Sustainable Finance Final

Analyze the past trading price and volume of China’s carbon emission trading market and forecast the future trend

Introduction

China’s carbon emission trading market was officially launched on July 16, 2021. In the first period of implementation, 2,162 key emitters in the power generation sector were included, covering about 4.5 billion tons of carbon dioxide emissions annually, making the Chinese carbon emission trading market the largest carbon market in the world (Chinanews.com). Compared with other carbon emission trading markets in the world, such as the EU carbon emission market, China’s carbon emission trading market is still very young. As of today, China’s carbon emission trading market has only been open just for more than a year. However,as far as I am concerned, the future prospects of this market in China are promising. As people and the government pay more attention to global warming, more and more enterprises will be encouraged and driven to join the market, leading to the establishment of more widespread and standardized carbon emission trading in China. In a market, the most important factor that determines its development by affecting people’s expectations and behaviors is the price of the commodity. Therefore, this article aims to predict the future price of carbon emissions in China to provide an outlook of the Chinese carbon emission trading market, mainly by analyzing the trading volume and price of each working day since the market opened.

Data Collection

The data I used for this analysis are all from the Chinese official account, “Shanghai Environment and Energy Exchange”. Inaugurated in May 2008, Shanghai Environment and Energy Exchange is China’s first environment and energy trading platform approved by Shanghai Municipal Government. In 2021, designated by the Ministry of Ecology and Environment of China,the exchange became an official institution for the construction and operation of the national carbon emission trading system. It is responsible for the account opening and operation maintenance of the national carbon emission trading system, the construction of trading institutions and market capacity. Its business covers carbon emission trading, China Certified voluntary emission reduction trading, carbon emission forward product trading, carbon finance and carbon advisory services. To analyze the development of China’s carbon emission trading market, I manually record the opening price, closing price, maximum price, minimum price, trading volume, and trading turnover for each trading day for this exchange’s report.

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Data Analysis

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Based on Graphs 1, 2, and 3, it is easy to see that a relatively large amount of bulk trade and listing activity occurred at the end of 2021. In addition, it is worth noting that within a few days after the opening, there was a relatively large volume of listed trading. Other than that, the volume of listed trading is relatively stable below 50,000 tons. According to Graph3, after July 2022, the trading activities of the bulk trade were not frequent, and the trading volume of many trading days was 0.

According to Graph4, the trading turnover of China’s carbon emission trading market mainly comes from bulk trading. Although the trading turnover of listed trades is generated every workday, in terms of the total amount of turnover, the trading turnover of bulk trades accounts for a larger proportion.This may be because the price of the block trade is lower than the listing price, attracting more buyers to choose this method of trading.

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According to Graph5, starting from late August 2021, the price plummeted from 60 yuan/ton to 43 yuan/ton, a decline of about 28.33%. I think one of the main reasons for the sharp drop in prices is that there is less demand. Starting from September 2021, the Chinese government has implemented a massive power rationing policy across the country.(Carbon Breif ).There were even prolonged and large-scale power outages. This policy has affected many provinces and cities, including the developed coastal areas in the east. As a result, plants operate for fewer hours, so they need less carbon. Such decrease in demand will lead to a decrease in price.

In Graph 6, I add 50 and 150-Day SMA lines on the original candlestick chart.

In Graph 7, I add 50 and 150-Day EMA lines on the bar chart.

As we can see from Graphs 6 and 7, the price of China’s carbon emission permit was relatively volatile at the beginning of the market opening. The simple moving average and the exponential moving average both show significant price volatility until January 2022. However, after January 2022, both the simple moving average and the exponential moving average stabilized at around 57 yuan/ton. In general, the EMA line and SMA line show similar results, but the EMA line convergence rate was faster than the SMA line.

## [1] "2022-11-02"

## [1] "2021-07-16"

## # A tibble: 1 × 2
##   max_high min_low
##      <dbl>   <dbl>
## 1     61.1    38.5

In Graph 8, I set the parameter for the Bollinger Bands indicator to 20. According to Grape 8, the opening of the Bollinger band is getting smaller, which means the price fluctuation is also getting smaller. Investors need to take note. As the Bollinger band gets smaller, the volatility of the price decreases, and the forces of both sides converge, the stock price may choose the direction of the break. The smaller the opening, the greater the chance of a price breakout.

Prediction

Volume

According to the above analysis, future bulk trading will still occupy a large share of China’s carbon emission trading market in terms of total volume and total turnover. Buyers should still prefer to bulk trade. However, that doesn’t mean listing trading will weaken. According to the Listing Agreement Trading Volume trend, the future listing volume should still grow.

Price

According to the simple moving average and the exponential moving average, in the future, the price of carbon emission will be stable and there will not be too much fluctuation. The price will be stable between 56-58 yuan/ton. And the price will not suddenly drop too low, such as the previous lowest 38.5 yuan/ton. From the perspective of controlling global greenhouse gas emissions, the gradual increase of carbon price is the market trend. A gradual increase in the price of carbon would further reduce greenhouse gas emissions. Although the price is expected to level off in the future, the possibility of a breakthrough cannot be ruled out.

Conclusion

China’s carbon emission trading market still has a long way to go before it becomes mature. The government needs to effectively raise the awareness and capacity of enterprises to reduce greenhouse gas emissions and accelerate the green and low-carbon transition. At the same time, the government needs to further strengthen the market function. On the basis of the successful operation of the carbon emission trading market, the Chinese government should gradually expand the industrial coverage of the carbon emission trading market and enrich the trading subjects and trading methods. It is hoped that China’s carbon emission trading market can be more standardized.