Influence of carbon derivatives on carbon capture investments in coal-based power sector, a China perspective

Coal-based power sector needs deep carbon emission reduction in the upcoming 20 years to fulfill China’s carbon peaking and carbon neutrality pledge. Due to the low and fluctuating carbon price in the emission trading system, decarbonization projects are risky and face massive potential losses. To promote decarbonization investment, a lot of policies of subsidy have been set forth. However, market instruments, which could be efficient and motivating for market entities, should have received more attention. In this article, the influence of carbon derivatives on decarbonization investment and financing is analyzed for different technology progresses and price trajectories. Results show that carbon futures and options have de-risking ability, lowering expected variation and financial cost, and consequently, making decarbonization project feasible. For advanced technology and optimistic outlook, investment can be feasible with 42–66% debt share when options are available. For the base case and neutral price outlook, derivatives can pull subsidy down by around 1%.