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China Would Regulate UN Carbon Credits at Home, Exchange Says

China probably won’t allow United Nations carbon credits in its cap-and-trade program unless they are approved by a domestic regulator, according to an official at the Shanghai Environment & Energy Exchange.

China likely will develop its own registration and verification process for so-called offset credits, which would be eligible for compliance with the country’s emission-reduction quotas, Li Jin, a researcher at the exchange, said at a carbon conference in Shanghai. The bourse is helping to design emissions trading in China’s financial center.

“It will be something like a local version of the United Nations Executive Board,” which oversees the Clean Developments Mechanism, known as the CDM, Li said. “Projects approved under the CDM will be easier to be used as domestic offsets, but they will still need to go through the local process.”

The surging supply of offsets from the CDM and uncertain demand for its credits helped drive prices in the European Union to four-year lows last month. That market, the world’s biggest, banned offsets from new projects in most emerging nations including China after 2012. China has supplied 59 percent of all credits issued since 2005, according to UN data.

China, the world’s biggest energy consumer, last month required seven cities and provinces including Shanghai, Beijing and Guangdong to set emission caps as part of its plans to start pilot programs for carbon trading. It aims to cut the nation’s carbon dioxide emissions by as much as 17 percent per unit of gross domestic product in its five-year plan through 2015.

Australia, China

Australia and China itself may replace Europe as main buyers of UN carbon credits for post-2012 projects from China, according to the International Emissions Trading Association.

Future demand for the new carbon credits “won’t come from Europe unless the Europeans raise their target for reducing emissions, but I don’t think that’s realistic considering the current state of the economy in Europe,” Jeff Swartz, international policy director of the Geneva-based association known as IETA, said at the Shanghai conference. “So the source of demand might come from Australia after 2015 because it will use international offsets and they might come from China.”

Chinese policy-makers are likely to tailor so-called Certified Emission Reduction credits from the CDM program to suit its domestic emission targets, Swartz said.

“You have all of these credits there in your backyard, and there is no buyer for them, and you have a reduction target in the country,” he said. “Why not use the CERs, why not take advantage of the system which is proven. ”

First Time

Australia passed a law last year that will force almost 500 of the largest companies in the country to pay for their greenhouse-gas emissions for the first time. The law gives emitters the option of using UN credits to offset as much as half of their Australian emissions by paying for pollution- abatement projects in developing countries starting in 2015.

“China is Australia’s largest trading partner, and Australia is the world’s largest exporter of coal,” Swartz said. “It makes sense for Australian companies to come to China and starts to buy CERs from Chinese projects,” he said.

UN emission credits for delivery in December fell 5.3 percent to 4.66 euros ($6.18), snapping four days of gains on the ICE Futures Europe exchange in London. They are down 60 percent from a year ago on concern about an oversupply of permits and weak demand from the EU as it struggles with its debt crisis and the possibility of another recession.

EU carbon permits also fell on ICE, dropping 5.4 percent to 8.77 euros on ICE. They are down 45 percent from a year ago.

--Jing Yang, with assistance from Mathew Carr in London. Editors: Mike Anderson, Alessandro Vitelli.

To contact the reporter on this story: Jing Yang in Shanghai at jyang251@bloomberg.net

To contact the editor responsible for this story: Mike Anderson at manderson34@bloomberg.net

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