China’s laws and regulations are improving the carbon settings of the world’s biggest emitter. China’s commitment to hit peak emissions by 2030 and carbon neutrality by 2060 (30-60 target) is at the heart of this shift.
In this Featured Insight, we look at four trends that, combined, are transforming the carbon settings across China and sending a strong signal to the world as it transitions to a net zero economy.
- Ongoing improvements and internationalisation of carbon markets
- Enhanced trading products and platforms – including diverse carbon finance and derivatives products
- Improving transparency via corporate environmental data disclosure
- Initiatives to empower and incentivize individuals to cut their own carbon footprint.
We are watching developments and actively contributing to the evolution of China’s carbon market, development of carbon finance and derivatives, and improvements of the standard and certification systems for carbon data disclosure. Subscribe to our Climate & ESG updates for more insights.
China’s carbon markets move to internationalisation and financial product complexity, led by regions
Both of China’s dual carbon market segments are experiencing rapid growth and development – the Compliance Carbon Market (trading China Emission Allowances (CEA)), and the Voluntary Carbon Market (focused on China Certified Emission Reduction (CCER)).
Compliance carbon markets are evolving to capture more sectors
China boasts world's largest carbon allowance trading market in its National Emission Trading System (National ETS), which launched in 2021 and hit a cumulative trading volume of more than 200mn tons by the end of 2022. Yet it is China’s pre-existing regional pilot schemes that are setting an example for the rest of the nation, positioning forward-thinking regions as pioneers.
The national scheme is expected to reflect this regional progress in time, under draft regulations to gradually integrate local carbon emissions trading into the national market. This creation of one unified national carbon trading system demonstrates China's commitment to addressing emissions in various industries and promoting sustainable development.
Trading evolution - increasing participation and complexity of financial derivatives
As carbon markets expand, trading is becoming more complex. Platforms are allowing cross-border trades and products are diversifying, including derivatives.
Trading platforms allow cross-border transactions
There are two international emission trading platforms: one in Hainan, the other Hong Kong. Both allow cross-border trades.
- The Hainan International Carbon Emissions Trading Center launched in July 2022. Six months later the first cross-border carbon trade took place, involving the trading of Verified Carbon Units (VCUs) under the globally recognized Verified Carbon Standard (VCS). The trade originated from India, with a total volume of 10,185 tons.
- The Hong Kong Exchanges and Clearing Limited (HKEx) introduced a new international carbon market called Core Climate on 28 October 2022. Participants on the platform can access product information and engage in voluntary carbon credit trading.
- The Ministry of Ecology and Environment (MEE) is promoting the construction of a centralised voluntary emission reduction trading market and plans to reopen the CCER market. The CCER is widely anticipated to resume soon.
Financial complexity is evolving beyond spot trades – and infrastructure is adjusting
- Financial derivatives have emerged in regional pilots, include funds, bonds, pledge financing and repo financing, adding depth and diversity to the market. These innovations have developed in several pilot regions including Beijing, Hubei, Shenzhen, and Guangzhou.
- The Guangzhou Futures Exchange plans to introduce green and low-carbon futures trading products, such as CEAs.
- Financial institutions are increasingly engaging in the carbon market. Eight securities companies are authorised to trade carbon emissions using their own funds, having received non-objection letters from the China Securities Regulatory Commission.
- Carbon trading infrastructure is evolving. The Shanghai Clearing House treats carbon emissions as commodities and provides central counterparty clearing for CNY Emission Allowance Forward (CEAF). Additionally, Hubei has proposed creating a clearing infrastructure for spot and derivatives in the carbon market.
- We expect Hong Kong and Mainland's carbon derivatives market will soon interconnect. The Inter-agency Supervisory Group released a feasibility assessment exploring investor access to China's carbon market via the Greater Bay Area platform, promoting carbon market interconnection. It proposes including carbon derivatives provisions in legislation.
China’s efforts to improve carbon data transparency
Since 2020, China has introduced voluntary and mandatory measures to enhance transparency, responsibility and incentivise emission reduction for sustainable development.
Policies encourage voluntary environmental information disclosure
Voluntary environmental disclosure helps companies to establish a positive social reputation and facilitates financing (given China’s urging of banks to consider environmental reports to encourage sustainable practices).
- Listed companies are encouraged to disclose environmental information including regarding verification, appraisal and evaluation by third-party organisations. The Shenzhen Stock Exchange (SZSE) and Shanghai Stock Exchange (SSE) also promote disclosure of pollutant data in social responsibility reports or individual reports.
