What does the launch of the carbon market mean for the power industry?

After more than four years of pilot operation, the nationwide unified carbon trading market has finally been launched. Today, the National Development and Reform Commission will hold a press conference on the launch of the national carbon emission trading system, announcing the launch of the national carbon market.

The national carbon emission trading market is officially launched according to law.

As early as 2010, in the "State Council's Decision on Accelerating the Cultivation and Development of Strategic Emerging Industries," the State Council clearly proposed to "establish and improve the trading system for major pollutants and carbon emissions." The carbon emission trading system in China has a practical legal basis and foundation. Subsequently, in 2011, the State Council and the National Development and Reform Commission successively issued documents approving pilot carbon emission rights trading programs in seven provinces (cities): Beijing, Tianjin, Shanghai, Chongqing, Hubei, Guangdong, and Shenzhen. In 2015, China pledged in the "Joint Statement by the Presidents of China and the United States on Climate Change" and at the Paris Climate Conference that China "plans to launch a national carbon emission trading system in 2017," which is a significant milestone in China's carbon market development.

From the above, it can be seen that China's establishment of a carbon emission rights trading system not only has political decisions but also national actions; not only a legal basis but also plan implementation; not only pilot programs in seven provinces (cities) but also nationwide promotion; not only macro requirements but also time schedule requirements; not only domestic actions but also international commitments.

The national carbon market is of great significance to the development of the power industry.

Whether from the experience of international carbon market construction or from the practice of China's carbon market pilot programs, it is inevitable that China's power industry will be among the first industries included in the carbon market, and almost all thermal power enterprises will be included. A preliminary analysis shows that about 1,600 thermal power enterprises will receive carbon emission allowances, these enterprises are involved in the emission of about 3.5 billion tons of carbon dioxide, accounting for 1/3 of the national carbon emissions, and the power industry will become the main force of the national carbon market.

The main impacts of the national carbon market on the development of the power industry are reflected in the following aspects:

① Carbon constraints on power development, using carbon constraints to force power structure optimization, explore emission reduction space, and promote low-carbon power development.

The construction of the carbon market is to give full play to the decisive role of the market in resource allocation. The carbon market is an artificially created market, and the core of its operation mechanism is to restrict greenhouse gas (calculated as carbon dioxide or carbon) emissions through the implementation of regulations, making the allowed amount of carbon emissions (emission rights), which is the subject of the transaction, scarce, and giving carbon emission rights value or commodity attributes. The carbon market imposes hard constraints on carbon dioxide emissions. The power industry is an energy conversion industry. Under the condition of a certain electricity target, the main methods for low-carbon development are to reduce the use of primary high-carbon energy (fossil energy) or to improve the utilization efficiency of high-carbon energy. Under the condition of a certain total carbon emission target for the industry, it is necessary to improve the power generation structure and improve power generation efficiency.

In the past few decades of reform and opening up, especially in the past ten years or so, the power industry has made significant achievements in power generation efficiency and carbon emission reduction through technologies such as new energy. According to a preliminary analysis by the China Electricity Council, in 2016, the national carbon dioxide emissions per kilowatt-hour of thermal power generation were about 822 grams/kWh, down 21.6% compared to 2005. By the end of 2016, China's non-fossil energy power generation capacity reached 570 million kilowatts, accounting for about 35% of the total power generation capacity.

From 2006 to 2016, the power industry cumulatively reduced carbon dioxide emissions by about 9.4 billion tons. It is becoming increasingly difficult to further explore the technological potential for carbon emission reduction in the power industry, and it is no longer sustainable to continuously promote deep carbon reduction through mandatory technical standards. Therefore, promoting the formation of new technological emission reduction potential through the construction of the carbon market has become one of the important purposes of the carbon market.

② Discover carbon prices through the carbon market, so that the value of low-carbon development is truly reflected in the economic activities and production operations of specific enterprises.

The concept that reducing carbon dioxide emissions is valuable, while emitting carbon dioxide requires an economic cost, will clearly affect enterprise producers and operators, further improving enterprises' understanding of low-carbon development, optimizing the construction, production, and operation activities of power enterprises, and improving the level of low-carbon development. At the same time, the carbon price formed by the carbon market is conducive to transmitting the cost of low-carbon development to the social level through the power market, promoting low-carbon development throughout society.

