The Green Team Speaks to…Zhang Xiliang

Dr. Zhang Xiliang is Professor of Management Science and Engineering and Director of the Institute of Energy, Environment, and Economy at Tsinghua University. His current research interests include low-carbon energy economy transformation, integrated assessment of energy and climate policies, renewable energy and automotive energy. Since 2015, Professor Zhang has been heading the expert group on China’s national carbon market design, which is a taskforce of the Climate Change Department in the Ministry of Ecology and Environment. He also served as the co-leader of the expert group for drafting China’s Renewable Energy Law from 2004 to 2005, legislation that was led by the Environmental Protection and Resource Conservation Committee of the National People’s Congress, and as a lead author of the 4th and 5th IPCC Climate Change Assessment Report. Dr. Zhang is the current Chair of the Energy Systems Engineering Committee of the China Energy Research Society. He holds a PhD in Systems Engineering from Tsinghua University.

You moderated an event co-hosted by Tsinghua and the Chinese government on the sidelines of COP25 in Madrid. It focused on policy making for and the progress of building China’s carbon emission trading system (ETS). You said, “I hope that by COP 26, we can talk about the operations instead of the policies of China’s national carbon market.” What do you predict or expect for China’s national carbon market in 2020?

First, as far as I know, all preparation for the national carbon market is on track, including carbon emission data reporting and verification, allowance allocation, registration, and the construction of the carbon trading platform. Personally, I think carbon trading in the power sector is not only necessary but also achievable by the end of 2020. Building a national carbon market is a landmark initiative for China to proactively address climate change. It is also China’s commitment to the international community. The seven pilot carbon markets and the work done in the last few years have provided relevant experience and ripe conditions for the national carbon market to begin trading this year.

Obviously, there are many challenges and difficult tasks in launching the carbon market this year. It will require unrelenting efforts and active participation from the corporate sector, competent central government ministries and local governments, and some good media reporting.

Since China announced the launch of the national carbon market in December 2017, much effort has been dedicated to building the national carbon ETS for China to start its carbon trading. As a key carbon expert, you led the research on setting the cap of carbon emissions and the emission allowances distribution. Both are very important topics. What do you think are the main opportunities and challenges in the development of China’s carbon market in the next five years? Can you list the top three opportunities and challenges?

The biggest opportunity in the development of China’s national carbon market is the transition of China’s growth strategy, which raises the importance of achieving ecological civilization to unprecedented levels. As China has incorporated climate change mitigation into the government’s medium- and long-term economic and social development plan, building a national carbon market is an important institutional arrangement for promoting high quality economic growth and implementing President Xi’s ecological civilization idea.

I think a fundamental challenge for building a national carbon market is the lack of consensus on climate change mitigation among the Chinese people. Obviously, this problem is not unique to China. A more technical challenge is the shortage of talent for operating and managing the carbon market. Once it is launched, the national carbon market of China will be the largest in the world. We are going to need a large group of talented people to manage it.

Once China’s national carbon market is trading, it will surpass both EU and US regional markets to become the largest carbon trading system in the world. However, in terms of liquidity, transparency, and financial innovation, China still has a lot of catching up to do. What do you think China should do to increase international cooperation and experience sharing in order to improve the robustness and efficiency of its national carbon market?

Advanced countries and regions such as the EU and California have been running carbon markets for years. Undoubtedly, China should learn from the experience of these countries and regions in building the carbon market. In fact, China’s national carbon market and the pilot markets did just that. However, we should also understand that the idea is easier said than done and should be based on China’s distinct market qualities and continuously improved.

Therefore, when we build the carbon market, we should learn from the best practices of China’s economic reform. Through international cooperation, we have learned about monitoring, reporting, and verification (MRV) including transparency, setting the cap, allocating allowances, and managing carbon emission trading, etc. Some of China’s pilot carbon markets have also engaged internationally on other topics like market liquidity and financial innovation, which I believe we will need more of going forward.

Your research team worked with the Massachusetts Institute of Technology (MIT) on building the infrastructure of China’s carbon market, and that research into corporate carbon emissions reporting and verification mechanisms was published in Nature Climate Change. Based on the research, what are the main challenges for Chinese enterprises who will be part of the national carbon market in terms of carbon emission data, information disclosure, and carbon asset management? What targeted capacity building and assistance will be needed?

As we all know, the quality of emission data is the cornerstone of a successful carbon market. It determines not only the effectiveness, efficiency, and fairness of the carbon market but also market confidence in it. Due to low MRV capabilities in developing countries, the quality of emission data is particularly important to the carbon market. Thus, an MRV system is imperative for China’s carbon market.

Our joint research with MIT shows that Beijing’s pilot program has developed an effective MRV system. It can ensure the reliability and quality of data. The accuracy of data continues to improve. There is no evidence of collusion between carbon-emitting enterprises and third-party verification institutions. Since 2015, key carbon-emitting enterprises have conducted data reporting and verification work, and this effort has laid a solid foundation for the national carbon market.

In my opinion, the main problems of China’s MRV system are monitoring and verification. We should guide and assist enterprises to develop an effective monitoring plan. The government also has to play the role of validator given the early stages of development for third party verification systems. Our research shows that if the government can buy third party verification services or reevaluate the verification reports of third-party verification institutions using random samples, the quality of data can be effectively improved.

The success of China’s carbon market is not only important to China, but also important for global efforts to combat climate change. China can export the experience of building its national carbon market to countries involved in the Belt and Road Initiative (BRI) to support the development of their own carbon trading systems and promote market-based climate change cooperation on a global scale. What are your suggestions regarding this effort?

I completely agree that this is a great idea. First, I believe we should develop a mechanism to enable government agencies to coordinate their work. The Ministry of Ecology and Environment (MEE), Ministry of Commence (MOFCOM), Ministry of Industry and Information Technology (MIIT), and the China Banking and Insurance Regulatory Commission (CBIRC) should all be involved. The development of the carbon market should be incorporated into the BRI to make up for the lack of market-based green investment incentives in belt and road countries. Second, we can start to set up a BRI carbon market forum. The key aims include introducing China’s experience in and disseminating knowledge of building a carbon market and helping these countries train professionals with expertise in carbon market design and implementation.

As a leader in climate change and energy space, how do you advocate the low carbon lifestyle in your daily life?

I seldom drive. I take public transportation to work every day, and I am proud of it.