Liu Hanwu is the President of China Hubei Emission Exchange and he has rich experiences in financial market operations and management, capital management, and carbon markets. Since 2012, Liu has been managing Hubei Carbon Emission Exchange, participating in establishing policies related to top-level design, quota distribution and trading of Hubei carbon market, leading on a series of carbon finance innovations, and exploring voluntary carbon market construction and ecological compensation schemes. He is a guest professor at China Geoscience University and Hubei University of Economics, and a consulted expert at the Chinese State-Owned Property Exchanges Association and State Intellectual Property Operation Platform.
UN Climate Action Summit 2019 will take place in New York this month. The success of China’s carbon market is therefore playing a more significant role not only for China itself, but for the rest of the world to tackle climate change. In your opinion, what are the top three most urgent issues that must be addressed in order to establish a full-fledged carbon emission trading market with sound regulations and active transactions?
To construct a well-developed and effective national carbon market, key processes including issuing laws and regulations, introducing an allowance distribution scheme, conducting emission verification and capacity building will have to be established. To ensure a healthy and steady market, I think the following three steps are important:
First, the construction of a functional carbon market management system will be critical. Different from regional pilot carbon markets, the national carbon market is more dispersed, covers more businesses, and will need to respond to more complex situations, which creates a higher demand for management and regulation. Therefore, we need to establish a comprehensive and functional management system where the main authorities can effectively regulate the market, professional service organizations can provide technical support, and industry associations and businesses can actively participate. The aim is to ensure both overall design and close coordination, and grassroot-level involvement to clearly set and implement responsibilities and policies.
Second, it will be important to put in place systems that cover all areas of carbon trading management as early as possible. Sensible, practical, fair, and consistent policies and systems including trading rules, offset rules, registration systems, trading system management, and regulations for third-party inspection institutions will be highly important to regulate market behaviors and expectations. Another important policy will be the quota distribution plan because it will determine if the price stimulus mechanisms are effective on the carbon market.
Third, stepping up carbon market infrastructure building should be a top priority. Registration and trading systems are the basic foundations for operating a carbon market. As the national carbon market system is still developing, a level of uncertainty exists in terms of the functions of the systems, especially given the limited timeframe. Therefore, these systems must be forward-looking, adaptable, and flexible, but also be functional and sound in order for them to effectively support the development and regulation of the national carbon market.
Among China’s carbon emission trading pilots, Hubei is the only province located in Midwest China, traditionally considered less developed than other regions in China. But since its establishment, Hubei’s traded carbon volume and value has led other pilots and accounts for more than a third of the total for all pilot markets. What experiences and lessons from Hubei can be applied to the national carbon market?
Hubei has been dedicated to constructing a well-regulated, open, transparent, and world-class carbon market. Bearing in mind that Hubei’s industrial landscape is tilted toward heavy industry and its current economic development stage, it has managed to leverage the carbon market to reduce the greenhouse gas emissions of energy-intensive and high emission businesses. This has led to improvements in carbon market system design, transition of government roles, and enactment of reforms. The result gives full play to the key role of the market in resource allocation for Hubei’s carbon market.
Concretely at the government-level, clearly defining responsibilities allowed for the development of a practical and sound management system. The government role shifted from micro-level enforcement to macro-level supervision by giving businesses the ability to make decisions related to reducing emissions or purchasing quotas. By establishing professional registration, settlement, and inspection systems, the government was able to regulate the market and control risks. The government also formed policy support teams such as the technology expert committee to provide expertise and reduce risk in administrative decision making. A full set of policies were made in terms of carbon quota distribution, market supervision, and emission inspection to ensure the orderly functioning of the carbon market.
In terms of the trading market, Hubei innovated trading mechanisms, reduced trading costs, and embraced the asset nature of carbon trading quotas. It identified effective carbon prices, which helped businesses manage carbon assets and facilitated the flow of funds into the carbon market. This attracted massive private capital to the market providing liquidity and funds for businesses to reduce carbon.
Accurate, complete, and credible carbon emission data is the cornerstone of a carbon trading system. Considering that Hubei has taken the lead to construct the national carbon emission registration system, what opportunities and challenges will Hubei face in this role? And in your observation, for the first tranche of over 1,700 power sector companies that will participate in the national carbon market, what challenges are they facing and what capacity building do they need for market readiness in terms of carbon asset management system, carbon trading, risk management, and information disclosure?
