China’s carbon emissions trading market has a positive impact on energy conservation and emission reduction efforts by small and medium-sized enterprises (SMEs). By trading carbon emission rights, SMEs can generate revenue, boost their profits, or secure financing through future carbon revenues. This effectively reduces the costs and difficulties associated with energy conservation and emission reduction, enabling SMEs to further enhance their efforts in this area. The SMEs and the carbon trading market mutually reinforce each other in a virtuous cycle, benefiting both environmental protection and the long-term development of both enterprises and the carbon trading market.

In September 2020, President Xi Jinping announced China’s “dual-carbon” goals at the 75th Session of the United Nations General Assembly. China is committed to reaching peak carbon emissions before 2030 and achieving carbon neutrality before 2060. Since then, the “dual-carbon” goals have been incorporated into the 14th Five-Year Plan, which also outlines a series of targeted action plans aimed at realizing these goals, demonstrating China’s unwavering determination to achieve them. In February 2021, the State Council issued the "Guiding Opinions on Accelerating the Establishment and Improvement of a Green, Low-Carbon, and Circular Development Economic System," emphasizing the need to vigorously develop green finance and fully leverage its role in supporting and advancing the “dual-carbon” goals. Green finance has become one of the key priorities for the People's Bank of China in 2021, ranking ahead of risk prevention and macroprudential measures. As an essential component of green finance, carbon finance plays a crucial role in encouraging Chinese enterprises to pursue green development, achieve high-quality growth, and contribute to the realization of the “dual-carbon” goals. According to data from the Ministry of Industry and Information Technology, China’s small and medium-sized enterprises (SMEs) account for more than 50% of tax revenue, over 60% of GDP, more than 70% of invention patent applications completed, over 80% of employment opportunities, and more than 90% of new job creations. China currently has 150 million market entities, including 46 million enterprises, among which SMEs make up over 99%. It is thus evident that SMEs are not only a source of economic vitality for China but also an important pillar of China’s manufacturing sector. Statistical data show that energy consumption by SMEs in China’s industrial sector accounts for roughly 25% to 30% of the total energy consumption of all industrial enterprises nationwide—enough to significantly impact China’s overall carbon emissions. From an energy conservation and environmental protection perspective, the effectiveness of energy-saving and emission-reduction efforts by SMEs greatly influences the country’s overall performance in energy conservation and emission reduction. To promote energy conservation and emission reduction among SMEs, carbon trading rights can be integrated into their operational systems. By harnessing the carbon trading market to encourage energy-saving and emission-reduction efforts by SMEs, we can both help these enterprises improve their energy efficiency and foster the healthy development of the carbon trading market itself.

I. Existing Approaches and Challenges in Energy Conservation and Emission Reduction for China’s Small and Medium-Sized Enterprises

(1) Existing Approaches for Energy Conservation and Emission Reduction in Small and Medium-Sized Enterprises Currently, Chinese small and medium-sized enterprises are implementing energy conservation and emission reduction through the following methods: There are three approaches: low-carbon technology transformation, contract energy management, and financial leasing. An analysis of the impact of carbon trading markets on energy conservation and emission reduction in small and medium-sized enterprises reveals that these three approaches each have their own distinctive features. SMEs can choose the approach that best suits their specific circumstances.

1. Low-carbon technology transformation can enable small and medium-sized enterprises to achieve a qualitative leap in reducing carbon emissions. However, this transformation comes with higher costs, requiring substantial capital investment for equipment replacement, technology acquisition, and optimization of production systems. The payback period for such investments tends to be longer compared to the other two approaches. Low-carbon technology transformation places high demands on enterprises’ financial strength—requiring not only short-term financial surpluses to absorb significant upfront investments but also ensuring that the enterprise can sustain its operations at least until the end of the investment payback period. By fundamentally addressing the issue of carbon emission reduction, successful low-carbon technology transformation allows enterprises to minimize their adverse impacts on the ecological environment, fostering eco-friendly production and operations and ultimately achieving high-quality development. Low-carbon technology transformation refers to the process by which enterprises upgrade and optimize key equipment, critical technologies, and production processes that consume large amounts of energy and generate high emissions during their production and operational activities. For example, enterprises may replace high-energy-consuming equipment with environmentally friendly, low-energy devices or adopt more advanced technologies to adjust production processes and reduce carbon emissions, thereby promoting harmonious coexistence among natural, industrial, and human ecosystems. In the agricultural sector, ecologically oriented agriculture represents a particularly successful example of low-carbon technology transformation. Ecological agriculture integrates traditional farming practices with modern scientific and technological advances, using ecologically sound, human-designed approaches to transform agriculture into a modern, market-oriented system that maximizes both ecological and economic benefits.

