On January 5, 2024, Professor of Sustainable Infrastructure Transition at University College London (UCL) and Secretary-General of the Guangdong Southern Carbon Capture and Storage Center...Liang XiGuest on the 41st episodeTsinghua Wudaokou Green Finance Lecture",around"How to understand carbon pricingThe lecture, themed "Sharing Insights," was hosted by Yang Luyuan, Executive Director of the Center for Green Finance Research (CGFR) at Tsinghua University's PBC School of Finance, and was held online and streamed live across the entire network.
At the beginning of the lecture, Liang Xi first pointed out that,gasThe essence of investment and financing is to increase the cost of carbon emissions for enterprises or the benefits of carbon reduction, thereby encouraging enterprises to carry out substantial and in-depth emission reduction work.While global climate finance has grown steadily at a rate of 7% per year over the past decade, with annual climate finance flows exceeding $1 trillion, current growth is far from sufficient to limit global warming to 1.5°C. To achieve the 1.5°C temperature limit target, global annual climate finance must increase by at least 590% by 2030 compared to 2020, reaching $4.35 trillion.
He further pointed out thatFilling the funding gap fundamentally requires increasing the rate of return on climate-friendly projects and reducing their risk, and strong carbon pricing is a key factor in bringing about these changes.Carbon pricing, as we commonly refer to it, means the explicit price of carbon emissions directly formed by market-based climate policies such as carbon taxes or carbon markets (i.e.,...).explicit carbon pricingPrices achieved through mandatory climate policies, such as national carbon emission intensity assessment indicators, total energy consumption and intensity control policies, industrial and project subsidies, and product carbon footprint entry thresholds, can be considered as...Implicit carbon pricingFurthermore, the mechanism for setting carbon emission prices through methods such as establishing carbon emission standards or targets, and conducting low-carbon development plans and pilot projects is known as...Carbon pricing guidelinesThis includes internal carbon pricing by enterprises and shadow carbon pricing provided by the government. Carbon emission intensity and penalties for exceeding limits, as well as carbon tariffs, represent a combination of explicit and implicit carbon pricing.Cross mode。From the perspective of explicit carbon pricing, according to World Bank statistics, in 2023, global carbon taxes and carbon trading systems covered approximately 23% of greenhouse gas emissions, involving 73 carbon pricing mechanisms. Among these, carbon allowance market prices vary significantly across different countries and regions. For example, the price in the EU carbon market is twice as high as that in the California-Quebec market. In response, Liang Xi raised the following question:Will carbon prices be higher if carbon reduction ambitions or targets are higher?He said,Carbon market allowance prices depend on the marginal cost curve of emissions reduction.Line and carbon emission reduction targetsTheoretically, the higher the total carbon emission reduction target, the more expensive the emission reduction technologies required, and the higher the carbon quota price in the carbon market. However, in reality, because parallel emission reduction policies (such as energy conservation tasks, energy conservation mobilization policies, and dual control of total energy consumption and intensity) may have already fulfilled some of the functions of the carbon market, therefore...Actual carbon allowance prices are usually higher than theoretical carbon prices.。Therefore, parallel emission reduction policies have a significant impact on carbon market allowance prices. When studying climate policy, we need to consider the inherent carbon price of emission reduction policies, comprehensively considering carbon allowance prices and the inherent carbon prices of different policy tools. The cost per ton of carbon dioxide from a combination of emission reduction policies is the sum of the costs of each individual policy. Furthermore, if we need to demonstrate higher carbon allowance prices domestically or internationally, we must weaken the role of other non-carbon market policies when formulating climate policies, thereby enhancing the carbon market's pricing power, allowance prices, and emission reduction effectiveness, and strengthening the carbon market's guiding role as an explicit mechanism for long-term carbon pricing.Liang Xi then stated,gasOne of the tasks of climate investment is to manage climate risks.(Including transformation risks and physical risks).The fundamental task in managing transition risks is to guide the long-term carbon pricing level of investment and financing activities through internal carbon pricing mechanisms under future climate policy scenarios.As policy constraints on climate change intensify in the future, carbon prices will also rise. Unlike traditional commodity prices, carbon prices may fluctuate dramatically depending on international climate policies and convention processes. Therefore, businesses and financial institutions should conduct stress tests in advance, consider the long-term carbon pricing level for future investment and financing decisions, and explore risk management through carbon finance instruments.Next, Liang Xi used carbon futures as a starting point to analyze whether futures can serve as a long-term tool for managing climate transition risks, and explained the relationship between climate risks and policies for addressing climate change.He said,The main underlying asset of carbon futures is carbon emission allowances or CCERs that may be included in the future.Market participants can use futures contracts to buy or sell carbon emission rights from a specific country or region at a fixed price at a predetermined future date, thereby locking in future costs or benefits and hedging against price risk. The futures margin system and the strong financial backing of futures exchanges provide credit guarantees for futures products; therefore, the futures market helps to enhance the carbon market.Liquidity and trading volume.In the EU carbon market, carbon futures trading volume far exceeds that of spot trading. Practical experience shows that carbon futures...It helps businesses manage transformation risks, improves carbon market efficiency, and enhances short-term price forecasting.At the same time, it can fully reflect the future quota demand of the real economy and show the market's expectations for future carbon prices.Liang Xi pointed out thatCarbon futures are an important tool for short- to medium-term risk management.In the international market, carbon futures contracts rarely have a maturity exceeding five years. Longer maturities reduce trading liquidity, and exceeding the maximum maturity allowed by carbon market rules can also create legal risks. Therefore, using carbon futures for hedging and long-term risk management is difficult and impractical. He further pointed out that when there is high uncertainty regarding climate change policies, carbon futures prices can fluctuate wildly, causing significant losses for both investors and policymakers. In the future, we...When establishing a carbon futures market, it is essential to anticipate policy stability and ensure that the policy environment remains stable throughout the futures trading period.。