BEIJING Aug 18 As China lays down plans for a
national carbon trading scheme, the world's biggest emitter of
greenhouse gases risks repeating mistakes made in carbon trading
in Europe by flooding its pilot markets with free permits.
The European Union's scheme, the world's largest, suffered a
collapse in prices hurting its credibility when the EU gave away
too many permits just as the global financial crisis was
slashing demand and in turn curbing pollution levels.
Fifteen traders, brokers and consultants speaking to Reuters
said that most of China's pilot markets launched last year were
riddled with an over-allocation of permits, bar pockets of
scarcity, such as parts of the Beijing market and the
electricity generation sector in Shanghai.
Shenzhen's vice mayor said in January that the city's carbon
market, China's smallest, had a surplus of around 10 percent of
permits in 2013, although he later said some of the surplus
would be cancelled.
According to a Shenzhen-based consultant, the market could
see an ever bigger surplus for 2014, as eight big power stations
had asked the government to give them more permits than last
year. The Shenzhen government declined to comment.
If the pilots fail it would be a blow to the credibility of
carbon markets as a tool to cut emissions and could cast doubts
over Beijing's plans to launch a national market later in the
decade, the centrepiece of China's climate change policy.
Jorgen Wettestad, a climate policy expert at Norway's
Fridtjof Nansen Institute, said the problems of overallocation
of permits in Europe and elsewhere offered pointers for China.
"Based on the experiences of others it will probably take
some time to get the numbers, procedures and institutions right.
So a little patience is necessary," said Wettestad.
Xie Zhenhua, China's top climate change official, said in
Germany last month that too many free permits and unambitious
emission reduction targets had made the EU market "sluggish",
and vowed that China would learn from this.
Under China's pilot schemes, companies hand over permits to
the government for each tonne of carbon dioxide they are
expected to emit. Most are given free, but if they exceed their
quota they must buy more in the market.
PERMITS TRADE AT RECORD LOW
None of the regional governments operating pilot schemes has
released data on the amount of CO2 the companies receiving
permits were estimated to have emitted last year or how this
compared to the number of permits handed out.
They have published approximate numbers for how many permits
they gave out then, ranging from 350 million in Guangdong to
around 33 million in Shenzhen.
No information has been released on how many permits have
been issued for 2014 or whether they are giving out more or
fewer than last year.
But local governments under pressure from Beijing to get the
schemes up and running reportedly handed out too many permits to
ensure industries came on board, threatening their capacity to
actually rein in emissions, according to industry sources.
"They have given out many more permits than the companies
need," said one trader at a firm active in several of the
markets, who declined to be named due to the sensitivity of
commenting on the issue in China.
Requests for comment from market operators in Beijing,
Guangdong, Shanghai, Shenzhen and Tianjin were not answered.
But flagging potential overallocation, permit prices fell
to record lows in markets such as Guangdong and Tianjin amid
weak demand in the days before a recent compliance deadline.
In a matter of weeks, prices in Guangdong fell by almost a
third to 41.50 yuan ($6.75) from 60 yuan, while Tianjin's price
dropped from 42 yuan to 19 yuan.
And the situation could get worse with the supply of permits
set to increase further from September, when China issues its
first domestic offset credits. These are handed out for projects
that can reduce emissions, such as building wind farms.
The northern city of Tianjin recognised it had given out
too many permits for 2013 and planned to reduce the number for
2014, although a final amount has yet to be set, said an expert
involved in the city's allocation process.
"Supply will be cut this year, especially for industries
like iron and steel," said the expert, who asked not to be named
due to a confidentiality clause in his employment contract.
He said the Tianjin government gave away too many permits
last year partly to placate industry in the area.
Officials in the pilot regions have focused on ensuring that
emitters have complied with their scheme's rules and data shows
this has been largely met.
But a refusal to publish data on emission is threatening
efforts to improve the schemes, because few trading houses or
banks would be willing to join a market where fundamentals are
One Beijing-based trader said that after seeking information
he was told no data would be released during the pilot period.
"I asked them, then how can we forecast the price? How can
we forecast the demand and supply balance? But they said it is
not their concern at the moment."
(Editing by Ed Davies)