2. Contract Energy Management (CEM) is a energy-saving and emission-reduction approach in which enterprises leverage future energy savings to engage energy service companies in upgrading process equipment, reducing operational costs, improving energy utilization efficiency, and cutting pollutant emissions. Specifically, the energy service company and the energy-consuming enterprise reach an agreement through negotiation, sign a contract, and set forth agreed-upon energy-saving targets for the project. The energy service company provides energy-saving services to the energy-consuming enterprise; if the enterprise achieves or exceeds the agreed-upon energy-saving targets, the energy service company may retain a portion of the reduced energy costs as a reasonable profit.

3. Financial leasing refers to a situation in which an enterprise (the lessee) identifies a suitable lessor and clearly communicates its specific requirements for the leased asset to the lessor—including energy consumption and pollutant emission standards. The lessor then purchases the leased asset from the supplier and leases it to the lessee for use. The lessee makes periodic rental payments to the lessor as agreed upon. During the lease term, ownership of the leased asset remains with the lessor, while the lessee enjoys only the right to use the asset. Financial leasing is a financial instrument that integrates financial products, technological upgrades, and trade into one. It possesses both financing and asset-leasing characteristics. Should the lessee encounter financial difficulties and be unable to make regular rental payments to the lessor, the lessor can repossess or dispose of the leased asset to avoid losses. Although, when calculated based on the total cost, it may seem that enterprises could acquire technology or equipment at a lower cost by purchasing them outright rather than through financial leasing, acquiring low-carbon transition technologies and emission-control equipment typically requires substantial capital investment. To alleviate financial pressure, adopting financial leasing allows enterprises to spread costs over time, thereby avoiding large, short-term cash outlays and ensuring the stability of their cash flow and normal business operations.

(2) The Challenges Faced by Small and Medium-Sized Enterprises in Energy Conservation and Emission Reduction: Overall, small and medium-sized enterprises (SMEs) in China generally have weaker capabilities in energy conservation and emission reduction. Yet, the total energy consumption and total pollutant emissions from these enterprises continue to rise. Typically, SMEs are smaller in scale and have limited financial resources. Moreover, the production technologies and equipment used by some SMEs are not advanced enough, often resulting in high energy consumption and high emissions. The difficulties SMEs encounter in energy conservation and emission reduction can be categorized into financing difficulties and investment difficulties.

1. Small and medium-sized enterprises (SMEs) facing difficulties in energy conservation and emission reduction often encounter financing challenges, including high financing thresholds and high financing costs. To carry out energy conservation and emission reduction initiatives, SMEs need to upgrade their technologies, replace equipment, and transform production processes, as well as purchase or lease environmentally friendly equipment. However, new large-scale production equipment or large-scale environmental protection equipment is typically very expensive, and SMEs’ own capital is often insufficient to cover the costs. As a result, SMEs usually have to rely on financing to obtain the necessary funds. One of the main reasons why SMEs find it difficult to secure financing is that they lack sufficient collateral to support substantial loan amounts, and their creditworthiness is hard to assess. The difficulty in obtaining loans often dampens SMEs’ enthusiasm for engaging in energy conservation and emission reduction efforts.

2. Investment Challenges Faced by Small and Medium-Sized Enterprises in Energy Conservation and Emission Reduction: These challenges include capital occupation and increased risks. Compared to large enterprises, SMEs have less available capital. Moreover, some energy-saving and environmentally friendly technologies or equipment are relatively expensive, requiring SMEs to allocate a larger portion of their limited funds for acquisition. The invested capital has a payback period; during this period, a portion of the SME’s available funds is tied up, reducing the amount of capital they can use for daily operations or other projects, thereby straining their cash flow. If SMEs rely heavily on loans to purchase such technologies or equipment, it will increase their debt-to-asset ratio and financial costs, consequently raising both their financial and operational risks.