Besides carbon futures, carbon forwards are also a medium- to short-term hedging tool for price risks. Unlike carbon futures, carbon forwards are non-standardized contracts traded in the over-the-counter (OTC) market. In January 2017, the Shanghai Environment and Energy Exchange, in cooperation with the Shanghai Clearing House, launched the Shanghai Carbon Allowance Forward (SHEAF), my country's first centrally cleared carbon forward product and currently the only standardized carbon financial derivative in the country. As of March 16, 2023, the cumulative trading volume of the Shanghai Carbon Allowance Forward exceeded 4.37 million tons. Carbon allowance forward products help improve the trading activity of my country's carbon market, enhance market liquidity, and facilitate enterprises to better manage their carbon asset risk exposure.When discussing the voluntary emissions reduction market, Liang Xi pointed out that unlike the mandatory carbon quota market, the voluntary emissions reduction market encourages non-controlled emission enterprises to participate in carbon trading. The main trading instruments are carbon credits, including carbon removal, carbon avoidance, renewable energy, the Qualified Unit Emissions (CORSIA) mechanism, and nature-based solutions.Carbon credits generated by the voluntary emissions reduction market depend on compliance value (whether they can play a compliance role in the quota market) and the quality of the emissions reduction projects.Globally, among different types of carbon reduction credits, carbon removal credits have the highest price.However, overall, the current international voluntary emissions reduction market price is relatively low. The reason is that many voluntary emissions reduction projects do not bring about real and additional emissions reductions, i.e., additionality.。Liang Xi stated that additionality is a necessary step in the verification of voluntary emission reductions in the carbon market and a key financing principle for climate investment in the use of public funds and incentive policies. Additionality aims to...Ensure that public funds from climate investment and financing are used to advance climate change goals, generate additional emissions reductions, or promote additional climate adaptation effects.The proposal calls for voluntary emissions reduction projects to possess both climate additionality (achieving emissions reductions beyond the baseline scenario) and financial additionality (requiring additional funding support) in order to gradually restore public trust.He further stated that we need to further revise [the regulations/revisions] in the future.To restore the environmental integrity of the carbon credits in the voluntary emissions reduction market and thus lay a solid foundation for it, verified voluntary emissions reduction projects must meet eight principles: additionality, avoidance of double counting, data authenticity, permanence, data transparency, measurability, avoidance of carbon leakage, and no negative environmental and social impacts.Finally, he mentioned that, from the perspective of the international voluntary emissions reduction market, carbon prices depend on project quality, project type, and investor willingness. Carbon negative technology is currently receiving significant international attention; it involves directly capturing carbon from the air, then mineralizing, utilizing, and storing it. Due to its high separation costs, carbon negative technology will represent the ceiling for future carbon prices.
Liang XiProfessor Liang Xi is a professor of sustainable infrastructure transition at University College London (UCL) and the secretary-general of the Southern Guangdong Carbon Capture and Storage Center. He also serves as a standing committee member of the Climate Investment and Financing Committee (CIFA) and the Carbon Market Committee of the Chinese Society for Environmental Sciences, and vice chairman of the Carbon Capture, Utilization and Storage (CCUS) Committee. He is also the vice chairman of the Carbon Neutrality Committee of the China Society for Sustainable Development. Previously, he was an associate professor of energy finance and director of the Centre for Business and Climate Change at the University of Edinburgh Business School, and a lecturer in energy policy at the Department of Geography, University of Exeter, teaching courses in infrastructure finance, energy finance, and climate finance. Professor Liang holds a PhD in Energy Policy and Climate Finance from Cambridge University Business School and is a CFA and FRM charterholder. In 2013, Professor Liang Xi co-founded the first CCUS non-profit organization in China, the Sino-British (Guangdong) CCUS Center, with the Guangdong Electric Power Design Institute of China Energy Engineering Corporation.
Liang XiProfessor Liang Xi is a professor of sustainable infrastructure transition at University College London (UCL) and the secretary-general of the Southern Guangdong Carbon Capture and Storage Center. He also serves as a standing committee member of the Climate Investment and Financing Committee (CIFA) and the Carbon Market Committee of the Chinese Society for Environmental Sciences, and vice chairman of the Carbon Capture, Utilization and Storage (CCUS) Committee. He is also the vice chairman of the Carbon Neutrality Committee of the China Society for Sustainable Development. Previously, he was an associate professor of energy finance and director of the Centre for Business and Climate Change at the University of Edinburgh Business School, and a lecturer in energy policy at the Department of Geography, University of Exeter, teaching courses in infrastructure finance, energy finance, and climate finance. Professor Liang holds a PhD in Energy Policy and Climate Finance from Cambridge University Business School and is a CFA and FRM charterholder. In 2013, Professor Liang Xi co-founded the first CCUS non-profit organization in China, the Sino-British (Guangdong) CCUS Center, with the Guangdong Electric Power Design Institute of China Energy Engineering Corporation.