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EU, California Show China How to Avoid Carbon-Permit Oversupply

European Union and Californian emissions markets have shown China how to avoid the pitfall of oversupply in its own carbon-trading programs, said the vice mayor of the city of Shenzhen.

Permit prices on the EU Emissions Trading System plunged 80 percent the past five years, according to data from the ICE Futures Europe exchange in London. Officials from China examined why this happened, said Tang Jie, vice mayor of the southern Chinese city that has a population of 13 million and average income of $20,000.

“If you look at EU ETS, excessive quota or irrational allocation of the quota for the power sector caused the lower price,” Tang said yesterday at climate talks in Warsaw. Instead of Europe’s model of initially granting allowances for free, China has opted to follow California and require carbon emitters to bid for allowances.

China is seeking to build a national carbon market even as low prices caused by Europe’s surplus -- equivalent to a year’s supply of permits according to Bloomberg New Energy Finance -- has prompted direct market intervention. The EU plans to delay the auction of 900 million metric tons of emissions permits to reduce the oversupply. The U.K. took the extra step in April of setting a minimum price for carbon emissions.

China is the world’s largest emitter of carbon dioxide, the gas scientists say is warming the planet. Seven cities in the nation are starting carbon markets. “We need to phase out that highly polluting, dirty production capacity,” Tang said through an interpreter. “We want to push them to pay for their carbon emissions. We want to kick them out of the market.”

‘Lowest Cost’

A carbon market “will be the lowest-cost way to realize our targets,” with a marginal cost of about 50 yuan ($8.21) for each ton of emissions reduced, he said.

Putting a price on carbon is forecast to cut power demand in the city by about 16 percent the next three years to an annualized 53 billion kilowatt hours, Tang said. “If we are able to reduce demand for power, then we will reduce carbon emissions,” he earlier told delegates at the United Nations climate conference.

The carbon price in Shenzhen may be about 70 yuan a ton, almost double the 4.43 euros ($5.99) today in Europe on ICE at 8:52 a.m., Tang said.

Shenzhen maintained “close interaction and discussion” with the California Environmental Protection Agency in the design of its program, Tang said. China is learning from the EU and California and is withholding allocations and creating permit reserves, he said.

California’s Experience

Carbon markets are cost effective and will provide California “with funds so that we can invest in other kinds of programs, so there are co-benefits,” Matthew Rodriquez, secretary for environmental protection at the California EPA, said yesterday in an interview in Warsaw.

He declined to recommend carbon markets to developing nations seeking ways to help protect the climate.

“I’m really loath to get involved in the international discussions,” Rodriquez said. “I’m trying to do what’s best for California and I will share my experience in California with other countries and let them make the decision about whether they want to pursue that.”

China’s adoption of carbon markets has been swift, he said. “What took California six years to get started, it has taken the Chinese provinces and governments six months to get started and that’s a remarkable achievement,” he told delegates.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net

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