Wang Zhixuan: “Electric Power Experience” Leads the Carbon Market

A few days ago, Wang Zhixuan, Vice President of the China Electricity Council, accepted an interview with the "China Power Enterprise Management"(CPEM) magazine. He said in the interview that the "2060 Carbon Neutrality" target puts forward a more severe test for the carbon emission reduction work in China, and also sets an overall timetable for the energy revolution and low-carbon development. In the tool library of emission reduction policies, the carbon market is one of the most important tools. At present, under the pressure of climate change commitments, the construction of global and Chinese carbon markets have entered the "Fast Lane". The electric power industry is a breakthrough in building a national carbon market.

Promoting low cost carbon emission reduction by market mechanism

CPEM: The carbon emission to peak in 2030 and carbon neutralization in 2060 in China is a very challenging goal. In some developed countries, there is a transition period of 50-70 years from carbon peak to carbon neutral, while the time left for China is only about 30 years. What kind of requirements and challenges does such a goal promise put forward for China's economic system and energy system?

Wang: Compared with the 2015 target, the 2020 target is firstly that China’s carbon dioxide emission peak time has been advanced, that is, from the original "around 2030" to "before 2030"; secondly, the carbon neutral target is proposed for the first time.

This goal requires the transformation of China's economic system to a green, low-carbon and circular development pattern, and the energy system to a green, low-carbon, safe and efficient pattern. The technology system represented by the new infrastructure is an important foundation and support for the realization of the first two systems. The core of circular low-carbon development is to reduce carbon emissions. However, for China, the largest developing country in the world, the largest energy superpower with the largest coal production, consumption and trade volume and coal consumption dominating the total energy consumption, a county with the world's largest power system based on coal power, reducing carbon emission is undoubtedly a huge challenge, which means that China's production method and life style will undergo a major change from high-carbon to medium-carbon and low-carbon.

In the " 14th Five-Year Plan", the positioning of coal and electricity should be further clarified. In terms of ensuring energy security and stable supply, coal-fired power should play the role of supporting power supply as basis and important load center. In promoting the development of new energy, it should play the role of main power source with flexible adjustment, and play the role of regional energy base in the large-scale optimal allocation of energy resources. While strictly restricting the building of new coal-fired power plants, it is necessary to improve the efficiency and economic benefits of the existing coal-fired power plants as far as possible. For the power plants close to the design life, targeted assessment and technical transformation should be carried out to make them continue to play their roles.

CPEM: What is the position of carbon market in the whole carbon emission reduction policy framework? What suggestions do you have for the upcoming national carbon market?

Wang: The carbon market is one of the important carbon reduction policy tools recognized by the international community, with a solid theoretical foundation and practical experience. Compared with relevant policy measures such as administrative directives, carbon taxes, carbon emission mandatory standards, renewable energy consumption guarantee mechanisms, etc., the carbon market mechanism featuring “cap and trade” has a clearer overall emission reduction goal. The carbon price formed through market competition can effectively stimulate the enthusiasm of enterprises and individuals to reduce emissions, and realize the optimal allocation of emission allowance resources within the whole society.

After years of accumulated experience in carbon market pilots, the national carbon emissions trading market is about to start. It is currently determined that the first batch of industries will only include the power generation industry, and will gradually be expanded in other industries in the future.

CPEM: Quota allocation is a key issue in the establishment of carbon market. Would you please talk about the principle of quota allocation and what factors should be considered?

Wang: Quota allocation is the core of carbon trading system, and quota allocation should reflect the basic and public characteristics of the power industry. The allocation of quota should consider the following aspects: First, to make low-cost carbon reduction as the goal orientation, so that it can be operated and implemented easily. The second is to give consideration to efficiency and fairness, fully consider the timing of system optimization, and promote the improvement of energy efficiency of the whole society. The third is to optimize the power generation mix and increase the proportion of coal used for power supply in the total coal consumption, especially to strengthen the substitution of scattered coal burning; The fourth is to establish a regular quota adjustment and emergency quota adjustment mechanism to avoid potential risks that the carbon market may bring to power companies. The fifth is to balance the allocation of quotas among industries, comprehensively consider the development potential of each industry from the national level, and reasonably position each industry in the carbon trading market to avoid uneven policies that vary from industry to industry.

Seize the institutional opportunity in green transformation

CPEM: Regarding electricity as a breakthrough in the establishment of the carbon market, what impact will it have on the power industry? How to seize the opportunities and respond to the challenge of reducing emissions?