- Listed companies controlled by state-owned enterprise (SOE) are encouraged to disclose ESG reports by the State-owned Assets Supervision and Administration Commission (SASAC), aiming for "full coverage" by 2023.
Mandatory disclosure requirements have grown – and the trend will continue
Companies must disclose environmental information under regulations implemented in 2015. The scope expanded in 2022 to cover more entities, introduce a centralized reporting system, require detailed carbon emissions information and increase the maximum fine to 100,000 yuan. Currently, enforcement primarily relies on administrative penalties and civil liabilities, but a comprehensive system is planned.
- Timely, truthful, accurate and complete disclosure is required.
- A comprehensive mandatory disclosure system is planned by 2025, under the "Reform Plan for the Mandatory Disclosure of Environmental Information" released in 2021.
- Administrative penalties apply to enterprises that fail to disclose environmental information truthfully and accurately. This includes orders of correction from government authorities, public notices of criticism and fines.
- Civil liability (based on judicial opinions) may apply to:
- listed companies and debt-issuing enterprises that fail to disclose investment details, including climate change and environmental issues of financed projects, per updated "Administrative Measures".
- key pollution-discharging companies, their subsidiaries, and listed companies in specific industries like thermal power generation that fail to disclose environmental information under the "Securities Law" and securities exchange regulations.
Providing guidance for enterprises to disclose environmental information
China is also guiding enterprises to standardise the disclosure of environmental information.
- An adaptable framework for disclosing environmental information - "Corporate ESG Disclosure Guidelines" (T/CERDS 2-2022) – was developed by the China Enterprise Reform and Development Research Society. It introduces the concept of Scopes One, Two, and Three in the GHG Protocol, covering emissions from operational activities, energy consumption and the entire value chain.
- Disclosure requirements for financial institutions are specified in The People's Bank of China's "Guidelines on Environmental Information Disclosure for Financial Institutions", including qualitative and quantitative information. Each financial sub-sector, including commercial banks, has guidelines on the measurement and basis of quantitative information based on operational characteristics. These standards normalise behavior and promote transparency and credibility.
Private enterprises have taken strides too – disclosing corporate emissions and product carbon footprint
Many Chinese enterprises have disclosed carbon emissions data in "carbon neutral" or related reports. Some companies publish carbon neutral verification reports for products.
Most reports are produced by recognized third-party certification bodies following international accounting standards, ensuring a certain level of international recognition.
How individuals are taking part in disclosing and cutting emissions
Corporate-led personal carbon accounts are enhancing transparency and widening environmental information disclosure. These systems lower participation barriers and costs to enable individuals to get involved and promote sustainable practices.
- People are incentivised to cut personal carbon emissions through low-carbon behavior via platforms like Ant Group's "Ant Forest".
- Users earn rewards, such as green energy, trees or protected land, based on their carbon reduction achievements.
The next frontier: further opening to foreigners, expanding carbon trading and boosting certification
As China's carbon market system becomes more sophisticated and with the impending return of CCER, we anticipate that China's carbon market will further open to investors worldwide.
The unification and expansion of China’s national ETS, along with the gradual liberalisation of voluntary carbon market products like CCERs, will significantly enlarge China’s carbon market. This will enhance the effectiveness of the carbon pricing mechanism and encourage more businesses to participate. So too will increased connections, such as between Hong Kong and Mainland derivatives.
Financial and derivative innovation will lead to a wider range of financial and derivative products in China’s carbon trading arena. The implementation of the Futures and Derivatives Act will support this, working to align with international rules and enhance the enforceability and irrevocability of netting termination.
The increased standardisation, certification and accreditation systems will help to promote the international recognition of China’s carbon assets. China will expedite the approval of national standards for carbon emissions accounting and verification, along with making domestic standards more coherent with mainstream international standards in key areas. China will also encourage domestic certification bodies to participate in international carbon emission certification programs and international carbon emission certification systems with mutual recognition. This is to address the insufficient number of accredited certification bodies compared to the large number of Chinese enterprises.
China's efforts to accelerate voluntary cuts to emissions and carbon data transparency for corporations are critical steps towards achieving a sustainable future. By promoting environmental information disclosure, China is fostering a culture of transparency, accountability, and environmental responsibility among enterprises.
Want to know more about China’s ETS and other carbon markets globally? See other insights from Molly, including from our Carbon Markets Series:
