China’s Carbon Markets: Implications for Business

18 October 2023 / Article

China's domestic carbon markets are a key pillar of its long-term decarbonization strategy. While still in its early stages, we expect government carbon pricing policy activity to ramp up in the coming years, with concrete changes such as the reactivation of the voluntary market, sectoral expansion of the compliance market, and market integration already in planning. These and other developments will impact China’s operating landscape in multiple ways, leading to both challenges and opportunities for business.

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Carbon prices will increase due to a reduction in the carbon intensity cap for power companies regulated under the Emission Trading Scheme (ETS), China’s national compliance market, as well as other measures that will likely be taken going forward to slowly, but steadily increase the cost of carbon for companies.
Compliance costs will rise for companies currently regulated under the ETS, including from investments into improved measurement, reporting, and verification (MRV) systems and
processes, as well as efficiency and emission reduction initiatives, or else increased costs to offset excess emissions. with sales of new houses still experiencing negative growth. This, along with the very high level of saving deposits, suggests that households remain cautious about the outlook.
Tightened MRV procedures will also have a trickle-down effect on non-regulated companies, especially those in closely linked sectors, as companies seek to voluntarily align with implicit compliance expectations by regulators and investors.tions.
A sectoral expansion of the ETS will bring many more companies into the compliance market, increasing the cost of compliance for those companies as well. Companies in the
cement and aluminum sectors should be actively preparing for this.
A consolidation of regional and national ETS markets may enable voluntary participation in trading on the ETS for financial gain. This could be an interesting avenue to explore for large companies which excel on the decarbonization front relative to their peers.
Demand for low-carbon products and services will increase in the long run, especially with a broader ETS market and stricter MRV measures, including outsourcing to low-carbon suppliers and increased interest in purchasing low-carbon solutions.
A relaunch of China's voluntary carbon market will open up new domestic trading and offsetting opportunities for all companies. Buyers of offsets will benefit from expanded options in China, but should proceed with caution and conduct due diligence to ensure quality and credibility of offsets. Developers/suppliers of offsets need to carefully evaluate the commercial feasibility of this avenue.
China’s carbon markets are a testing ground for other countries in the region, and developments are thus worth monitoring for companies operating across Asia, especially
those in sectors that are likely to fall under a national ETS scheme.