Traders are banking on Beijing’s plans for a national carbon market being a success, but challenges in its design remain
By Ed King
Barcelona has seen more raucous partygoers, but the sharp suits drinking in the beachfront Carpe Diem bar last week were in bullish form.
Wine, beer and champagne flowed as carbon traders from around the world gathered on the final night of industry fair Carbon Expo to toast what many think could be their finest hour.
Many of their colleagues have fallen in the past few years, brought low by the twin woes of the EU’s emissions trading scheme and the UN’s Clean Development Mechanism.
Both heralded a new dawn of market-based climate policies. Both were found wanting. The price of EU and CDM credits don’t lie. Nor does the string of bust companies.
But in the East a red dawn is breaking. In June 2013 China launched the Shenzhen pilot carbon trading scheme. Six more – including two in Beijing and Shanghai – have followed.
In 2016 the country plans to go national, setting a market emissions cap of four billion tonnes of CO2 equivalent.
By 2020 when the system is expected to be fully operational the world’s largest emitter of greenhouse gases could likely control the fate of CO2 trading around the world.
“The moment China came into carbon market it changed the landscape,” says Xueman Wang, a World Bank official charged with helping developing countries on emissions trading.
“When China comes into play we see the emergence of a global carbon market.”
The role of markets in the Communist superpower’s climate toolbox will form the centrepiece of China’s pledge to a UN climate pact, set to be finalised in Paris later this year.
Known in UN circles as an Intended Nationally Determined Contribution (INDC) and due this month, the commitment will be a huge moment for hopes that dangerous levels of climate change can be avoided.
China’s emissions leapt 4.2% from 2012-2013, accounting for 28% of the global total. To stop the world overheating they need to come down.
In November 2014 president Xi Jinping made an historic pledge to guide the country to peak its greenhouse gas emissions by 2030, building on a 2009 goal to cut the carbon intensity of GDP 40-45% on 2005 levels by 2020.
In December 2014 the NDRC, Beijing’s premier economic body, released plans for a national market, followed by a more detailed framework and timeline in February 2015.
The direction of travel is clear, although Jeff Swartz, head of policy at the International Emissions Trading Association (IETA) warns against expecting too much, too soon.
“I think it’s important everyone manages their expectations… but clearly it’s a place where once China has made a decision, things happen quickly,” he says.
“We shouldn’t be too confident that the launch next year means we will suddenly see an active liquid carbon market – it could just mean more companies start to measure and report emissions.”
Work on a national emissions trading scheme started back in 2006, with the publication of the National Assessment on Climate Change.
Since then, NDRC developers and think tanks have watched the pained progress of the EU’s emission trading scheme closely.
In particular says Hongliang Chai, an Oslo-based analyst with Thomson Reuters Point Carbon, they want to avoid a situation where vast numbers of carbon credits allow polluters off the hook at minimal cost.
“The EU ETS is definitely the default market which China officials decision makers and think tanks when they look at examples,” he says.
“They have said want to avoid the over allocation of credits seen in EU markets, and want to set the cap right up front.”
The government has watched the internal negotiations with EU member states closely, adds Hongliang, aware it faces similar discussions with provinces over the allocation of carbon credits.
Watching Brussels make mistakes is likely to be an immense help to Beijing, says Eric Boonman, global markets manager at Norwegian energy utility Statkraft.
He is one of many experts who has travelled to China to offer advice on the pros and cons of the European system. “We opened up the weakness of the EU scheme – and they learned from that,” he says.
A three-year EU-China ETS capacity building project has also proved invaluable, says XingAn Ge, an official at the China Emissions Exchange in Shenzhen.
Growth has not been restricted to the seven pilots, according to an IETA study on China’s carbon market, published in March 2015.
Governments in Hanghzou, Qingdao, Zhejiang, Gansu and Anhui have also announced plans for their own pilot projects.
By the end of 2017 all 33 provinces and other regions will be required to “blend policies” with the national system, says IETA, after which it will be adjusted to ensure market stability.
Analysts from around the world are furiously trying to analyse every release by the NDRC for evidence of its long term market intentions.
Many desperately want to know if and when China will fully open its market to foreign companies, and how it could interact with others in North America, Europe and Asia.
Brussels and Beijing have a long-planned summit set for July this year, where a raft of climate goals are set to be unveiled.
The Carbon Pulse website reports European Commission officials have already been in Beijing for meetings over a tie-up between the two, but suggests it’s unlikely for now.
Markets in California, South Korea and Canada have also been mooted as possible partners once Chia’s national scheme takes off.
Long term the vision is for a global market with China one of many regions buying and selling credits, says XingAn Ge.
Still, that seems a fair way off, according to James Liu, China markets manager at Statkraft.
“To get it to one system or a few central market places it will probably take time… there is going to be a cluster in the north, middle, south – that’s just a thought,” he says.
Initially some zones may focus on energy consumption, others on emissions, he says, while heavy emitters and the transport sector will take time to be integrated into a national system.
As IETA points out in its recent analysis the seven pilots were specifically designed for their local regions. Integrating them sounds simple but in practice could be challenging.
On the ground, the sheer numbers are mind-boggling, points out XingAn Ge.
In Shandong province alone, 3000 companies responsible for 113,000 tonnes of CO2 a year will suddenly find themselves having to comply with new regulations, he says.
Race for riches
Traders in Barcelona speak of the China market in mythical terms. Jan Fousek from the Czech firm Virtuse says he’s taking Chinese lessons to be ready for the big launch.
Others at Expo talk of opening offices in Shenzhen, the one pilot scheme which allows direct interaction with foreign traders.
But development is likely to take time, says XingAn Ge, who warns of the initial challenges Shenzhen businesses faced in 2013.
“They had no previous experience… they are manufacturing and power plants – not trading companies,” he says.
The launch was initially plagued by a lack of trust between companies and ETS officials. Many refused to believe carbon credits would ever have a value or could be transferred for cash.
Few companies had sufficient data collection structures or the internal management in place to ensure they could trade credits. The scheme was born from nothing, he adds.
That said, China’s central economy has its advantages.
Beijing can enforce its will over utility companies in a way not enjoyed by European leaders, points out Jian Wei Lim, a Chinese carbon markets analyst with ICIS.
“The unique thing about China is that the big emitters are mostly state owned, so the battle is not as fierce as in the EU for example,” he says.
“Moving forward – when more foreign companies come into the picture they might find problems and difficulties in trying to appease these foreign companies.”
Just as China learnt from the EU, so other developing countries seeking to create their own systems are looking to its seven pilots for inspiration.
“Chinese pilots are the first bottom up experience that can really be used as a model for developing countries,” says Manuel Cocco, business development manager at South Pole, a trading firm.
Over 60% of IETA members believe South Africa, Mexico, Chile and Brazil will have carbon markets before 2025, a number that drops to just over 30% for India and Indonesia.
IETA and its members are now lobbying hard for this year’s Paris climate pact to offer support for carbon markets – laying the basis for a global network perhaps as soon as the 2030s.
In recent weeks German chancellor Angela Merkel, UK prime minister David Cameron and France president Francois Hollande have offered their backing for a new focus on the role of markets.
So too have six of the world’s top oil and gas companies in a belated push to influence the global climate talks.
They may win a line or two in the final Paris text, but long term success will likely depend on China.
The big question as ever is whether Beijing can deliver on its high ambitions and engage all of its provinces. “Most people are curious… how real is it?” says IETA’s Swartz.
More market blueprints will be released when China’s National People’s Congress signs off on the 13th Five Year Plan in October.
For the traders and analysts in Carpe Diem – the party has just started.