China’s Carbon Prices Could Plummet to Zero, Researcher Says


China may be doling out too many emissions allowances at the start of its national carbon market, potentially causing prices to quickly crash to zero when trading begins later this year, according to new research.

A lax baseline for power plant efficiency will create a surplus of permits, meaning that even generators who pollute too much will be able to buy them cheaply and won’t have incentive to cut emissions, TransitionZero co-founder Matt Gray said.

China’s Carbon Prices Could Plummet to Zero, Researcher Says

A similar fate befell Europe’s nascent carbon market in 2006, rendering it impotent as a policy tool for years. Unless Chinese officials intervene, the same could happen when emissions begin trading there later this year, Gray said.

“China needs to learn from the mistakes of Europe,” Gray said in an interview. “We don’t have time for policies that just don’t do much for the next five to 10 years. We really need to get going in decarbonizing quickly.”

China launched its national emission trading system in February after several years of delays, with the first trades expected to take place mid-year. It covers more than 2,000 large power-plant operators, and will be expanded in the coming years to include more industries such as steel and cement-making.

The idea is to use market forces to encourage cleaner forms of energy as China aims for peak emissions by 2030 and carbon-neutrality by 2060. The country’s Ministry of Ecology and Environment gives plants allowances for a certain amount of emissions, and those that exceed it must buy more permits to make up the difference.

The problem, according to London-based TransitionZero, is that the MEE hands out those allowances based on how efficient plants are, and China’s biggest coal stations are so good they can accumulate excess permits instead of building up a deficit.

TransitionZero used satellite images and machine learning to estimate operations at China’s biggest coal plants in 2019 and 2020, and found that the power system as a whole probably earned about 1.6 billion tons of excess allowances. That oversupply means prices will tank unless the government orders state-owned companies to keep them above a certain level, or it changes the trading system’s rules.

“Since supply is greater than demand and there is no indication that the benchmarks will be tightened, the fair value of allowances is zero,” Gray said in the report. “Without reform, we expect the price to crash.”

TransitionZero also plans to use its research techniques to let investors know which fossil-fuel power plants are being under-utilized and therefore are at risk of becoming stranded assets, Gray said. It’s backed by groups including and Bloomberg Philanthropies, the charitable organization founded by Michael Bloomberg, who owns Bloomberg News.

©2021 Bloomberg L.P.

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