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Financial Innovation for Emission Trading Scheme

Against the existential and ubiquitous threat of climate changes to the environment, human health, and economic well-being, the proliferation of carbon neutrality from both government and private sector recently prevail in order to strengthen preparedness for the future global crisis. More than 70 countries and regions have pledged to achieve the goal of carbon neutrality by 2050 (ICAP,2020).While the momentum toward adopting carbon neutrality targets continue to build, a growing body of countries and subnational governments move toward carbon pricing through rolling out,speeding-up, or strengthening the construct of emission trading scheme (ETS) and carbon financial market ( e.g. Wei et al.,2021). As a flagship initiative policy instrument in climate regime under the Tyoto Protocol, ETS stands out climate policy portfolio due to the salient merits including cost-effectiveness, wide-coverage, flexibility ,and predictable and transparent market environment, and cost-effectiveness (Bazzan and Klügl,2014;Wang et al.,2018). By imposing a price on emission, the ETS incentivizes emitters to curb emission and speed up low-emission technology transition (Fan et al.,2016;Yuan et al,2018).By January 2020, there are 21 ETSs in operation, covering about 10% of the total global emissions;the annual trading scale of the global carbon financial market also exceeds US $60 billion(ICAP,2020). As a precursor to similar market-based environment regulations, the EU ETS came into force in 2005 is the world’s largest, long-established and mature carbon market (Guo et al.,2020). It is worthy to note China recently set up a national-wide ETS in the midst of developing eight regional pilot ETSs since 2013. The other similar systems include Tokyo, South Korea, New Zealand and nine northeastern states in the U.S. under the Regional Greenhouse Gas Initiative. Ex-post evidence showed that the EU ETS had saved more than 1 billion tons of CO2 between 2008 and 2016 compared to a world without the EU ETS (Bayer and Aklin, 2020). In the countries with high emission reduction costs, such as Japan and South Korea, 1.33% and 1.42% GDP loss will be reduced, respectively, by means of ETSs (Zhang et al., 2017).

Notwithstanding the laudable objectives of ETS to enable emission reduction, the potential of ETS is still largely untapped, largely stemming from poor financial innovation. First, the innovation of global carbon financial products and derivatives services still lags behind both the climatic governance and private demand. Overall, there are a lack of diversity and complementary carbon finance market structure which is bolstered by carbon spot, forward, futures and other derivatives trading instruments. Except some precursors including EU ETS and RGGI, some ETSs such as China national-wide and eight regional pilot ETSs are mainly based on spot trading and the degrees of financialization and carbon monetization are low, shown as the limited access to carbon financial products and services, small transaction scales, lukewarm market trading and the lack of carbon financial derivatives trading mechanism. Second, as technical support infrastructure, the introduction of Fintech in the ETS is a key enabler to improve the liquidity, trade dealmaking and supervision, information sharing and market transparency and to consummate the market design particularly in the aspects of quota allocation and MRV (Monitoring, Reporting &Verification) . However, the use of related emerging Fintech such as blockchain, cloud computing, artificial intelligence are still in the nascent stage. Third, regulators bemoaned low carbon prices results in the less-than-expected ETS effect on emission reduction. Nearly half of the global carbon price is less than US $10/ton, which is far below the price required to achieve the goals of the Paris Agreement(Bayer and Aklin, 2020). Carbon financial innovation is a panacea for these issues and flawed ETS institution, as it can help ETS realize a better role of discovering and stabilizing carbon prices. Financial innovations and the expanded access to financial service promote greater financial inclusion in the ETS to boost permit trading mobilization,create climatic investment opportunity, and stabilize market uncertainty.   

This special issue is, therefore, aimed at promoting research broadly related to ETS and carbon financial system in China and around the world. The theme of this Special issue (SI) is “Financial innovation for Emission Trading Scheme”. The Special Issue will focus on the carbon financial innovations,financial derivatives services, the use of Fintech and the optimization on architectures of the ETS such that ETSs could drive the transformation toward low-carbon development path and the achievement of Carbon Neutrality targets. All types (empirical, review and theory) of papers on this theme are welcomed. Specific topics of interest of this Special Issue including but not limited to the following areas are welcomed:

  • Carbon financing innovation and carbon financial derivatives;
  • Financial risk related to ETS;
  • Fintech in carbon market including the use of Blockchain, cloud computing, artificial; intelligence and other emerging financial technologies in the carbon market;
  • ETS decision support system;
  • ETS trading mechanism design;
  • ETS implementation effect;
  • ETS forecast method and model;
  • ETS evaluation methods and models;
  • Case studies of ETS financial innovation;
  • Impacts of ETS on the economy;


Submission Deadline: March 31,2022
Publication of Special Issue: December, 2022

Guest Editors

Ying Fan, School of Economics and Management, Beihang University 
Yigang Wei, School of Economics and Management, Beihang University 
Liang Xu, School of Business Administration, Southwestern University of Finance and Economics 
Xiaoguang Chen, Research Institute of Economics and Management, Southwestern University of Finance and Economics 
Xi Liang, Bartlett School of Sustainable Construction,University College London

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