③ It is conducive to the power industry achieving low-cost emission reduction.

According to the theory of the carbon market, the core role of the carbon market is to achieve the lowest cost while achieving carbon reduction goals by leveraging market mechanisms. Due to various factors such as the operating years of power plants, regions, technology, and management levels, the cost of carbon dioxide emission reduction is different for different power enterprises. Through carbon market transactions, the overall cost of power enterprises can be minimized. For example, if there are two power enterprises, A and B, with the same allocated carbon quota. When the marginal carbon reduction cost of enterprise A is greater than the excess emission reduction cost of enterprise B, there will be a situation where enterprise A's quota is insufficient while enterprise B has a surplus. In this case, A can purchase surplus carbon indicators from B, reducing A's cost while increasing B's revenue, and overall reducing the total emission reduction cost of the two enterprises. In the long run, the role of market mechanisms will continuously force power enterprises to carry out technological innovation and promote the development and application of carbon reduction technologies.

For the power industry, the carbon market can better promote enterprises to flexibly adopt different carbon reduction technologies, structural adjustments, and optimized management methods to achieve low-cost carbon reduction.

Overall, the carbon market has the following role in promoting power structure optimization and low-carbon transformation of the power industry:

Explore greater emission reduction space in structural adjustment and carbon reduction, and through carbon price guidance, make renewable energy power generation technologies more economically competitive and accelerate the replacement of high-carbon energy power generation with renewable energy power generation.

By linking the carbon market with the power market and using the smart grid platform, promote the consumption side to digest more low-carbon electricity, and promote the low-carbonization of the supply side from the demand side.

Through the continuous improvement and expansion of the carbon market, promote the proportion of scattered coal being converted into power coal, and promote centralized utilization and centralized governance. While meeting the needs of economic and social electricity consumption and ensuring energy security, it can effectively reduce carbon emissions throughout society.

Expand the space for low-carbon development through carbon asset operation, carbon finance, and other activities.

Actions and suggestions to promote the development of the national carbon market

The construction of the national carbon market involves all aspects of the economy, society, energy, environment, and finance, and is a huge systematic project. Therefore, the following suggestions are put forward:

First, the carbon market is a mechanism led by the government and constructed by policies. Based on good top-level design, it should be problem-oriented, and pay close attention to the phased nature, unity, fairness, operability, and compatibility of the national carbon market construction. Based on the experience of seven carbon trading pilot programs and international carbon markets, following the principle of proceeding from easy to difficult, basing on national conditions, considering regional and industry differences, design, construct, and gradually improve the national carbon market.

Second, following the promotion of the national carbon market, we need to accelerate the improvement of relevant laws and regulations, formulate laws related to carbon trading, central and local administrative regulations and systems, etc., to form a complete legal system, which is the fundamental guarantee of the carbon market. At the same time, the construction of the carbon trading legal system should focus on coherence, clear levels, and internal and external coordination. Externally, it should maintain effective connection with international carbon trading laws, especially adapting to the new situation, changes, and development of the global carbon market after the Paris Climate Conference; internally, it should achieve connection and complementarity with other already issued departmental laws related to carbon emission reduction, thereby ensuring the harmonious unity of the entire carbon trading legal system.

Third, the carbon market should focus on market laws and reduce government intervention. Only when the carbon market operates under the market supply and demand mechanism and the competition mechanism can it form a reasonable carbon price, effectively and reasonably allocate emission reduction resources, achieve the survival of the fittest through market competition, and encourage enterprises to achieve energy conservation and emission reduction at the lowest cost. In addition, in order to promote the healthy development of the carbon market, we should strengthen the supporting conditions for the accuracy of emission data, the completeness of the trading platform, and strict supervision of fulfillment.

Fourth, both electricity market-oriented reforms and carbon trading are the roles of market mechanisms in the allocation of energy resources. The new electricity reform policy helps to solve the current problems of inefficient emission reduction cost conduction and the inability of enterprises to digest emission reduction pressure, and plays a crucial role in the carbon market. At present, China's electricity market and carbon market are both in their infancy. The correlation between the two markets has not been comprehensively considered in the design stage. The construction of the electricity market and the carbon market should be effectively connected to avoid contradictions and overlaps.