Carbon pricing expected to boost carbon market, ESG

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The 2nd Sina Finance ESG Global Leaders Summit was held online from June 28 to 30, aiming to promote global ESG development and build a sustainable future.

It was jointly organized by Sina Finance and the China International Trust Investment Corporation (CITIC), and was held under the guidance of the Climate Change Department of the Ministry of Ecology and Environment.

Zhu Min, dean of the National Institute of Finance at Tsinghua University, vice chairman of the China Center for International Economic Exchanges (CCIEE), and former vice president of the International Monetary Fund (IMF), delivered a keynote speech about how ESG can help achieve the dual carbon goal.

Zhu pointed out that a strong and predictable carbon price can play an irreplaceable role in the management of carbon neutrality, the energy transition, and ESG, which requires giving full play to the leading role of the market in resource allocation.

However, due to the complexity of carbon pricing, in order to avoid market failure, it is necessary to establish a complete and multi-dimensional market pricing system, including a carbon tax system, carbon emissions trading scheme, a market for carbon financial derivatives, and a market for offsetting carbon emissions, in order to coordinate government intervention with market regulation systems.

Zhu proposed three carbon pricing recommendations:

First, despite the difficulties, a basic carbon tax system should be established.

The main concern is that the advent of a carbon tax will alter the entire existing pricing system, with an unpredictable impact on the market.

In addition, because the carbon emissions of various industries are not the same, the actual tax burden will be different, leaving a sense of unfairness.

Another concern is administrative feasibility; it is always difficult to pass new taxation policies.

However, the carbon tax system can provide a clear and quantifiable reward and punishment mechanism for the market, which can most effectively promote the enthusiasm of market players to participate in carbon reduction.

The government can set up independent carbon tax systems according to the economic indicators of different regions, such as regional GDP and industrial structure.

Second, on the basis of a carbon tax, the role of a carbon trading market should be strengthened and carbon prices should be gradually increased.

China established a nationwide carbon emissions trading scheme (ETS) last year, but so far, the trading volume and price fluctuations have not been large.

In order to make the market more active, Zhu gave six suggestions:

  1. Expand trading coverage and include more high-carbon emission industries into ETS;
  2. Reduce the total amount of carbon emission allowances issued, and increase the proportion of allowances allocated through auctions;
  3. Allow differentiated allocation of carbon emission allowances according to the specific situation of different industries;
  4. Improve the multi-dimensional carbon market system, and incorporate other offset mechanisms that have been practiced and demonstrated, such as CCER in China;
  5. Gradually introduce financial derivatives trading through hedge funds;
  6. Strengthen the construction of a unified national carbon trading market and promote regional pilot projects.

Third, before the establishment of a carbon pricing mechanism, companies should be encouraged to set shadow prices.

The shadow price is crucial to the formation of a carbon emission offset market, which will provide an important supplement to the carbon emission allowance trading market.

The tradability of carbon emission offsets will greatly strengthen the role of the carbon trading market in the national economic system and improve the market mechanism for carbon pricing.

Zhu highlighted the irreplaceable role and inescapable responsibility of central government in the process of establishing carbon pricing mechanisms to promote ESG.

He also emphasized that ESG will fundamentally change production and people’s current way of life, and therefore requires the participation of all stakeholders in society.

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