In September 2020, President Xi Jinping clearly put forward the “30·60” target at the UN General Assembly, and realizing low-carbon development has become a national strategy. Among all the ways to reduce carbon emissions, carbon emission rights trading is the most effective market-based method, and the prerequisite for fiscal and taxation measures such as carbon taxes and subsidies to function is that market-based trading forms a reasonable price of carbon emission rights as a reference. The price of carbon emission rights will also effectively guide R&D and medium- and long-term investment related to carbon peaking and carbon neutrality.
Since 2011, my country has piloted carbon emissions trading in Beijing, Shanghai, Tianjin, Chongqing, Guangdong, Hubei, and Shenzhen. However, in the pilots, market rules are not uniform, government interventions vary widely, and carbon allowance prices vary widely And other issues. At the end of June 2021, the national carbon emissions trading market will be launched in Shanghai. The National Carbon Trading Registration System (China Carbon), located in Hubei, has completed account opening procedures for the first batch of 2,225 compliance companies, all of which are key emission units in the power generation industry.
At this stage, the trading products of the national carbon emission rights trading market are mainly carbon emission credits allocated to key emission units within a specified time. The Ministry of Ecology and Environment formulates total quotas and allocation plans in accordance with the national total greenhouse gas emission control and stage targets. The initial distribution will be free, and paid distribution will be introduced in due course in accordance with national requirements. Under carbon emission quotas, companies can adopt more advanced low-emission equipment, carry out low-emission retrofits to existing equipment, or purchase carbon emission allowances from companies with surplus carbon emission allowances.
As a right certificate for greenhouse gas emission, carbon emission right is a new asset type created by human society according to the needs of economic and ecological development and based on economic theory. It is of epoch-making significance in financial development. This asset has distinct financial attributes, including homogenization, divisibility, registration and custody, and spot and futures trading. Theoretically, the same amount of greenhouse gas emissions in different countries and regions have the same impact on atmospheric temperature, and the carbon emission rights created by different countries and regions should also be equivalent to each other.
Similar to the logic that my country has moved from multiple local carbon emission trading pilot markets to the national carbon emission trading market, if the carbon emission trading markets of different countries and regions become interconnected, a unified global carbon emission trading will be formed. The market will be more efficient, more reasonably priced, and will make the prices of carbon emission rights in different countries and regions more consistent. In this scenario, regions with relatively high carbon emission allowance prices are equivalent to providing financial support to regions with relatively low carbon emission allowance prices. However, the design of carbon emission trading markets in different countries and regions is very different. How to move towards interconnection? For example, the European Carbon Emissions Trading System (EU-ETS) has been in operation since 2008, but the United States has no federal-level carbon emissions trading market to cover the regional greenhouse gas trading plans (RGGI) and California’s carbon emission cap and trading system have the most scale and influence.
Another important issue in the carbon emissions trading market is the participants. In theory, in addition to key emission units, institutional investors and individual investors can also be involved. They may be interested in the investment value of the preservation and appreciation of carbon assets, or they may be responsible for serving green transformation and development. The diversification of participants helps to improve the efficiency of price discovery in the carbon emission trading market, which is beneficial to the healthy development of the market. In addition, there are a large number of institutions and individuals who are willing to contribute to green transformation and development, although they will not directly participate in the carbon emissions trading market. How to design incentive mechanisms for these institutions and individuals so that the carbon emissions trading market can exert greater social effectiveness?
Blockchain-based carbon emission trading market interconnection mechanism
Two types of main participants in the interconnection mechanism
First, in different countries and regions, corresponding to the carbon emission rights trading market, there is a carbon emission rights registration system, which undertakes the functions of carbon emission rights confirmation registration, transaction settlement, distribution and performance, which is equivalent to the securities market. Central Securities Depository (CSD) and Securities Settlement System (SSS). On the one hand, the carbon emission rights registration system is connected with the emission reporting system to obtain emissions and verification data of enterprises within the jurisdiction, and provide support for carbon allowance allocation and compliance; on the other hand, it is connected with the carbon emission rights trading system and the clearing bank to provide carbon Asset transaction change confirmation and fund clearing and settlement services.
Second, in different countries and regions, select a certain number of important participants in the carbon emission trading market (such as key emission units) and allow them to buy and sell carbon emission allowances with overseas counterparties. Such participants are equivalent to importers and exporters of carbon emission rights.
The core of the interconnection mechanism is a consortium chain called “interconnection network.” The nodes of the alliance chain are operated by the carbon emission rights registration system participating in the interconnection mechanism.
Carbon emission rights are embodied as digital certificates on interconnected networks. In each country and region participating in the interconnection mechanism, if the participating institution of that country applies to the national carbon emission rights registration system, the carbon emission rights registration system will generate a unit of number on the alliance chain for every unit of carbon emission rights destroyed. Voucher (digital voucher issuance); on the contrary, if the participating institution in the country destroys a unit of digital voucher on the alliance chain, the carbon emission rights registration system will generate one unit of carbon emission rights (digital voucher redemption). This is to maintain the discipline and integrity of the carbon emission rights trading market and to prevent inflated carbon emission rights or digital certificates.
The carbon emission rights created by different countries and regions are equivalent to each other, and the digital certificates generated by different carbon emission rights registration systems are also equivalent to each other, and they should have the same price at the same time. This provides a basis for cross-border transactions of digital certificates.
Participants in different countries and regions can negotiate settlement currencies for digital voucher transactions on interconnected networks. If a compliant stable coin is introduced, the settlement efficiency will be higher, and the payment of money (DvP) can be realized through smart contracts.
