China's plans to launch a unified carbon market later this year will create the largest experiment to date on carbon trading.
While it will start on a small scale with possibly just the power sector covered, it will eventually cover the major polluting sectors in China. In addition, China has ambitions to expand domestically -- but also internationally. Yet before it can achieve this grand vision, there are some important and practical steps that must be taken.
Earlier this month, the Paulson Institute and the Green Finance Committee (GFC) of China hosted the China Carbon Market Roundtable. Close to forty leading experts from different fields of finance, trading, and environmental policy met to discuss the challenges of launching this important initiative and develop policy recommendations to help ensure its success. This roundtable is the first in a series that the Paulson Institute and the GFC will convene over the next year.
A few key themes emerged from the discussions:
Regulation: It is strongly recommended that while regulation is important, it is better to have less in the beginning. Too much regulation will stifle trading, so better to let the trading start strong and have the regulatory structure "catch up".
Legal Framework: It is important for a world-class legal structure to be developed and enforced, but it still does not exist for carbon markets in China.
Policy Coordination: There are many ministries and regulators involved in the launch and oversight of the carbon market, but the reporting lines are unclear.
Governance: It is vital to have a clear and transparent governance structure for both governments and the carbon market exchanges.
Capacity Building: As it is such a new field, few experts have the environmental and trading knowledge to support the effective launch and operation of the unified carbon market.