In taking the lead to construct the national carbon emission registration system, Hubei is facing the following challenges:
The first challenge is safety. The national carbon emission registration system is an information platform for national level trading and serves as a quota distribution and management platform as well. In designing and constructing the system, we must ensure that it meets the relatively high requirements listed in China’s “Disaster Recovery Guidelines for Important Information Systems” to minimize the possibility of information distortion, data loss, and other technological risks.
The second challenge is stability. The registration system will serve the initial 1700 power plants included in the national carbon market, but it will also need to accommodate for the addition of future market participants. As stakeholders grow in number, the market becomes more complex with an increasing demand for timely information. This dictates that software and hardware of the registration system should have enough space and flexibility for the future growth of the national carbon market.
The third challenge is adaptability. Compared to other carbon trading markets, China’s registration system will assume a more administrative role. As such, market players will have more practical demands of the system. At the same time, regulators will use the registration system to monitor and supervise the market. Balancing the actions of market players and regulators on the registration system leads to the demand for increased adaptability. Therefore, while ensuring that the system is sound for market players with regulators able to adhere to strict inspection standards, it must also optimize user experience and reduce the chances of operational errors to increase the efficiency of the system.
The fourth challenge is connectivity. The national carbon market may need to be connected to other international carbon market systems in the future, which means the registration system must be able to connect to external systems. This will give rise to challenges such as different standards of system interfaces, different coding technologies, and a level of uncertainty. We must take these possibilities into consideration.
In terms of capacity building, among the first group of power plants included in the national carbon market, many have already began constructing their internal carbon capital management systems and accumulated experience by participating in pilot carbon market trading. However, capacity building is a major concern for some power companies in non-pilot regions, especially self-supplied power plants. And in general, capacity building should focus on the national carbon market policy landscape, construction, trading and risk control of internal carbon capital management system for the participants, and operations of the registration systems and trading systems. Further, capacity building should be executed as a standardized and targeted training for companies.
There are large gaps between China’s carbon pilots and more established carbon markets like the EU ETS and US regional markets, especially with regard to trading products, market liquidity, and transparency. Out of China’s pilots, the Hubei pilot has performed above average in terms of carbon finance innovation and information disclosure. But to build a fully functional national carbon market, international cooperation should be strengthened. Which areas might be most helpful for China?
The first area that could be helpful is in conducting research and cooperating on major issues regarding market construction. For example, in market linkage, we should explore feasible paths to link the national carbon market or pilot markets with international carbon markets or explore ways to connect mandatory or voluntary quota markets. This would facilitate the flow of market factors across borders and cultivate a complex and multifaceted national carbon market for China.
A second area could be strengthening international cooperation on capacity building. China can provide training on carbon market construction, energy conservation, environmental protection, climate change mitigation and adaptation, and technology transfer for countries and regions most severely affected by climate change including ASEAN countries, countries along the “Belt and Road” and “south-south countries”. China’s experiences in pilot markets and national carbon market construction can help governments and businesses in these countries and regions to establish their own carbon trading systems, enhancing their capacity to addressing climate change.
Increasing international cooperation on carbon finance innovation is a third area that could be helpful. We should learn carbon finance product design, risk control, and market expansion best practices from international markets, especially the EU carbon market. Based on the needs and demands of our national carbon market, we can then provide for more complete and better carbon capital management tools, reduce emission reduction costs for businesses, and explore feasible ways for investors of the international carbon market to participate in our carbon market.
Lastly, promoting international exchanges on green and low-carbon technologies would be beneficial for China’s national carbon market. Based on the needs of Chinese businesses and industry, we should harness the resources and information of various carbon market platforms and introduce advanced green and low-carbon technologies and ideas through conferences, events, and project collaborations. The strong mix of “market+capital+technologies” will help boost the energy conservation and emission reduction capacity of businesses.
As a leader in the carbon market space, how do you advocate living a low carbon lifestyle in your daily life?
In my daily life, I try my best to use less plastic, including disposable tableware. When I travel, I use my own instead of disposable products at hotels. I avoid unnecessary purchases and recycle as much as I can to produce less garbage. I walk to locations within 3 km and avoid wasting food when I eat out. In my job, I ask for double-sided printing and advocate digital systems to reduce using paper. I am also a proponent of saving water and electricity and support China’s “clean plate” campaign.