An Analysis of the Mechanism by Which Carbon Trading Markets Promote Energy Conservation and Emission Reduction in Small and Medium-Sized Enterprises Compared to large enterprises, China’s SMEs operate under more flexible mechanisms and incur lower costs when replacing or adjusting entire sets of production equipment. At the same time, SMEs are numerous and continuously generate innovative ideas; they demonstrate a certain degree of resilience in the face of difficulties and possess significant potential for green development. Energy conservation and emission reduction involve saving energy, lowering energy consumption, and reducing pollutant emissions. While energy conservation and emission reduction are closely related, they also have distinct differences. In implementing energy conservation and emission reduction projects, it is crucial to strengthen the application of energy-saving technologies, avoid unilaterally pursuing emission reduction results at the expense of sharply increasing energy consumption, and focus on striking a balance between economic and environmental benefits.

(1) Development of the Carbon Trading Market In February 2005, the Kyoto Protocol officially came into effect, sparking a boom in the global carbon trading market. China gradually began establishing its own carbon trading markets as well. From 2011 to 2021, carbon trading markets were successively launched in Beijing, Shanghai, Shenzhen, Guangdong, Tianjin, Chongqing, and Hubei, accumulating considerable experience in carbon trading operations, optimizing the carbon trading market system, and cultivating specialized professionals. In July 2021, the national carbon trading market was officially launched. Experts predict that China’s carbon trading market is poised to become the world’s largest market covering greenhouse gas emissions.

(2) Mechanisms by which carbon trading markets promote energy conservation and emission reduction in small and medium-sized enterprises (SMEs): There are two main channels through which carbon trading markets facilitate energy conservation and emission reduction in SMEs. One is that SMEs can generate revenue by participating in carbon trading; the other is that SMEs can use their future carbon revenues to issue carbon bonds, obtain carbon-backed loans, and other similar financial instruments.

1. Generating revenue through carbon trading: Leveraging the carbon trading market to generate additional income is an effective way to encourage energy conservation and emission reduction among small and medium-sized enterprises (SMEs). By selling their carbon emission rights on the carbon trading market, SMEs can secure much-needed funds, thereby alleviating the financial burden associated with energy conservation and emission reduction efforts. This, in turn, effectively motivates SMEs to step up their energy-saving and emission-reduction initiatives, ultimately contributing to a reduction in China’s overall carbon emissions. Through energy conservation and emission reduction, SMEs can directly or indirectly reduce their carbon emissions and earn surplus carbon emission rights, which they can then trade in the carbon trading market. After obtaining funds from trading carbon emission rights in the carbon trading market, SMEs can reinvest these funds into energy conservation and emission reduction projects, further boosting their efforts in this area and continuously generating surplus carbon emission rights—thus setting off a virtuous cycle.

2. Using future carbon revenues to issue carbon bonds and carbon-backed loans: As early as 2018, the Research Group on Pledge and Collateral of Environmental Rights under the Green Finance Professional Committee of the China Financial Society had already begun studying methods for leveraging carbon emission rights as collateral for financing. In September 2021, the General Office of the State Council issued a relevant document clearly requiring the promotion of the assetization of resource and environmental rights, accelerating the improvement of market trading mechanisms, and speeding up the implementation of using resource and environmental rights—such as carbon emission rights—as collateral for financing. Small and medium-sized enterprises can obtain financing through future carbon revenues in the carbon trading market by pursuing energy-saving and emission-reduction efforts via three main pathways: low-carbon technology transformation, contract energy management, and financial leasing.

