighted the need for setting up a global governance body to strengthen the oversight of voluntary carbon markets.