Advancing sustainable growth in the United States and China

The Green Team Speaks to…LIN HUI

Dr. Lin Hui is the Chairman of Shanghai Environment and Energy Exchange (EEX). He was previously Executive Vice President of SS-GATE, Trading Director of technological property rights at Shanghai United Assets and Equity Exchange, and the CEO of Shanghai Intellectual Property Exchange. He has rich theoretical research and practical experience in technological property right trading, commercialization of technological research, intellectual property right protection, and technology management. Since he became Chairman of the Shanghai EEX in 2015, he has taken an active role in designing and constructing Shanghai’s carbon trading pilot system, facilitating carbon trading, and exploring the financialization of carbon trading to provide experiences and support for China’s national carbon market development.

  1. China’s carbon emissions trading system was officially launched in December 2017. What will be the biggest challenges to national carbon market construction in the next few years?

China is facing many challenges in the near future in building a national carbon market:

The first major challenge is to develop a market management system. To establish a complete system suitable for China’s carbon market, we should set up not only the main regulatory document and emissions trading regulations, but also a suite of supportive measures on data reporting, allowance allocation, market supervision, and organizational management. This will encourage rules-based implementation of emissions trading system (ETS).

The second challenge is to build a data reporting and management system. Data monitoring reporting and verification (MRV) in key industries across the country has been functional for many years, and research based on existing data for allowance allocation methods is ongoing. However, it is important to advance the current MRV experiences to improve data quality and strengthen data management for more effective data collection in providing a foundation for a national MRV system.

The third pressing challenge, we are facing now, is infrastructure construction. Infrastructure for the carbon market must be constructed and coordinated at the national level, following the principle of unified trading, registration, and management, for a single national carbon emissions trading market to become reality.

The fourth is capacity building. While the “7+2” regional emissions trading pilots have been previously established, the estimated 1,700 power sector companies and 7,000 companies in industry sectors that are waiting to be incorporated in the national market still have limited understanding of the carbon market. The transition of climate change responsibilities further adds to the capacity building challenges in addressing these industry gaps.

As the ETS is gradually developed, there will be continuous improvements, and questions like how to develop the carbon market more effectively, how to connect the carbon market with the emission reduction targets, and how to establish a link between the carbon market and financial market will be addressed. As a national capacity building center, the Shanghai EEX will continue to contribute to national carbon market development.

  1. The trading system is one of the most important supporting systems in a carbon market and Shanghai is taking the lead to construct and operate the national carbon trading system. What opportunities and challenges will Shanghai face in this role?

Construction of the national ETS is important and demands high standards. It involves multiple interests and is on a strict timeline. Therefore, learning from experience, optimizing our advantages, and building synergies are key to building a well-regulated, transparent, and widely recognized ETS that meets national requirements and first-class benchmarks.

Shanghai EEX should learn from its experience and leverage the pilot trading capabilities gained over the years. The Shanghai pilot has produced clear rules, standard market practices, good governance, and effective emissions reduction. It has successfully established a complete set of management regulations to help build an open, transparent, stable, and effective market.

Optimizing the advantages of Shanghai as a financial center has helped create a wealth of best practices in trading and market risks control, and a pool of talent that can provide “nutrients” and “resources” for the construction of the national ETS.

With the overall notion of consultation and cooperation with a win/win orientation and a uniform national strategy, we are working as a bellwether to communicate with other provinces and cities, and draw on the experience accumulated in their pilot projects in order to accelerate the completion of the ETS. This communication will help build synergies.

  1. The Shanghai EEX has made significant and innovative efforts in carbon allowance compliance, trading regulatory system, and carbon finance since the 2013 launch of the pilot carbon market. What experiences and lessons can be applied to the national carbon market?

Effective policy system and regulatory mechanism. Operation of a carbon market is impossible without an effective policy system and regulatory mechanisms. Years of research and development in the pilot carbon markets have generated operational documents, technical documents, and a set of trading rules that form the basis of a regulatory architecture that accounts for a variety of stakeholders including the government, exchange houses, verifiers and law enforcement. In the formulation of ETS regulations for the national carbon market, pilot market experiences show emissions target control and corporate obligations should be designed in a top-down manner and supervision measures at the market level to regulate trading activities are necessary. 

