China begins carbon trading in earnest

A total of 2,225 power plants will participate in the initial stage of China’s first emission trading scheme, an open market for emissions allowances. More industries and financial derivatives are to be introduced soon.

Photo from CFP

Photo from CFP

By ZHUANG Jian, XI Jinghua, XU Ning


China’s emissions trading scheme will start this month, the State Council announced on July 7. More than 2,000 coal and gas power plants are involved in the initial stage. China plans to reach its carbon peak by 2030 and carbon neutrality by 2060.

Beyond limits

Power plants account for about 40 percent of all carbon emissions in China. They were required to report greenhouse gas emissions in 2019 and 2020. An allowance has been allocated to each plant. Those that emit more than their allocated amount can buy more in a Shanghai exchange, and those with surpluses can sell them. The mechanism acts as a tax and a subsidy at the same time by penalizing heavy emitters and rewarding carbon-conscious ones, without the government intervening to collect and distribute the money.

The allowances are expected to be generous at first. Most facilities except the worst offenders will be able to comply without paying huge extras. Moreover, obligations for excess emissions are capped at only 20 percent of total emissions. If a power plant emits 2 million tons of carbon dioxide but has only 700,000 tons of allowance, it only needs to pay for an extra 400,000 tons instead of the total excess of 1.3 million.

Since 2013, seven big cities including Beijing, Shanghai and Shenzhen, and Fujian Province have issued local pilot emission trading schemes. Shenergy Group, one of the earliest participants, established a financial subsidiary in 2018 to manage emissions trading, which has helped the company lower the cost of its emissions by 40 percent. Its plants involved in the Shanghai pilot scheme emit 20 million tons of carbon dioxide a year, about a quarter of which is bought. Most of its plants will exceed their national allowances, according to Liu Xian, a former trader and now an executive at the financial subsidiary, but not by significant amounts.

Emitters are still trying to figure out the supply and demand situation in the initial rollout. Most experts interviewed by Jiemian News expect supply to be abundant. Companies with surpluses may hold off selling due to uncertainties. Some are also concerned about sudden allowance cuts in the future.

Credit hoarding

Companies can also use offset credits, known as China Certified Emission Reductions (CCER), to comply with their allowances. Offsets are generated from government-certified emission reduction projects and can be traded among companies. One CCER offsets one ton of carbon dioxide

and emitters are allowed to offset up to 5 percent of their total emissions.

In the first two years of certification (2015 – 2017), Shanghai, with 41 percent of all CCER transactions, traded the equivalent of 110 million tons of carbon emissions. The price rose 175 percent last year, due to a low supply of CCER. Large emitters have built CCER reserves and thereby reduced liquidity through trading or acquisitions of approved projects.

Many new CCER projects are in negotiation or development, although concerns about changes in the validity periods — for how many years a project can legally generate offsets — may complicate valuations.

Volumes and prices are low in local markets, partly due to ineffective emission caps and weak demand for extra allowances. Liquidity is expected to improve when the national market opens and more participants are involved. There will continue to be some oversupply. The total allowance will be 4 billion tons, much higher than that of the EU, the largest emissions market in the world.

Imperfect market

Steel, construction, petrochemicals and aviation industries will soon be included in the plan. Financial institutions are also making preparations and training staff trading. Most trading in the early stage would be for compliance purposes rather than speculation and liquidity will remain low for the foreseeable future. Prices may be slow to adjust and some power plants will end up overpaying.

Eventually, institutional investors and individuals will be allowed in. Complex emissions derivatives will also be introduced, which will promote liquidity and make prices more accurate.