Emitters are trading. But liquidity is lacking.
Photo from CFP
By XU Ning
It's been a year since China's carbon market started trading. At the end of last December, a total of 2162 companies were involved, altogether emitting 4.5 billion tons of CO2 annually, making China the second largest carbon market in the world.
The actual trading volumes, however, were small. From last July to December, 179 million tons of emissions were traded for 7.6 billion yuan (US$1.1 billion). In comparison, the total transaction amount of the EU carbon market was 760 billion euros (US$7.8 billion) last year. Only 2 percent of the allocated quotas were traded, versus the EU's 500 percent.
Over 80 percent of the trades were larger than 100 tons and took place over the counter. This often happens in markets with weak pricing mechanisms, according to industry insiders.
FEI Zhi, Managing Director at GCL Energy Technology, which owns 15 emission-trading power stations, said volumes fluctuate greatly by season. Over three-fourths of last year's trades took place in December. While in January, the beginning of the new compliance period, there were days when less than 10 tons changed hands. Only 15 million tons of emissions were traded in the first seven months of this year, on average 118,000 tons a day. With volumes so low, the prices don't reflect the true costs of cutting emissions.
Companies have hesitated to buy or sell mainly due to policy uncertainties. Seven months into the new compliance cycle, they still don’t know what their quotas are. The expectation is that as China nears its 2030 carbon peak deadline, the allowances would get tighter – there was an overall 8 percent surplus last year by some estimates – which makes companies less willing to sell.
Market rules and structure may change too. It is unclear when the CCER program (China Certified Emission Reduction), which allows emitters to generate carbon credits through certified activities such as using renewable energy or planting trees, would be relaunched. Nor does anyone know whether and how credit generated under the program can be used against allocated quotas.
There are talks about letting in non-power-station emitters. Refineries reportedly have been asked to count their emissions or at least start preparing to do so. Steel mills and aluminum factories supposedly will also be joining within the next five years. But no plan has been set.
It has been reported that there would be no non-power-station participants for another two years due to data fraud. Last July, an Inner Mongolian company was found to have tampered with inspection reports, which led to its emissions being undercounted by up to 30 percent. Since then, more quality issues and fraud have been uncovered. Regulators have allowed some level of workarounds, approximation and inconsistencies in emission counting for early participants, but this created an opportunity for manipulation. In the Inner Mongolian case, the accused changed the dates on the report to make it look like the inspection happened after 2019. There was a methodology change around that time which may cause significantly different results.
Researchers are closing the loopholes. Policymakers plan to make calculation and auditing more rigorous. But data fraud has nevertheless caused delays and shaken confidence, which will take effort to restore.
Would more clarity make the carbon market more liquid? Bin Hui, Vice President of Shanghai Environment Energy Exchange, wrote last month that while clear and predictable policies would help participants plan ahead right now many emitters are hoarding quotas in case there is not enough to go around when there is an influx of participants or if current offsetting credits are no longer valid.
Pan Hao, Vice President at State Power Investment Corporation, has called for more complete legislation to better define the terms, rights and obligations in the carbon market. Carbon derivatives should be introduced. A wider variety of participants, including emitters, financial institutions and even individuals, should be allowed in. There is a clear need to be regulatory bodies for businesses that serve the carbon market, such as auditors.
In a letter to Jiemian News, the Ministry of Ecology and Environment attributed the current market liquidity to the lack of product diversity, the homogeneity of participants and their unfamiliarity with the market mechanism. With research and experimentation, the market could play a larger role in pricing and cutting emissions.