The launch of the national carbon trading market brings five major opportunities

Recently, the State Council executive meeting pointed out that based on pilot projects, the nationwide carbon emission trading market for the power generation industry will be launched for trading at an appropriate time in July this year. Next, the industry coverage will be steadily expanded to control and reduce greenhouse gas emissions through market mechanisms. This means the national carbon trading market will be implemented this month.

Industry insiders indicate that unlike the "dual peak" and "dual decline" model in Europe and the US, China's energy consumption and carbon emissions are still in a "dual rise" phase. With the launch of the national carbon emission trading system, China is expected to become the world's largest carbon market, with a huge market capacity covering emissions exceeding 4 billion tons and a transaction volume exceeding 100 billion yuan. From the perspective of specific industries, considering the potential impact of carbon trading on various sectors, five major sectors—carbon monitoring, zero carbon emissions, new energy vehicles, carbon consumption, and green buildings—present investment opportunities.

1. Event-driven: The national carbon trading market is about to launch.

On July 7, 2021, the State Council executive meeting pointed out that based on pilot projects, the nationwide carbon emission trading market for the power generation industry will be launched for trading at an appropriate time in July this year. Next, the industry coverage will be steadily expanded to control and reduce greenhouse gas emissions through market mechanisms.

On July 12, Ying Yong, Secretary of the Hubei Provincial Party Committee, emphasized during his research on carbon market construction at the Hubei Carbon Emission Rights Trading Center that great importance must be attached to carbon market construction, and the national carbon emission rights registration system must be built to high standards; next, according to national deployment requirements, all tasks for the construction of the national carbon emission rights registration system must be completed well.

Carbon trading refers to the process in which the government allocates an upper limit of greenhouse gas emissions to each enterprise in the form of emission quotas, and enterprises freely sell their emission quotas.

Since 2021, the Ministry of Ecology and Environment has successively issued market management rules for carbon emission rights trading, further improving the unified national carbon emission rights trading system. On January 5, 2021, the Ministry of Ecology and Environment announced the "Administrative Measures for Carbon Emission Rights Trading (Trial)," comprehensively covering key elements and the full management process of the national carbon market, and officially launched the first compliance period for the power generation industry in the national carbon market.

The "Administrative Measures for Carbon Emission Rights Trading (Trial)" officially came into effect on February 1. During the first compliance period from January 1 to December 31, 2021, 2,225 power generation enterprises emitted according to their allocated carbon emission quotas. Meanwhile, in May, the Ministry of Ecology and Environment issued the "Carbon Emission Rights Grading Management Rules (Trial)," "Carbon Emission Rights Trading Management Rules (Trial)," and "Carbon Emission Rights Settlement Management Rules (Trial)," providing foundational guidelines for building the entire national carbon market system.

In addition, on June 22, the Shanghai Environment and Energy Exchange issued the "Announcement on Matters Related to the National Carbon Emission Rights Trading," standardizing national carbon emission rights trading and related activities, clarifying details such as trading periods and trading times. The national carbon emission rights trading institution is responsible for organizing centralized and unified national carbon emission rights trading, marking the countdown to the launch of the national carbon market.

2. Market prospects: China's carbon trading market has huge capacity.

Currently, 54 countries worldwide have reached peak carbon emissions, accounting for 40% of global carbon emissions. As a strong advocate for addressing global climate change and reducing greenhouse gas emissions, the European Union as a whole reached peak carbon emissions as early as 1990. Nine member countries including Germany reached their emission peaks in 1990, while the remaining 18 member countries reached their peaks between 1991 and 2008. The United States reached its carbon emission peak in 2007, more than 15 years later than Germany, the UK, France, and Eastern European member countries in the EU.

According to data from BP's "2020 World Energy Statistics," the main carbon emission sources in the EU are energy industry, transportation, manufacturing, and other energy activities. Carbon emissions from energy activities accounted for 76.94% of total emissions, with a peak emission of 4.854 billion tons of CO2 equivalent and a per capita emission of 10.28 tons of CO2 equivalent. The US peak emission was 7.416 billion tons of CO2 equivalent, accounting for 22.8% of global emissions, with a per capita emission of 24.46 tons of CO2 equivalent, 138% higher than the EU per capita level.

