The guideline on accelerating the establishment of a unified domestic market, jointly issued by the Communist Party of China Central Committee and the State Council on April 10, 2022, specifies the building of a unified national carbon market. Prior to this, the China Carbon Emission Trade Exchange (CCETE) was officially launched on July 16, 2021. However, there are still problems with market, industry, information, and regulatory segmentation in the national carbon market, resulting in limited market participation, inactive trading, and relatively low carbon prices, which prevents the market mechanism from performing its full function.

Ending segmentation

The first concern is “market segmentation” caused by multiple parallel carbon markets, such as parallel local pilot carbon markets and national carbon markets, and mandatory carbon markets which run tandem to voluntary carbon markets. While the pilot carbon markets provide experience for the national carbon market, they also lead to the problem of regional segmentation among pilot carbon markets, which is not conducive to optimizing the allocation of emission reduction resources, weakening the emission reduction effect of the carbon market.

The second is “industrial segmentation” caused by incomplete industrial coverage, i.e., high-emission industries have not been fully included in the national carbon market. In order to establish a national unified carbon market, the power generation industry should be the first focus, and then petrochemical, chemical, building materials, iron and steel, non-ferrous metals, papermaking, aviation, and other high-emission industries will be gradually incorporated during the 14th Five-Year Plan period (2021–2025).

The third is the “information segmentation” led by information asymmetry. We are finding information segmentation between the central government and local governments, as well as between the government and enterprises.

The fourth improvement to make is to tackle “regulatory segmentation” caused by the incomplete regulatory system. There is a trade-off between “streamlining administration and delegating powers” and the demand for multi-level carbon market regulation. A perfect carbon market regulatory mechanism is the basis for the carbon market’s orderly operation.

Effective measures

In accordance with the general requirement of accelerating the construction of a national unified carbon market with high efficiency, fair competition, and full openness, with the goal of establishing the national carbon market as a carbon pricing center with international influence, and take into account its current progress, the national unified carbon market can be promoted in the following ways.

To address “market segmentation,” first, it is urgent to develop a roadmap and timetable for the transition from regional carbon markets to a national one. Plans must bridge the gap between a national carbon market and local pilot carbon markets, unify carbon prices, improve market liquidity, improve carbon-trading efficiency, and leverage the power of carbon pricing mechanisms. Second, a plan for interconnection between the voluntary carbon market and the mandatory carbon market should be introduced as soon as possible, and the voluntary carbon market’s long-term mechanism should be established and improved as well. It is equally important to expand the national carbon market’s capacity to support the China Certified Emission Reduction(CCER), optimize the structure of CCER programs, and form a government-led, market-oriented, and sustainable voluntary carbon market.

To address “industrial segmentation,” first, the carbon market’s coverage should be expanded gradually and strategically. In regard to high-energy-consuming industries, combined with the five types of products covered by the European Union’s Carbon Border Adjustment Mechanism (CBAM), the national carbon market will give priority to the steel, cement, and non-ferrous metals industries. This will alleviate external pressure while fully improving the carbon market’s activity through market expansion and upgrading, effectively reducing the expense of export enterprises. Second, we should improve and optimize the pilot carbon market quota allocation standards. For industries not being included in the national carbon market yet operating in the pilot markets, strict quota allocation standards and optimized allocation methods should be adopted, taking into account the development trend in the global carbon markets, and free allocation should be gradually replaced with auctions, to unify allocation standards and improve the carbon market’s fairness and efficiency.

To address “information segmentation,” first, the central government’s centralized supervision should be strengthened, and forecast unified, total allocation unified, and information management unified as well, to solve information asymmetry between the central and local governments, whilst local governments should be fully mobilized through system design, to improve emission information credibility. Second, a sound enterprise carbon emission information disclosure system should be established. Providing standardized and mandatory rules and models for enterprise carbon emission information disclosure can effectively eliminate information asymmetry between the government and enterprises and strategically develop the carbon market. Third, qualified industries should be selected to establish a Continuous Emissions Monitoring System.

To address “regulatory segmentation,” first, we should promote the introduction of Interim Regulations on the Administration of Carbon Emission Trading. National level legislation will unify regulatory standards and procedures, regulate enforcement behaviors, reduce discretionary power, and promote fairness and justice. Second, we should make full use of the carbon emission rights registration system for the whole process and comprehensive supervision. Third, in due course, a professional and independent third-party regulator should be introduced. Ensuring a complete and fair regulatory system and clear separation of authority and responsibility with both government regulation and social regulation will help protect and promote market competition and enhance the confidence of localities, enterprises, and the public as we construct the unified carbon market.

Huang Jinpeng is from the Center of Hubei Cooperative Innovation for Emissions Trading Systems. Cheng Si is from the School of Low Carbon Economics, Hubei University of Economics.