China's regional carbon exchanges evolve into testbeds for expansion, new products

China is using its regional carbon exchanges as test beds for expanding its carbon ecosystem, including the rolling out of experimental environmental products, trialing carbon frameworks in new economic sectors and preparing for global cross-border carbon trades and carbon taxes.

The move represents an evolution in the role of the pilot carbon exchanges that were set up in different provinces and cities since 2013 to test the rollout of the national carbon market locally, before national-level implementation.

The eight pilot exchanges, hosted by Beijing, Tianjin, Shanghai, Hubei, Chongqing, Shenzhen, Guangzhou and Fujian, were meant to test run regional emission trading scheme or ETS and provide trading platforms for domestic voluntary credits called China Certified Emission Reductions or CCERs.

Over the years, these exchanges have specialized in niche areas of carbon policy or carbon markets and, with the national compliance and voluntary carbon markets already launched, will now find a new role in Beijing's climate plan.

New ETS sectors

China's national ETS currently covers only power generation and the Ministry of Ecology and Environment, or MEE, expects seven more sectors such as -- iron and steel, non-ferrous metals, building materials, refining and petrochemicals, chemicals, papermaking and civil aviation -- to be covered by 2030.

There is a wide swathe of sub-sectors and industries that are not in the pipeline for the national ETS but are already being regulated by local carbon exchanges.

Exchanges in Shenzhen, Beijing and Shanghai have started regulating some tertiary sectors such as data centers, hotels and shopping malls. Shenzhen and Hubei carbon exchanges have started enrolling light manufacturing industries such as food and beverage, electronics and medical devices.

Besides civil aviation, Shanghai's carbon exchange is incorporating more transportation sectors into its ETS, such as shipbuilding, car manufacturing, railways and ports.

Tianjin's regional ETS has started putting a price on emissions from upstream oil and gas exploration and production, on top of refining and petrochemical production. The municipality is one of the country's hubs for oil and gas industries.

These test beds allow new sectors to become familiar with complex carbon accounting procedures and give Beijing the flexibility to decide where to expand the national ETS in the next decade.

Cross-border carbon trading

China has not opened its gates to foreign companies to trade domestic CEAs or voluntary CCERs but the carbon exchanges in Shenzhen and Hainan have plans to kick off cross-border trading.

In 2014, the Shenzhen exchange obtained a license that allowed foreign companies to trade Chinese carbon products listed on its platform in all currencies, with no cap on trading volumes.

As of H1 2024, the total value of cross-border trades through the Shenzhen exchange reached Yuan 247 million ($34.66 million), Liu Yang, general manager, said at an industry forum in July, adding that participants included multinational companies such as BP.

According to the local government's plan, the Shenzhen exchange will also work with Hong Kong and Macau, and the neighboring Guangzhou carbon exchange, to develop a regional carbon market in the Greater Bay Area.

In 2022, Hainan International Carbon Emissions Exchange was established despite no local ETS. It is expected develop into an international trading hub of environmental products in line with plans to shape the island province in southern China into a free trade port.

Hainan has been working with foreign exchanges such as European Energy Exchange, US-based Intercontinental Exchange, Bursa Malaysia, and Singapore's Climate Impact X, an exchange official said at the same event, without disclosing details.

The official said Hainan will start with facilitating trades of international carbon credits issued by Verra and Gold Standard, and international renewable energy certificates or I-RECs, instead of China's domestic products.

Financial products

Some regional exchanges are taking the lead in developing financialized carbon products, to emulate China's successful commodities exchanges like Dalian Commodity Exchange, Shanghai Futures Exchange, and Zhengzhou Commodity Exchange and high liquidity futures markets like iron ore and soybeans.

These include the Shanghai, and Guangdong's Guangzhou and Shenzhen carbon exchanges, which are in cities at the heart of China's financial and industrial clusters. Guangzhou's carbon exchange has been working with Guangzhou Futures Exchange to launch the country's first carbon futures product.

Shenzhen and Shanghai's carbon exchanges offer financial services that treat carbon products like conventional assets. Their offerings include carbon bonds, carbon funds, as well as carbon pledge and repurchase agreements, although these services still have limited demand, according to market sources.

Consumer products

Other exchanges like Sichuan United Environment Exchange (SUEE), set up in 2016, is innovating in a unique space -- new products under the country's Tanpuhui program that rewards consumers who reduce their daily carbon footprints.

SUEE was initially designed to trade CCERs, China's voluntary carbon credits, and with no plans for any regional ETS in Sichuan province, which is known for tourism, pandas and rich forestry resources. Over time the exchange has emerged as one of the most active CCER markets for renewable and nature-based credits.

Sichuan established a Tanpuhui program that rewards consumers for purchasing low-carbon goods and services with panda souvenirs. This has become one of the most active Tanpuhui programs in China attracting over two million participants, official data showed.

Sichuan now plans to evolve the scheme to list curated Tanpuhui credits that can be traded by companies to offset the carbon footprint of their operations and events, Jiang Jieping, Vice President of the exchange, said at July's forum.