Chinese carbon market doldrums may undermine climate efforts

Reuters News
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Posted: Jul 01, 2015 6:31 AM

By Kathy Chen and David Stanway

BEIJING (Reuters) - Regulatory uncertainty and a lack of transparency have left trade on China's seven pilot carbon exchanges in the doldrums, which could undermine efforts to cut the nation's greenhouse gas emissions.

China told the United Nations on Tuesday it would cap its emissions by 2030, and promised to cut carbon intensity - the amount produced per unit of economic growth - by 60-65 percent from 2005 levels by then as well.

China told the U.N. it would build on the pilot regional schemes to help make the cuts, and "steadily implement a nationwide carbon emissions trading system".

The national scheme should be ready by the end of next year or early 2017, but traders said the transition to a national system is already causing problems.

"The opaque policymaking process makes it confusing for trading companies, and without clarification on market integration, companies are not encouraged to make long-term trading plans," said a senior trader who declined to be named.

Four of China's seven pilot markets have reached the end of their compliance year, which should have boosted trade volumes as firms bought permits to cover annual targets, but activity has remained slow.

Tianjin, Hubei and Chongqing have all postponed deadlines to give companies more chances to meet targets and avoid fines, raising concerns about the integrity of trading rules.

"The market has been volatile and the flexibility of the rules has sometimes been a bit unreasonable," said Shawn He, a lawyer with the Huamao & Guigu Law Firm in Beijing who specializes in carbon trading.

Each of the carbon schemes operates independently and with different rules. Some companies have complained about unfair treatment, and traders have struggled with policy adjustments.

"It is impossible to check if the authorities are allowing big influential companies to flout the rules because emissions data is not revealed," said another trader.

China said last week it would need to invest 41 trillion yuan ($6.6 trillion) to meet its U.N. pledges. Some of that investment will be raised through the national carbon market, expected to cover around 3 billion tonnes of carbon emissions - about 30 percent of the annual total - by 2020.

But liquidity on China's seven pilots schemes has remained low, with just 28 million permits traded over two years, only about 2 percent of the permits handed out annually.

Prices in five of the markets have fallen sharply, with the Shanghai market ending its compliance year on Tuesday at 15.5 yuan, down 38 percent from its launch. Permits in the biggest pilot exchange in Guangdong have dropped 73 percent to 16 yuan.

(Editing by Tom Hogue)