III. Recommendations for Leveraging the Carbon Trading Market to Promote Energy Conservation and Emission Reduction in Small and Medium-Sized Enterprises

Small and medium-sized enterprises (SMEs) and the carbon trading market influence each other. For the carbon trading market, on the one hand, the participation of SMEs can bring more participants to the market, increase the supply of carbon emission rights, boost market vitality, and better promote the concept of green development. On the other hand, SMEs’ involvement can positively encourage the participation enthusiasm of key emitting enterprises, thereby fostering a favorable trading environment. Similarly, the carbon trading market also has a positive impact on energy conservation and emission reduction efforts by China’s SMEs. By trading carbon emission rights, SMEs can generate revenue, enhance their profits, or secure financing through future carbon revenues—effectively reducing the costs associated with energy conservation and emission reduction, which in turn further promotes these efforts. SMEs and the carbon trading market thus promote each other in a virtuous cycle, benefiting both environmental protection and the long-term development of SMEs and the carbon trading market. The entry of SMEs into the carbon trading market will undoubtedly contribute to China’s achievement of its overall energy conservation and emission reduction goals. “Adding bricks and tiles.” Small and medium-sized enterprises (SMEs) are numerous, and their carbon emissions are closely linked to the quality of life and health of residents living near these enterprises, thereby influencing public satisfaction with the environment. While major carbon-emitting enterprises have already come under scrutiny and have entered the carbon trading market, “visible emissions are relatively controllable, whereas invisible emissions are less so.” Given the persistent issues among China’s SMEs—such as “secret emissions” and “non-compliance with emission standards”—we should address these problems at their root causes as much as possible. By helping SMEs participate in the carbon trading market and monetize their surplus carbon emission allowances, we can effectively encourage them to actively engage in energy conservation and emission reduction efforts.

(1) Perfect the carbon emission accounting framework, related systems, and legal framework. As soon as possible, develop a carbon emission accounting scheme for small and medium-sized enterprises (SMEs), refine relevant laws and regulations, and promote SMEs’ standardized participation in carbon trading markets. On the one hand, a sound legal framework serves as the bottom line for urging SMEs to adopt green and environmentally friendly practices. With such a bottom line in place, it becomes easier to regulate SMEs’ relevant behaviors more effectively. On the other hand, a well-established legal framework clearly defines enterprises’ rights and obligations, thereby better safeguarding their interests and enhancing SMEs’ willingness to participate in carbon trading.

(2) Optimize the entry procedures for the carbon trading market and lower the barriers to entry for small and medium-sized enterprises (SMEs), ensuring that SMEs can enter the carbon trading market smoothly and conveniently. Specifically, focus on streamlining the registration and review procedures for SMEs in the carbon trading market, reducing the time required for SME review, and guaranteeing the efficiency of SMEs’ market entry. Lower the barriers to entry for SMEs, enabling more SMEs to participate in the carbon trading market. Lower barriers are attractive to SMEs and encourage them to engage in the carbon trading market at an earlier stage.

(3) Reducing the Income Tax on Carbon Market Transactions Currently, China’s tax system for carbon trading is still imperfect. It could be considered to lower the income tax rate applicable to enterprises’ carbon trading activities, thereby boosting the net revenue from carbon trading for small and medium-sized enterprises (SMEs) and enhancing their willingness to enter the market. The primary motivation for SMEs to participate in the carbon trading market is to reap greater financial benefits and increase their incentives for energy conservation and emission reduction. At the same time, this also injects greater vitality into the carbon trading market. The revenues generated from carbon trading can provide SMEs with additional incentives while simultaneously alleviating the burden of government subsidies for energy conservation and emission reduction efforts among SMEs.

(4) Optimize the online trading operation process and simplify online trading procedures. Not all small and medium-sized enterprises (SMEs) participating in the carbon trading market are professional institutional investors or professional individual investors. To some extent, the complexity of trading operations can affect SME operators’ willingness to engage in the carbon trading market. Online trading is considerably more convenient than offline trading; however, if the online trading procedures are not simple and easy to understand, SME operators may encounter too many difficulties when conducting transactions online, which could reduce their frequency of participation in carbon trading.

(5) Officially certify and label institutional investors, and establish diversified participation channels. To prevent small and medium-sized enterprises (SMEs) from being ensnared in financial scams perpetrated by illegal entities, reduce their risks, enhance their sense of security, and maintain social stability, it is recommended that relevant institutional investors entering the carbon trading market undergo official certification. After undergoing official assessment and certification, these investors should be awarded a certification label, making it easier for SMEs to identify and select them. SMEs can channel their surplus carbon emission rights or proceeds into officially certified institutional investors, thereby reducing uncertainty regarding both returns and costs.

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