Scientific approach for cap-setting and allowance allocation. Cap-setting and allowance allocation is the core of the carbon market mechanism. Based on the Shanghai pilot’s first phase experiences, allowance allocation was tightened for the second phase yielding optimal results. Thus, a combination of industrial benchmarks and historical emission data for most sectors are now used to send a clear price signal to the market to set prices at certain levels.

Stable market rules, diversified market players and products. We must respect market forces and let the market play a decisive role in developing the carbon market, which means a need for stable market rules, diversified market players, and a variety of market products. From the pilot experience, policy adjustments and operational changes were needed to ensure an efficient market. This was done with the input of relevant stakeholders. As the national carbon market develops, replication of this process is vital and will increase policy predictability.

Operation of a carbon market requires the participation of market players with different trading objectives. Different market participants, including emissions control companies, voluntary emissions reduction companies, financial institutions and institutional investors were active in the pilot markets, and some pilot markets were even open to individuals and foreign investors. For example, the Shanghai carbon market opened to institutional investors in 2014, which has improved the market’s ability to determine prices and allocate resources.

A variety of products have been developed to meet the trading needs of different market players. Some pilot areas featured spot allowance trading market and supplemented by Chinese certified emission reduction (CCER) trading. Other pilot areas introduced carbon credit systems and experimented with linking it to the carbon market. Innovative carbon finance tools have also been introduced in pilot areas. At the national level, the initial products are spot allowances, which are open only to emissions control companies, and not to institutional investors. It is recommended that the range of market participants and products be gradually expanded in the national carbon market.

  1. Shanghai EEX and Shanghai Clearing House have successfully developed carbon allowance forwards. Looking forward, more work in creating innovative carbon finance services, reducing the trading risk in carbon markets, enhancing market liquidity, and establishing a transparent carbon market with thorough pricing mechanisms and effective supervision will be imperative. Regarding this observation, what are your considerations and suggestions?

The National Carbon Emissions Trading Market Construction Plan (for the Power Generation Industry) explicitly states, “the carbon market should be positioned as a policy tool for controlling greenhouse gas emissions, and financial risks should be effectively controlled.”

For robust carbon market growth, a strict risk management system is necessary. A carbon market has both standard financial market risks and specific carbon-related risks. To address, we rely on the cooperation between the government, exchange houses, and enterprises. The government solves top-level design and other macro-level, fundamental and systemic issues; the exchanges improve risk operations systems and develops systems for limiting price fluctuations, large account reporting, risk warning, and risk reserves. Enterprises must establish organizational structures, systems, processes, and a culture for risk management.

We will develop carbon finance gradually. Carbon finance is key to improving the carbon trading mechanism, market liquidity, and market growth. After years of development, carbon finance has increasingly diversified with a growing number of innovative products. Carbon finance can only continue to grow in parallel with a robust ETS. As the carbon market is still in an early stage, carbon finance development is also nascent, but the future is bright. In the context of macroeconomic and market risk control policies, carbon finance should comply with risk prevention policies and align with the needs of the carbon market.

We will improve information disclosure. Timely disclosure of real, accurate, and complete information can reduce information asymmetry enabling market participants to make more informed decisions. This will reduce market risks and improve market liquidity. In addition, how to better use emissions trading data in the age of big data will become a hot topic.

We will utilize a trading platform and build a diversified market. A trading platform is valuable in optimizing the transaction process, improving market efficiency, promoting price discovery, and reducing transaction costs. Further, in the national carbon market, introduction of a price discovery system would provide market liquidity, and market stability in a diversified market.

  1. In terms of international cooperation, how can a foreign NGO can be most helpful? 

The Shanghai EEX has always maintained active communication and collaboration with various stakeholders, especially with the UNFCCC Secretariat and the UN Climate Change Conference (COP)—the flagship institutions for addressing climate change—to deepen our understanding of ongoing global efforts and developments.

Europe and California are leading global carbon markets and there is much to gain from increased exchange. We expect to have more interactions with international institutions, learn advanced international experience and best practices, and embrace more opportunities for cooperation on the international stage with the support of foreign NGOs.

Topics: Green Finance