China’s New Carbon Market Is Crippled by Low Turnover, Prices
(Bloomberg) -- China’s new carbon market won’t be an effective brake on emissions until it attracts more participants and prices rise, according to the chief of a regional exchange that served as one of the pilots for national trading.
One impediment to the national market’s eventual success is a lack of depth in its products, Mei Dewen, the general manager of the Beijing Environment Exchange, said in an online briefing on Tuesday. Only physical trading among power companies is currently allowed, and adding derivatives and getting financial players involved would trigger more activity, said Mei.
The environment ministry, which oversees the national market hosted by the Shanghai Environment and Energy Exchange, has said derivatives and financial institutions could be introduced when the market has matured. Mei said that might not happen until 2028.
China remains wary of involving speculative investors while utilities learn how to trade, said Mei, who also cited the experience of building spot markets from the pilots that began running in 2013.
“It’s very risky for China to become carbon neutral without banks providing liquidity, and while coal and energy-intensive manufacturing dominate its economy,” he said.
In the meantime, China’s national trading scheme, which has supplanted the European Union’s carbon market as the world’s largest, has made a slow start since launching on July 16. Activity has dropped dramatically after 4.1 million tons of carbon changed hands on its debut, and the cumulative total stands at just 6 million tons.
With about 4 billion tons of allowances issued, that represents a meager churn rate of less than 2%, just a fraction of the EU’s. Moreover, access to trading has been rolled out very slowly and only a few of the 2,200 power companies holding permits have participated so far.
Prices are also too low to drive investment to cleaner power, said Mei. The peak so far has been 58.7 yuan ($9.05) a ton on Aug. 4, and Mei said he expects prices at between 50 and 80 yuan for most of the year. That’s a tiny cost to emitters compared to about $67 a ton in the EU.
Prices edged up 1% to 55.9 yuan a ton on Wednesday with 20,000 tons changing hands, the National Carbon Emissions Trading Agency said by WeChat.
Putting a price on emissions is one tool for delivering on President Xi Jinping’s vision of a carbon neutral economy by 2060. It’s a target that’s been given fresh urgency after a United Nations climate report this week warned that time is fast running out to stop the worst effects of global warming.
But the world’s second-largest economy -- and its biggest carbon emitter -- is also wrestling with slowing growth. The low stakes and relative lack of ambition baked into China’s carbon market, at least at its inception, are largely due to this competing influence. Only last month, China’s top policy makers urged an easing of the aggressive measures taken to reduce emissions as Beijing strives to balance economic health with its climate goals.
Still, the market is expected to expand, adding another seven sectors beyond power by 2025. That would capture 7,000 to 8,000 companies responsible for about 9 billion tons of carbon emissions, according to Mei.
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