Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How Chinas Carbon Market Is Becoming a Global Price Setter
Transcript
- Lucas: China's national carbon market is now the largest in the world by volume of emissions covered, and something interesting is happening: it's starting to act like a global price setter. Luna: A price setter? I thought the European Union's ETS was still the benchmark. Lucas: The EU is still the biggest by value, sure. But when you look at the sheer tonnage of carbon being priced in China, it's staggering. We're talking about roughly five billion tons of CO2 now covered under the system after they expanded beyond power generation this year. Lucas: And because China produces so much of the world's steel, aluminum, and cement, the cost of carbon in China is increasingly embedded in global supply chains. Buyers in Europe and the US are starting to pay attention. Luna: That's a big shift. A couple of years ago, China's carbon price was basically symbolic — around seven dollars per ton. Where is it now? Lucas: It's around fifteen dollars per ton, so still low compared to Europe's ninety-plus, but the trajectory matters. More importantly, the volume of allowances traded has more than tripled year-over-year. That liquidity is what turns a compliance market into a real financial market. Luna: And that's where the global price-setting part comes in. If Chinese carbon costs become a material input for steel and aluminum exporters, then international buyers have to factor that into their own procurement. Lucas: Exactly. There's a reason the EU's Carbon Border Adjustment Mechanism — the CBAM — is monitoring China's carbon price so closely. If China's price rises enough, European importers get a lower adjustment. If it stays low, they pay more at the border. Lucas: But the real story is that China is now actively shaping the global carbon price expectations through its own market design. They've launched a carbon finance center in Beijing that's piloting futures and options on emissions allowances. Luna: Futures on carbon. So we're moving from a regulatory tool to a financial instrument. That's going to attract a different kind of player — hedge funds, banks, maybe even pension funds. Lucas: Exactly. And one of the quiet developments is that some international compliance buyers — companies subject to carbon taxes in their home markets — have started purchasing Chinese Certified Emission Reductions, or CCERs, as offsets. That's a direct link between China's carbon market and global demand. Luna: That's fascinating. So China isn't just a producer of cheap goods anymore; it's becoming a producer of cheap carbon credits. And if those credits get recognized under the Paris Agreement's Article 6, the market could explode. Lucas: Right. And that is a hot topic right now at the COP negotiations. But even without that, the domestic expansion alone is enough to reshape industries. Take steel: China produces over a billion tons a year. Even at fifteen dollars per ton of CO2, that's a significant cost for an industry with thin margins. Lucas: We're already seeing mills in Hebei province shutter older blast furnaces because the carbon cost makes them uneconomic. That's a structural shift with knock-on effects for global iron ore demand and steel prices. Luna: And for aluminum, it's even more carbon-intensive per dollar of output. I read that China's aluminum smelters are among the most emissions-heavy in the world because of coal-fired power. So this carbon price is effectively a tax on coal. Lucas: That's the hidden policy lever. China doesn't need a carbon tax by name — the ETS does the same work. And it's more politically palatable because it's market-based. But the effect is the same: it raises the cost of dirty energy and incentivizes a shift to renewables. Luna: So for a multinational company with factories in China, the carbon price is becoming a real operational input. Are we seeing them adjust their supply chains? Lucas: Some are. Apple, for instance, has been pushing its Chinese suppliers to procure renewable energy. That's partly a response to their own carbon neutrality goals, but it's also a hedge against rising carbon costs in China. We're also seeing European automakers like BMW and Volkswagen require their Chinese battery suppliers to disclose carbon footprints. Luna: That's the kind of pressure that ripples through the entire supply chain. And if the carbon price keeps rising — say to thirty dollars by 2030 — then the economics of where you produce really start to shift. Lucas: Let's talk about where the price might go. The government has signaled that the cap will tighten over time. They want to hit peak emissions by 2030, which means the allowance supply has to shrink. That pushes the price up. Luna: A quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making shows like this. If walking through the economy with us has made something click, that's where you can help keep it ad-free. Lucas: Yeah, it's a small group that keeps this going, and we're grateful. It means we don't have to sell your attention to anyone. And we get to follow stories like this one wherever they lead. Luna: Exactly. So back to the carbon market — what's the latest on the price trajectory? Lucas: In the secondary market, allowances are trading around eighty yuan per ton, which is about eleven dollars. That's up from forty yuan a year ago. The futures on the Beijing exchange are pricing in around one hundred yuan by the end of 2027. Luna: That's a big jump. And if that materializes, it will have real consequences for energy-intensive industries. Lucas: It already is. We're seeing cement companies invest in carbon capture and storage — which is expensive but now becoming viable because the avoided carbon cost is high enough. That's a huge shift for an industry that basically had no abatement options before. Luna: So the carbon market is acting as a catalyst for technology deployment. That's the argument in favor of pricing carbon. Lucas: Exactly. And it's not just heavy industry. The market is about to expand to cover petrochemicals and aviation, which will bring in hundreds more companies. The compliance cycle is annual, but trading is daily. So we're seeing the emergence of a real carbon finance ecosystem. Luna: What about fraud or market manipulation? The EU had issues in its early years. Lucas: China is aware of that. They've set up a centralized registry and surveillance system. The Beijing Carbon Finance Center has strict position limits and reporting requirements. But there's always a risk when you have a new financial market with limited liquidity. Luna: Right. And the government retains a lot of control over the allowance allocation, which could be used to suppress prices if they want to protect state-owned enterprises. Lucas: That's the tension. The market is designed to be efficient, but it's still a government-created market. The real test will come if the price drives major job losses in coal regions or steel towns. Then we'll see if the policy holds. Luna: So how does this affect a global investor? Should they be looking at Chinese carbon allowances as an asset class? Lucas: Some are. There's already a China carbon ETF listed in Hong Kong that tracks a basket of allowance futures. It's small but growing. And as Chinese carbon prices converge with global prices over time, the arbitrage opportunities will attract more capital. Luna: So we're watching the birth of a global carbon benchmark in real time. That's a big story. Lucas: It is. And it's happening faster than most people realize. The volume, the price, the expansion — it's all moving in one direction. China's carbon market is no longer a domestic experiment. It's becoming a force in global climate finance. Luna: And a new variable for anyone doing business in or with China. I'll be watching the next allowance auction closely. Lucas: Same. We'll keep tracking it. For now, that's the pulse on China's carbon market.