New market may be worth more than Rmb500bn, supporting carbon neutrality

In line with other countries announcing their moves into carbon pricing instruments, China launched its national carbon trading market on 16 July 2021, initially for the power sector, which accounts for 40% of its total emissions. In 2022, we believe carbon trading will start to become an essential market tool to carry out the difficult process of decarbonising industrial sectors (China's are responsible for 50% of its emissions). Moving on from our 2018 Q-Series, our three new conclusions are that:

  1. the impact to earnings has widened across companies, driven by a higher carbon price;
  2. carbon may evolve into an alternative investment with a market size exceeding Rmb500bn (US$77bn) and more available carbon-related financial products;
  3. China's carbon prices may exceed Rmb200/t (US $31/t) in the next few years versus Rmb40-50/t (US$6.20-7.70/t) now.

Interactive model shows widened earnings impact between -45% and +10%

Based on a Rmb50/t (US$7.70/t) carbon price and 95% free allocation of carbon credits, our interactive model shows carbon trading could bring an earnings impact of between -45% and +10% to companies we cover, compared with -12% to +8% in our 2018 Q- Series. Our four scenarios lay out China's potential paths to developing its carbon trading market, based on what we believe are the two major swing factors—carbon prices, and the number of industries compliant to the programme. In our most positive 'Booming' scenario, beneficiaries of carbon trading could gain up to 40% in net profit.

Carbon: alternative investment tool with possible price of more than Rmb200/tÌý

Based on our preliminary calculations, we think China's carbon exchange may have a market size of more than Rmb500bn (US$77bn). Similar to the EU's Emissions Trading Scheme (ETS), we expect the majority of carbon trading volume to be contributed by carbon futures market, to be formed in the next few years. In our bull case, we estimate the market size could reach Rmb2trn, bringing potential commission fees of hundreds of millions to trading exchanges and market makers. Furthermore, new carbon financial products could evolve with ample market sizes, bringing new business to Chinese financial institutions. We forecast China's carbon price to exceed Rmb200/t (US$31/t)— 5x the current price—in the next few years given stronger demand and tightening supply. Our very long-term upside carbon price estimates are around Rmb650/t (US$7.70/t).