January 21, 2014 / 3:11 AM / 5 years ago

China carbon markets risk missteps unless more open

* Crucial for pilot trading schemes to release timely data -experts

* China’s moves to develop schemes comes after EU market hit by scandals

* Beijing and Tianjin yet to disclose emission permits, caps

By Stian Reklev

BEIJING, Jan 21 (Reuters) - China’s moves to establish the world’s second-biggest emissions trading market risk being undermined by a lack of transparency, including a failure to release data on permits issued and even whether emissions will go up or down under the schemes.

Guangdong province and four Chinese cities have launched carbon markets, with two more pilots due to be launched over the next few months, as the world’s top emitter of greenhouse gases seeks to limit its impact on climate change.

Successfully operating the pilot schemes is seen as vital for the foundations of a national scheme for China, particularly after the missteps Europe has faced developing the world’s biggest emissions market.

“It is crucial for any emissions trading scheme to publish reliable and timely information about how many permits are issued and will be issued in future years, and how this compares to previous emissions levels,” said Frank Jotzo, a professor at the Australian National University’s Climate Change Institute.

“Otherwise markets are in the dark about the likely stringency of the scheme, and pricing is a guessing game,” he said.

The pilot schemes regulate around 700 million tonnes of carbon dioxide per year, more than South Korea’s annual total emissions.

Under the schemes, hundreds of power generators and manufacturers must buy permits in the market if they emit climate-changing gases above a certain allocated quota.

In Beijing and Tianjin, both located in China’s heavily polluted north, governments have not revealed how many emission permits have been handed out to scheme participants and how caps were calculated, and did not respond to questions.

Other market regulators have released approximate overall numbers for the permits issued, although it remains unclear how those compare to historical emissions.

Beijing-based NGO Greenovation Hub has said over-reliance on unchecked emissions data from companies raised the risk of too many permits being handed out, and urged scheme operators to make the information public.


When the European Union launched its emissions market in 2005, allocation was based on companies’ own estimates of their historical emission levels. When it became clear that those were vastly exaggerated, prices plummeted from 30 euros to just a few cents.

Shenzhen, the first of the Chinese markets to launch last June, has already seen high volatility. Permits opened at 28 yuan ($4.63) then quickly moved up to 130 yuan, before falling back to current levels of around 70 yuan.

But the Shenzhen price moved on tiny volumes - the highest trade was for only three permits - as that market has mostly been driven by small, private investors.

This is partly because many compliance firms prefer to sit back and wait for greater clarity, but also due to the way trading rules have been designed.

All trades in the Chinese pilot markets must be reported to and settled via government-appointed carbon exchanges, one in each region.

But in all the regions trades of a certain size, ranging from 10,000 permits in Beijing and Shenzhen to 200,000 in Tianjin, can be agreed bilaterally between counterparties, and prices or volumes will in most cases not be publicly reported.

This could mean the emergence of parallel markets - a low-volume market for small companies and individuals with publicly available prices and volumes, and an opaque market with little public information for bigger emitters and institutional investors.

Such a trend is common in commodity markets, but maintaining confidence in the integrity of the systems is particularly crucial in emissions markets, as illustrated in Europe, where scandals involving various frauds sparked public outrage and made many question the scheme’s existence.

Rob Elsworth, an analyst with London-based environmental think-tank Sandbag, advised Chinese officials to be transparent.

“The point we stress is that without making the data transparent it will be difficult for anyone other than those who have access to evaluate how the pilots are functioning.” (Additional reporting by Kathy Chen; Editing by Ed Davies)

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