Oct. 12 (Bloomberg) -- China’s first steps to build what is destined to be the world’s second-biggest emissions market are boosting the prospects for fledgling programs from Australia to California.
Four cement makers in China, the world’s biggest emitter, bought 1.3 million pollution permits for 60 yuan ($9.55) a metric ton last month in Guangdong. The province plans the largest of seven pilot programs for a proposed national market within three years. Exchanges will trade permits to emit an estimated 1 billion metric tons of greenhouse gases a year by 2015, close to half the volume in the European Union system.
By setting its own emission limits and allowing polluters to buy and sell permits, China’s domestic market is set to dwarf its own participation in the UN market, Bloomberg New Energy Finance forecasts. The country’s commitment may also help break a logjam in global-treaty negotiations and support trade in Australia and the U.S., where opposition to carbon pricing is unwavering, according to Climate Bridge, which has developed projects in China since 2006.
“What China is doing with its pilot scheme and ultimately with a national scheme sets a terrific example for the rest of the world,” said Alex Wyatt, the Melbourne-based chief executive officer of Climate Bridge and author of a report released yesterday with the Sydney-based Climate Institute. “Any suggestions by people in the West that China is not acting on climate change aren’t true.”
Global Climate Summit
Negotiators from China, the U.S., the EU and about 200 other nations are scheduled to meet next month in Doha, Qatar, for a global summit on climate. The discussions are expected to culminate in 2015 with a treaty to reduce greenhouse gases linked to climate change by imposing cuts on the richest nations and requiring poorer ones to slow increases in emissions, said Luiz Alberto Figueiredo Machado, Brazil’s undersecretary general for environment in the foreign ministry.
UN envoys agreed last year in Durban, South Africa, to work toward a treaty taking effect in 2020 that includes legally binding targets for all nations, including China and the U.S. Under the current pact negotiated in 1997 in Kyoto, Japan, emission limits apply only to industrialized nations. The U.S. has declined to sign the treaty, citing China’s refusal to commit to binding reductions.
Until now, China’s main role in the global emissions arena has been hosting the world’s largest stream of projects earning credits under the United Nation’s Clean Development Mechanism.
From windfarms in Inner Mongolia to hydropower plants in Yunnan, China is home to almost half of the 4,200 projects worldwide that are registered in the CDM, according to Climate Bridge. The projects have generated almost 600 million credits known as offsets, according to figures compiled by Bloomberg.
The offset market, in which richer nations pay for projects in developing countries in exchange for tradable credits known as Certified Emission Reductions, is struggling with record-low prices. CERs for December delivery closed down 6 percent at 1.66 euros ($2.15) on London’s ICE Futures Europe exchange, near the all-time low of 1.43 euros on Sept. 18.
UN credits traded at their biggest-ever discount to EU permits this week. The spread, which trades as a separate contract on the ICE Futures Europe, widened to a record 6.18 euros today, a 75 percent increase from a year ago.
The collapse in UN carbon prices hasn’t dissuaded China from using the so-called cap-and-trade system to meet a target of reducing emissions intensity by as much as 45 percent by 2020, according to John Connor, CEO of the Climate Institute. After initial skepticism, China’s government has seen the benefits of the CDM, he said.
“This positive experience with carbon markets has contributed to China choosing to establish its own domestic carbon-trade scheme,” Connor said in a report.
The carbon price of 60 yuan a ton last month in Guandong, the manufacturing hub near Hong Kong, reflects government policy more than market forces, said Milo Sjardin, the Singapore-based head of Asia-Pacific analysis at New Energy Finance. Depending on whether China allows investors and financial intermediaries to participate in the domestic market, prices may eventually be driven by the supply and demand, he said.
Shanghai, China’s biggest city, and Guangdong plan to require producers of steel, petrochemicals and electricity and others with annual emissions of more than 20,000 tons to buy tradable permits. The other regions in China’s pilot program are Beijing, Tianjin, Chongqing, Shenzhen and Hubei.
China is starting a domestic carbon-trading system in the five years through 2015 to achieve a 2020 target to control greenhouse-gas emissions through a market-based mechanism, the National Development and Reform Commission said in a statement in January.
The regional markets are expected to cover 800 million to 1 billion tons of emissions by 2015, according to estimates from Bloomberg New Energy Finance. That compares with 331 million tons in Australia, 439 million tons in California and Quebec, and 2.18 billion tons in Europe, Sjardin said.
While China’s pollution per unit of economic growth is falling, absolute emissions continue to rise, Connor said.
“China’s emerging schemes can dovetail with other global schemes as a stepping stone toward a global climate change agreement by 2015,” Connor said.
Australia, the biggest emitter per capita in the developed world, has yet to settle its climate policy, even though it started charging its biggest emitters $A23 a ton on July 1. While Prime Minister Julia Gillard won support last year for a fixed price on carbon for three years and a cap-and-trade system starting in 2015, she is trailing in the polls behind Tony Abbott, the opposition leader. Abbott has pledged to end what he says is a “toxic tax” that will raise prices in Australia and eliminate jobs as mines are forced to close or relocate.
“I have just come back from China and the U.S., and they are very concerned about their economic future, and the last thing they want to do is damage their competitiveness, score an economic own goal without doing any good for the environment by hitting their people with a carbon tax,” Abbott said July 31.
Australia has the broadest carbon tax of any country in the world, said Greg Hunt, climate spokesman for Abbott’s Liberal party. With 22 million people, Australia is charging emitters $9 billion a year, or about $400 per person, undermining the country’s competitiveness, he said.
Australia, which committed to reduce carbon pollution by 5 percent from 2000 levels, agreed in August to scrap a minimum price for carbon and link its market with the EU. Australian companies can now buy EU permits to comply with half their compliance requirements starting in 2015.
Carbon trading is still off to a slow start in Australia because of the political debate, Martijn Wilder, a partner at Baker & McKenzie LLP in Sydney, said in a Oct. 10 interview.
Wait and See
“Clients are going to watch what happens,” Wilder said. “Three years is a long time away.”
Cap-and-trade also faces political opposition in the U.S., the world’s biggest emitter after China. Former President George W. Bush refused to ratify the Kyoto Treaty, and President Barack Obama wasn’t able to win congressional approval for his own proposal.
One exception to U.S. climate skepticism is California. The first carbon auction in the biggest American state is scheduled next month in preparation for cap and trade next year.
The California’s Air Resources Board will sell at least 21.8 million allowances on Nov. 14. The state’s carbon futures traded today at $14.40, down 29 percent from this year’s peak of $20.25 a metric ton in July.
Governments in California and Australia said they are working together to promote global carbon trading. Australia is also in talks with China, according to Mark Dreyfus, the country’s parliamentary secretary for climate change. Dreyfus said he met in New York last month with China’s National Development and Reform Commission Vice Chairman Xie Zhenhua.
“We have been working closely with China over the last year on a range of policy and technical issues to support the development of credible, robust and effective carbon markets,” Dreyfus said in Sept. 28 statement.
Disagreement on whether developing nations should be forced to reduce emissions has been the “sticking point” in global climate talks, according to Sjardin at Bloomberg New Energy Finance. While a new climate treaty by 2015 remains an “ambitious goal,” negotiators at this year’s summit in Doha may start on “a more hopeful note” than last year, he said.
China’s steps to limit emissions are also undermining arguments against cap and trade in the U.S. and Australia, according to Sjardin.
“China has long been perceived as a laggard on climate action and used as scapegoat by other countries like Australia to delay action,” Connor said. “But this argument is increasingly difficult, if not impossible, to make given China’s recent policies.”
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