Assuming that a participant obtains a certain number of digital certificates through buying and selling, and applies for redemption from the country’s carbon emission rights registration system, then the carbon emission rights registration system will generate the same amount of carbon emission rights and grant them to the participant . These carbon emission rights can then enter the country’s carbon emission rights trading market and sell them to other institutions in the country.
In addition to facilitating the cross-border trading of carbon emission rights, the “interconnection network” also enhances the mutual trust between the carbon emission rights registration systems of different countries and regions through the credit enhancement function of the alliance chain, and can also be compatible with the carbon emissions of different countries and regions. Differences in the right trading market (such as different systems used, different trading hours, and different price identification methods, etc.).
If the number of digital certificates of carbon emission rights that can be generated and traded on the interconnection network is not limited, then driven by the arbitrage mechanism, the prices of carbon emission rights in different countries and regions will tend to be consistent. However, in the early development of the interconnection mechanism, in order to avoid a major impact on the carbon emission trading market of various countries and regions (especially when the carbon emission trading market of many countries is immature), it is necessary to deal with the generation of and The number of digital certificates for trading carbon emission rights shall be restricted. The general principle is that developing countries should be allowed to sell a certain amount of negative carbon allowances to developed countries through the interconnection mechanism each year to promote the green transformation and development of developing countries.
Interconnection limits can be dynamically adjusted according to needs, and alliance chains and smart contracts will facilitate such adjustments. The higher the limit, the more obvious the role of the interconnection mechanism to “levelize” the price of carbon emission rights in different countries and regions.
Blockchain-based carbon credit mechanism
How do general institutions and individuals participate in the carbon emission trading market? If they are allowed to enter the market directly, three issues need to be considered. First, the pricing of carbon emission rights requires high professional knowledge, and ordinary institutions and individuals without relevant knowledge may encourage market speculation. Second, in the early development of the carbon emission rights trading market, the price of carbon emission rights will not be very high, and small transactions may not be economical in terms of handling fees. Third, it will increase the management difficulty of the carbon emissions trading market.
Drawing lessons from my country’s A-share market, the carbon emission trading market adopts a membership system, mainly for institutional participants, but the participant groups must be diversified on the current basis, such as absorbing financial institutions such as banks, securities companies, and insurance companies to allow carbon emissions The emission trading market has become an integral part of the financial market. General institutions and individuals can open accounts with real names in the national carbon trading registration system through some special members of the carbon emissions trading market (they are equivalent to securities companies in the carbon emissions trading market), and place orders through these special members. In other words, the carbon emissions trading market adopts a direct holding model. The carbon emission rights held by general institutions and individuals are managed by these special members, and the carbon emission rights held by the special members themselves and on behalf of customers are recorded in the national carbon trading registration system.
Under this institutional arrangement, carbon emission rights will truly become a mainstream asset type that can be owned by the public. In the future, in everyone’s financial apps, in addition to showing how many deposits, stocks, funds and financial products, etc., will also show how many carbon emission rights there are.
In addition to purchasing carbon emission rights as investment products, general institutions and individuals can also make their own contributions to carbon peaking and carbon neutrality by purchasing negative carbon allowances. This is related to the country’s certified voluntary emission reduction (CCER). At present, there are already many apps that help general institutions and individuals assess their carbon footprint. For example, based on the evaluation results, individuals can purchase negative carbon allowances through special members of the carbon emission trading market as a hedge against the amount of carbon emissions generated by a domestic travel. With the growing awareness of the whole society for green transformation and development, this type of application will have more and more application scenarios.
In order to make better use of the “gathering less and more” effect of the carbon emission reduction efforts of general institutions and individuals, and to make carbon emission reduction penetrate into all aspects of social life, a method worth trying is carbon credits based on the blockchain. The mechanism design is as follows:
The Carbon Points Alliance is composed of organizations that play an important role in social life, such as power grids, gas networks, public transportation networks, home appliance companies, automobile companies, shopping malls, restaurants, and other consumer places.
The member institutions of the alliance run the alliance chain, generate and issue carbon credits to their users on the alliance chain. Carbon credits have no other purpose other than conversion into carbon emission rights, especially they cannot be directly traded in fiat currency.
The member institutions of the alliance grant users carbon credits that reflect their carbon emission reduction efforts based on their users’ behaviors in relevant scenarios and with reference to the carbon footprint assessment results. The carbon credits issued by the same institution are universal, but the carbon credits issued by different institutions are not universal. Through smart contracts, a user can easily manage his own carbon credits from multiple institutions. Some application scenarios may involve multiple alliance member institutions, which, with the assistance of smart contracts, can issue their own carbon credits to users without conflict.
Each alliance member institution accumulates the carbon credits issued to users, which reflects the institution’s efforts to promote carbon emission reduction in its own application ecology. After quantitative verification, it can be linked to the CCER mechanism. Alliance member institutions can obtain carbon allowances.
The member institutions of the alliance will redeem and reward users with a certain percentage of the carbon allowances based on the users’ carbon credits. The exchange rules are formulated by the member institutions of the alliance. Users who have obtained carbon allowances through different institutions and pooled together (carbon allowances are universal) can achieve the effect of “gathering less into more”, giving users more motivation to participate in carbon reduction. “Don’t do something small without doing something good” needs economic incentives as support.
In the blockchain-based carbon credits, the blockchain plays a role in establishing mutual trust between different alliance member institutions. On the one hand, smart contracts help different institutions run their own carbon credit system in parallel, and on the other hand, they also help users better manage their diversified carbon credit assets.