Treasure Carbon’s Zhu: “China’s carbon market a great opportunity for foreign capital”

• The national carbon market is set to be based on a carbon intensity benchmark rather than a total cap and trade and will only include power producers
• Treasure Carbon has approximately a 25% share of carbon assets in China, the nation’s first domestic carbon fund, and is set to launch the first foreign-funded carbon fund
• With the further opening of China’s capital market, foreign investors and family offices have vast opportunities to make an impact in China’s carbon market according to Zhu

Important milestones in China’s carbon emissions trading scheme (ETS) are expected this year as pressure increases to meet the sustainable development goals for 2030, in addition to the positive externalities of cleaner air, developing new technologies and creating the jobs and exports of the future.

According to the Climate Action Tracker (CAT), China is the world’s largest greenhouse gas (GHG) emitter, accounting for approximately 27% of global GHG emissions, excluding land use, land-use change and forestry. Rather than declining, greater fossil fuel consumption drove an estimated 2.3% increase in Chinese carbon dioxide (C02) emissions in 2018 and 4% in the first half of 2019, marking a third year of growth.

China’s coal-powered capacity reached 2045GW of energy, with a further 200GW under construction and a whopping 300GW additional capacity planned, CAT recorded in 2019, despite the cost competitiveness of renewables and reports of huge losses for coal-powered factories across the nation.

China started its ETS through seven pilot cities in 2013, with 2,038 emitters involved in this carbon market and with exchanges based at the provincial level. In 2017, the Chinese government announced that a national carbon market will be introduced involving 20,000 emitters and around one billion tons of carbon – ten times the size of the pilot market.

Originally slated to be nationally running by June this year, the COVID-19 pandemic has delayed implementation and there are still differing opinions on its execution, as highlighted in suggestions made by delegates attending the annual Two Sessions held in Beijing in May.

Hanyuan Liu, NPL deputy and president of Tongwei Group, suggested, “China should accelerate the establishment of a carbon trading mechanism, which will turn challenges into opportunities and will have an immediate effect on promoting the development of renewable energy and achieving the goal of zero carbon.”

On the other hand, Renxian Cao, NPC deputy and chairman of Sungrow, encouraged a carbon tax to be implemented immediately, saying that it can connect with the existing carbon trading market. Cao stated, “Since the country is currently improving the national carbon trading market, we should have an appropriate transitional period. During the transitional period, enterprises can participate in carbon market transactions without repeating transactions and levies. After that, the calculation will be based on carbon emissions volume. The carbon tax scheme can significantly reduce transaction prices.”

This is all the more pressing as at the end of May 2019, the national carbon market had a cumulative trading volume of only 310 million tons of C02, with a value of about $959 million (RMB 6.8 billion) according to Sina Finance, creating a tiny impact.

As one of the biggest carbon assets development and management institutions in China, Treasure Carbon serves upstream and downstream low-carbon industrial chains. Since 2014, it started to manage the carbon assets for emitters, which were in the new position of having to purchase credits from the market and needed consulting services based on strategy, big data and market movements.

Treasure Carbon set up the first carbon fund with Haitong and the first trust plan founded with AJC in China for investing in Chinese Certified Emission Reductions (CCER) with companies registered across several provinces as well as a carbon fund in Australia. It has, in the last few years, also issued carbon finance products, including China’s first carbon fund and a Carbon Trust. This is in addition to developing carbon pledges for banks.

So far, the integrated service provider has worked with over 200 projects, covering over $14 million (RMB 100 million) in the carbon market, including solar power, often by assisting renewable energy providers to move away from their reliance on subsidies. The company also invests and purchases credits from the market and direct from the project owners. It currently has a carbon market share of around 25% in China.

In contrast to the European ETS, which operates under a cap and trade principle, China’s carbon trading market is posed to be a carbon intensity trading scheme. The intensity is being measured against a set benchmark and plants are allowed to purchase and sell excess or additional quotas beyond their benchmark allocation. Initially, this will only encompass the power industry, which has the highest quality data available.

Susan Zhu (pictured centre, with the microphone), chairman of the board and CEO of Treasure Carbon, told Triple Bottom Line Investing in a webinar interview last month that “high emitters will now only have two choices in China – invest in energy saving projects or purchase the credits from the market – such as from renewable power projects.”

Incidentally, since the epidemic has subsided in China, the carbon price has increased sharply for two reasons according to Zhu. She said, “First, the pandemic situation is better and factories have started to open again. But second and more importantly is that the national carbon market will be launched very soon with over 20,000 emitters involved, meaning the demand from the emitters will be huge.”

With the allowances given to emitters by the Ministry of Ecology and Environment and the CCERs generated by clean energy companies determining the price of carbon, Zhu hopes that the CCER generated from clean energy projects can reach $8.46 (RMB 60) to $9.87 (RMB 70) per tonne “soon”, and that it will further increase in the next three to five years.

“I think the credit price will get near to the cost price of carbon. I hope the price will get to $28.21 (RMB 200) per kilo in five years. CCER price will always be close to the allowance but a little lower, perhaps 60% to 70%,” Zhu said.

Zhu also said, however, that there is still “not enough credits for the national carbon market yet.” In China, the price is still exceptionally low at around $4 per tonne, while it is $20 in other countries. Zhu highlighted that the price will rise after the national market is launched.

As for the fallout from the COVID-19 pandemic and geopolitical tensions, Zhu does not believe this will affect the price of carbon or foreign cooperation due to the size of the Chinese carbon market, which will eventually be the biggest in the world.

“The very low price of carbon currently, which is expected to increase, presents huge financial opportunities. The big emitters are massive companies so there are vast opportunities to import leading foreign clean technology into China,” Zhu added.

In conclusion, Zhu said, “Before 2018, foreign capital could not enter into China’s carbon market – apart from institutional and licensed individuals. Now, China is open, and this year we have our first US dollar carbon fund. This is a really good opportunity for foreign capital to come to China, and foreign capital can have a very good experience in the domestic market, especially family offices that are interested in areas of impact investing.”