According to World Bank statistics, when the US reached its carbon peak in 2007, its GDP was 14.45 trillion USD, per capita GDP was 48,000 USD, the Chicago Climate Exchange transaction volume was 23 million tons with a transaction amount of 72 million USD, and the transaction amount rose to 309 million USD in 2008.

Unlike the "dual peak" and "dual decline" model in Europe and the US, China's energy consumption and carbon emissions are still in a "dual rise" phase. Since the EU carbon market was established in 2005, there is a 15-year gap from the 1990 carbon peak, and the emission peak times of member countries span 20 years. Therefore, the scale of China's carbon market is estimated based on the EU's 2005 carbon trading volume as a proportion of total emissions and the ratio of carbon trading market emission value to GDP in the EU's second phase in 2013.

In terms of carbon emission proportion, in 2005, the EU's carbon trading volume accounted for 38.43% of total emissions. Using the same proportion as a benchmark and based on the estimated 1.0941 billion tons of carbon emissions at China's 2030 carbon peak, the carbon emission quota trading market size is expected to reach 4.205 billion tons. China's GDP is expected to approach 300 trillion yuan in 2030. According to the EU's second phase, where the carbon trading market accounts for 0.005% of GDP, China's carbon trading volume at the carbon peak is expected to reach 163.208 billion USD, corresponding to a carbon price of 38.8 USD. With the launch of the national carbon emission trading system, China is expected to become the world's largest carbon market, with a huge market capacity covering emissions exceeding 4 billion tons and transaction volume exceeding 100 billion yuan.

3. Investment ideas: Carbon trading contains five major investment opportunities.

China's fully developed carbon emission rights trading market adopts a "dual-city" model, with Shanghai responsible for the trading system construction and Wuhan, Hubei responsible for the registration and settlement system construction. The trading targets currently mainly consist of carbon emission quotas (CEA) and national certified voluntary emission reductions (CCER), where the mandatory quota (CEA) market is the dominant market and the certified voluntary emission reductions (CCER) market is auxiliary, complementing each other.

Carbon emission quota (CEA) trading should be conducted through the trading system, adopting trading methods such as listing trading, agreement transfer, one-way bidding, and paid transactions. For national certified voluntary emission reductions (CCER), there are currently no comprehensive trading rules issued for their participation in the national carbon trading market.

Southwest Securities stated that with the official launch of the national carbon emission rights trading market, focusing on specific industries and considering the potential impact of carbon trading on various sectors, five major investment opportunities have been identified:

First, carbon monitoring. With the full launch of the carbon market, the coverage of the carbon trading industry has increased. Monitoring of carbon dioxide and other greenhouse gas emissions, carbon quota allocation, and environmental protection testing are top priorities, which will drive a series of carbon emission monitoring manufacturers. Focus on carbon dioxide emission monitoring equipment manufacturers: Pony Testing.

Second, zero carbon emissions. The power sector will be the first to be included in the national carbon emission trading market for online trading, which will accelerate energy transition and structural upgrades. It is recommended to pay attention to Mingyang Smart Energy, China Three Gorges New Energy, LONGi Green Energy, Tongwei Co., Ltd., etc.

Third, new electric vehicles. The goal of achieving carbon neutrality by 2060 will inevitably drive the penetration rate of new energy electric vehicles. The entire industry chain, including the new energy vehicle supply chain, manufacturing, and operation, will benefit. Recommended to focus on: Tianci Materials, Zhonghuan Semiconductor, BYD, CATL, etc.

Fourth, carbon consumption. With the promotion of CCER and the smooth progress of carbon trading, the environmental protection services and carbon consumption sectors will be driven. It is recommended to focus on targets related to waste treatment and carbon consumption.

Fifth, green buildings. In recent years, the country has repeatedly emphasized the concept of "green buildings." Opportunities will arise from upstream new building materials to the construction phase. Focus on the building photovoltaic integration track: Trina Solar, Sungrow Power Supply, GoodWe, etc.