The establishment of the carbon market depends on the government to formulate a mandatory emission reduction policy, with its core laying on the fact that the discharge enterprises should pay their carbon emission quota equivalent to their carbon emission volume within given time. After the initial allocation, carbon emission rights could enter the secondary market and various trading entities could trade their carbon emission rights in the carbon market in light of the supply and demand of the market.

I. The main components of the carbon emission trading mechanism.

1. Trading entities: enterprises with obligation of performance automatically become trade entities in the pilot carbon market. Trading entities without obligation of performance include investment institutions and individuals who are subject to certain restrictions to a certain degree in different pilot areas. Governments at various levels play a direct role in promoting carbon market transactions.

2. Trading products: China’s pilot products of carbon trading mainly include carbon quota spots and carbon emission reduction spots. Carbon quota is issued by the local Development and Reform Commission in all pilot areas, while the majority of carbon emission reduction comes from the China-certified voluntary emission reduction issued by the National Development and Reform Commission.

3. Trade intermediary service agencies: since the launching of pilot carbon trading in 2014, Shenzhen, Shanghai, Beijing, Guangzhou, Tianjin, Hubei, and Chongqing have established their respective trading posts. All carbon quota trading and emission reduction trading in each pilot carbon market must be conducted in designated trading posts.

II. The inadequacy of China’s carbon emission trading mechanism and ways for improvement.

1. The diversification of carbon trading entities is inadequate and the number of trading entities is also limited, which requires the introduction of more carbon trading entities, the strengthening of market supervision and the improvement of a better market environment in the future.

2. The trading products in various pilot markets are simplistic, and efforts should be made on the feasibility study of the establishment of carbon emission futures market.

3. It is necessary to promote fair competition between intermediary trade service agencies, improve the platform for supervision, and remove the administrative barriers.

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