Wang: First of all, the electric power industry is an important area of greenhouse gas emissions, and also the main focus of tackling climate change, and is the key to achieving the national carbon emission reduction target. Secondly, major countries or regional carbon markets in the world have incorporated the power industry into the market, which provides rich experience for the construction of China's power industry carbon market. Third, the electric power industry in China has advantages to develop a carbon market, including solid data foundation, sophisticated regulatory system, and a high level of management. Based on the above reasons, the electric power industry became the first important industry to be included in the carbon market.

The electric power industry’s participation in the carbon market (initially the power generation industry) has many impacts: First to promote the power generation industry and power generation companies to pay more attention to carbon emission reduction, and carbon will be a valuable resource that will affect the production and operation of enterprises; Second, enhance the capacity building of carbon emission management of the industry and enterprises; Third, providing a low-cost market approach for carbon reduction when the space for energy saving and consumption reduction in the power generation industry is becoming smaller; Fourth, promoting the transformation of power industry to clean and low-carbon, and further promote the rapid development of low-carbon or zero carbon renewable energy.

At the same time, renewable energy will usher in huge development opportunities. With the gradual introduction of offset mechanism in China's carbon market, emission control enterprises are allowed to use CCER to fulfill the contract. Renewable energy will become an important field of green investment and financing, which will strongly support the low-carbon transformation of energy and power sector.

CPEM: How does the embryonic carbon market coordinate and promote each other with the reforming electricity market?

Wang: At present, the electricity market and carbon market in China are both in the initial stage. The prerequisite for a good connection between the two is to accurately grasp the relationship between the two. Electricity price and carbon price are closely related and interact. From the experience of foreign countries, on the one hand, carbon price will have an important impact on electricity price and will be reflected in the price of electricity wholesale market (spot market) and affect the price ranking. On the other hand, the electricity market will also lead to carbon price fluctuations. Taking China's carbon market as an example, the carbon emission of power generation industry accounts for more than 70% of the total emission of the national carbon emission trading system. Any adjustment of the power generation industry will have an impact on the carbon price.

Therefore, the synchronous promotion of electricity market reform and carbon market is conducive to further stimulate market vitality and smooth electricity price transmission mechanism. In the future, the two will be gradually integrated. The carbon price will be found through the carbon market, and the cost of carbon emission will be transmitted to all aspects of social production and life, so as to better play the decisive role of the market in the allocation of climate capacity resources, to promote the whole society to gradually form the awareness of reducing carbon emissions, and to provide long-term stable carbon price expectations for the market. And thus, it will affect the investment decisions and consumption of stakeholders behavior, promote energy conservation and carbon reduction technology innovation and technology application, and promote China's economic development and low-carbon transformation of industrial structure.

International experience of carbon market and China's path

CPEM: The carbon market is an imported product. What are the experiences and lessons that we can learn from the typical foreign carbon markets, such as the EU carbon market? Compared with foreign carbon markets, what are the unique national conditions faced by China's carbon market?

Wang: In terms of quota allocation, the EU experienced a sharp drop in quota prices during the first phase of the EU’s compliance period due to over-issuance of quotas and oversupply in the market. Therefore, it is very important to consolidate the basis for emissions data, formulate reasonable quota allocation plans, and strengthen market supervision on the carbon market. The EU has always regarded the carbon market as the cornerstone of its climate policy, which has stabilized the confidence of companies and investors participating in the carbon market, and companies that control emissions are also confident in the carbon market mechanism.

The stability and consistency of carbon market policies are important. The EU has successively promoted the reform of the carbon market system and achieved the expected emission reduction effects. The EU carbon market adopts a "top-down" emission reduction target decomposition method, and allocates the EU's overall climate target to each member state, which is binding. In terms of transactions, due to the high degree of liberalization of the electricity and energy market in the European Union, energy enterprises have always set up a complete trading team, responsible for coal, natural gas, and electricity trading, that is skilled in the use of various financial instruments and derivatives. For Chinese enterprises, it is also necessary to strengthen the construction of trading teams and the training of energy trading practitioners.

As the largest developing country in the world, China needs sufficient low-cost energy to meet the needs of economic growth. The construction and operation of China's carbon market must adhere to the principle of gradual development, put forward a reasonable phased path, and timely assess and revise the path according to the real-time development situation, so as to avoid plans beyond reality at the beginning and leading to the overall decline of the market.