China Projects Skirt Price Floor, Avoid Carbon Supply Cuts

Chinese carbon-cutting projects are skirting around the nation’s unofficial floor price for carbon credits, according to the former head of an emissions trading lobby group. That would indicate the country is less likely to show supply restraint, said a Stanford University researcher.

Some Chinese projects get paid at a floor price of about 8 euros ($10.06) a metric ton and then send fees back to the buyer for consultancy services in a second transaction, according to Henry Derwent, former president of the International Emissions Trading Association, the Geneva-based lobby group. EU factories, power stations and airlines can use the offsets to cut the cost of complying with the bloc’s greenhouse-gas laws by 48 percent.

China, the biggest exporter of carbon credits since the Clean Development Mechanism started supply in 2005, installed the floor by refusing to approve projects that proposed in their applications to sell offsets at lower prices, said Laurent Segalen, the London-based managing director of ECMF, a Luxembourg fund. Certified Emission Reductions, or CERs, for December in the secondary market broke though the limit in September last year and reached a record 3.27 euros on April 4.

“The government has a difficult time enforcing price controls when they conflict with basic economic incentives,” said Richard Morse, a researcher specializing in carbon and coal markets at the Freeman Spogli Institute for International Studies at Stanford University. The nation may be struggling to make rules stick, as it does in its coal market, Morse said.

‘Notoriously Hard’

“Beijing’s price caps in coal are notoriously hard to enforce once you get out into the provinces where oversight is thinner and there is money to be made by transacting at market-based prices instead of government-dictated prices,” Morse said.

Wang Shu, an official in the department of climate change in the National Development and Reform Commission in Beijing, declined to comment or say whether China may lower its floor price, when contacted by phone. Yang Zongjie, another official in that department, said China was approving emission credits for supply out to 2019 and also declined to comment on the floor. The NDRC acts as China’s regulator for United Nations carbon credits.

China’s consumption of coal was 1.7 billion tons of oil equivalent in 2010, 2.5 times the level in 1997, when the world agreed the Kyoto Protocol, according to statistics from BP Plc. The nation is the world’s biggest emitter of greenhouse gases blamed by scientists for climate change.

‘Sensitive Topics’

Camco International Ltd. on May 22 reported a loss for 2011 of 29.3 million euros after writing down the value of its CERs, including those in China. The credits have plunged 71 percent in the past year on an oversupply in Europe. The contract for December rose 1 cent today to 3.61 euros a ton on the ICE Futures Europe exchange in London as of 4:50 p.m.

Scott McGregor, Camco’s chief executive officer, declined to comment on Chinese government regulation in a phone interview from London on May 22. “These are very sensitive topics,” he said.

McGregor declined to say how Camco renegotiated the company’s contracts to buy carbon credits from China to ones linked to market prices instead of based on fixed prices above those currently in the secondary market.

Camco’s renegotiation indicates sellers including those in China are willing to accept lower prices, said Bloomberg New Energy Finance.

‘Tangible Evidence’

It’s unclear how widespread the consultancy services payments are to China carbon-reduction projects, Derwent said May 4.

The world’s most populous nation is establishing pilot carbon markets as its seeks more ambitious greenhouse-gas reductions from developed nations including the U.S. That may not slow its exports anytime soon, Stanford’s Morse said.

“I would be very skeptical of the idea that China is going to be holding back supply for its own non-existent market,” Morse said. “I think it’s wishful thinking.”

China may become a buyer of offsets sometime after 2015, Derwent said.

“They are grappling with the transition to the buy side from the sell side,” he said.

‘Subliminal Discussion’

China may never officially repeal its floor because it was always a “subliminal discussion,” said ECMF’s Segalen, who was a commodities managing director at Nomura Holdings Inc. ECMF invests in energy assets and carbon contracts.

“What was never written down, doesn’t have to be repealed,” he said.

Supply from China may help drive emission credit prices to record lows because the EU has set a maximum usage through 2020 of about 1.8 billion tons, Segalen said. About 3.9 billion tons of credits may compete to fill that quota, including offsets from China, Russia and Ukraine, according to data from the UN Environment Program’s Risoe Centre on Energy, Climate & Sustainable Development in Roskilde, Denmark and Bloomberg New Energy Finance in London.

“When you have a market that has a wall, it tends to go near zero,” Segalen said.

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