What is carbon trading?

In layman's terms, carbon trading is the right to sell carbon dioxide emissions. As climate issues become a global focus, carbon trading is gaining more and more attention as a young trading species. The main body of the carbon trading market is the enterprises that emit carbon dioxide. If there are two thermal power plants with different carbon emission levels, the less-emitting power plants can sell their extra emission credits to the power plants that emit a lot of electricity through the trading market. This can motivate enterprises to reduce their emission levels and achieve the overall effect of energy conservation and emission reduction.

Carbon trading is a market mechanism used to promote global greenhouse gas emission reductions and reduce global carbon dioxide emissions. The United Nations Intergovernmental Panel on Climate Change adopted the UN Framework Convention on Climate Change on May 9, 1992 through difficult negotiations. The first additional agreement to the Convention was adopted in Kyoto, Japan, in December 1997, the Kyoto Protocol (the "Protocol"). The "Protocol" regards the market mechanism as a new way to solve the problem of greenhouse gas emission reduction represented by carbon dioxide, that is, the right to carbon dioxide emissions as a commodity, thus forming a carbon dioxide emission right transaction, or carbon trading for short.

The basic principle of carbon trading is that one party to the contract obtains greenhouse gas emission reductions by paying the other party, and the buyer can use the purchased emission reductions to mitigate the greenhouse effect so as to achieve its goal of reducing emissions. Carbon dioxide (CO2) is the largest of the six greenhouse gases that are required to be eliminated, so this transaction is calculated in units of carbon dioxide equivalent (tCO2e), so it is commonly referred to as “carbon trading”. Its trading market is called the Carbon Market. Leading in the composition of the carbon market, rules are the initial and most important core elements. Some of the rules are mandatory. For example, the "Protocol" is one of the most important mandatory rules in the carbon market. The "Protocol" stipulates quantitative emission reduction targets for Annex I countries (developed countries and countries with economies in transition) of the Convention; Between 2008 and 2012, its greenhouse gas emissions dropped by an average of 5.2% in 1990 levels. Other rules derived from the "Protocol", such as the "Protocol" stipulates that the collective emission reduction target of the EU is that by 2012, it will be 8% lower than the 1990 emission level. The EU will then redistribute it from other member countries and set up the EU in 2005. The Emissions Trading System (EU ETS) establishes trading rules. Of course, there are also some rules that are voluntary. There are no international, national policies, or legally-enforced restrictions that are voluntarily initiated by regions, companies, or individuals to fulfill environmental responsibility. After the Kyoto Protocol came into effect in 2005, there was an explosive growth in the global carbon trading market. In 2007, the carbon trading volume jumped from 1.6 billion tons in 2006 to 2.7 billion tons, an increase of 68.75%. The increase in turnover is even more rapid. In 2007, the value of the global carbon trading market reached 40 billion euros, an increase of 81.8% from 22 billion euros in 2006. In the first half of 2008, the global carbon trading market was even at the same level as in 2007.

So how do you trade CDM in the carbon market? According to Cheng Guang, salesman of Beijing China Carbon Technology Co., Ltd., according to the Marrakesh Accord agreed at the 7th Meeting of the Parties to the United Nations Framework Convention on Climate Change in 2001, a typical CDM project started from preparation to implementation until the eventual Effective emission reductions need to undergo major steps such as project identification, project design, approval of participating countries, project validation, project registration, project implementation, monitoring and forecasting, verification and verification of emission reductions, and verified emission reduction credits. According to the UNFCCC Executive Board (EB), as a developing country, nearly 2,000 CDM projects in China have been approved by the National Development and Reform Commission, and 267 CDM projects have been successfully registered in the EB. As an intermediary company engaged in carbon market transactions, Cheng Guang said that in the process of serving enterprises, they feel that the successful registration of CDM projects with EB is a key factor in the success of trading CDM. Cheng Guang introduced that, in general, carbon market transactions include the three processes of pre-development, carbon asset development, and carbon asset project management. Each process stage includes many links. For example, in the early development stage, a project analysis should be carried out to determine which projects of the company are in line with the concept of the CDM; further information needs to be collected to estimate the emission reductions and determine the calculation methods; the sustainable development capability of the company and the future of the market Trends predict and determine development costs and development risks. In the carbon asset development phase, procedures such as project document design, seller and buyer government approval, carbon purchase agreement signing, third-party certification, and UN registration are required. Cheng Guang said: "Every CDM project has an independent file report. The Chinese part is submitted to the Chinese government for approval. The English part is submitted to third-party certification and the United Nations is registered. Registration is required to be posted on the Internet for 50 days. If there is no doubt, public notice period At the end, it means automatic registration is successful. It is learned that in the carbon asset management phase, it is necessary to focus on three aspects. First, to carry out daily management, including the monitoring of the process and the acquisition of business operations information, the purpose is to protect the company's carbon assets, stable income, to avoid the situation in the absence of emission reductions, communicate with buyers in advance to take preventive measures. Second, according to the actual emission reduction, according to the company's requirements, the project inspection report will be issued quarterly or annually. Third, third-party certification of emission reductions, registration in the United Nations, and final delivery of carbon assets. In these processes, what costs do companies need to deliver? According to Cheng Guang, the general expenses include the third party's review of the project (18,000 Euros), registration fee (0.2 US dollars/annual verified emission reductions), monitoring verification and certification costs (about 10,000 U.S. dollars), and the UN CDM Directorate. It will collect the applicable costs (2% of the total verified emission reductions), the administrative expenses (0.2 US dollars/tons of verified emission reductions), and the environmental resource tax (2% of the total verified emission reductions) imposed by the Chinese government. As for the role played by the intermediary companies, Cheng Guang stated that it identifies CDM projects, finds and screens carbon buyers for project owners, assists enterprises in negotiating with buyers, and helps companies maximize their profits in emission reduction transactions. Ultimately, the completion of CDM projects is their main task. According to the three mechanisms of carbon trading, carbon trading is divided into two types:

Allowance-based transactions: refers to the transactions of emission reduction units that are generated under total control. For example, the European Union Allowances (EUAs) trade of the EU's EU emissions trading system is mainly The transaction of excess emission reductions between countries that have reduced the Kyoto Protocol is usually a spot transaction.

Project-based transactions refer to the transactions of emission reduction units resulting from the implementation of emission reduction projects, such as emission reduction licenses under the CDM and emission reduction units under the joint implementation mechanism. The emission reduction transactions, which are mainly generated through the cooperation of country-to-state reduction plans, are usually bought and sold in advance.