China Urged to Avoid Excess Carbon Quotas in National Trading

  • Taking back of quotas when the economy slows is urged
  • Nation advised to auction some emission quotas at beginning

Operators of two local pilot carbon-trading programs in China are urging designers of a national trading scheme to avoid allocating more emissions quotas than the market needs in order to avoid some of the supply imbalances the European Union has experienced with its own program.

China should “make it possible to take back carbon quotas in an economic downturn” to learn lessons from the European Union, said Zhou Cheng, vice president at the China Beijing Environment Exchange. A glut of carbon allowances could result as the economy slows because allocations are based on historical emissions, Zhou said. 

China Emissions Exchange, which overseas carbon trading in every part of Guangdong except the city of Shenzhen, is advising the government to auction some of the quotas at the beginning rather than making all permits free, said President Ye Jun.“This is to attract more investors, raising liquidity in the market,” he said.

China has targeted a 2017 start for a national emissions trading scheme to help reduce greenhouse gases. In the run-up to that date, seven local projects have been in operation. The Beijing Environment Exchange and the China Emissions Exchange are among the seven pilots. The other regions include Shanghai, Shenzhen, Tianjin, Chongqing and Hubei.

China’s national system will adopt a cap-and-trade rule, under which the biggest corporate polluters buy credits from those that don’t pollute as much and companies are encouraged to cut their emissions so they can sell their unused allocations.

Permit Glut

The European Union’s Emissions Trading Scheme, begun in 2005, is the world’s biggest program for trading greenhouse gas emissions allowances. The EU ETS has been criticized, among other things, for an over-allocation of permits and price volatility.

Benchmark EU front-Dec. carbon futures have lost almost 40 percent this year on ICE Futures Europe in London as nations handing out free permits add to increasing supply from almost-daily auctions.

Zhou and Ye expect China to keep the pilot exchanges even after the national system debuts. Carbon prices among exchanges will tend to unify based on a national standard of quota allocation, Zhou said.

China has announced its national program will cover eight industries including papermaking and aviation. Beijing Municipal Commission of Development and Reform said in January that it’s studying plans to link its allocated emission quotas with the national market’s allowances, along with rules regulating the repurchasing of quotas.

Emission allowances given to local companies excluded by the eight industries will still be effective and could be traded on the Beijing Environment Exchange, said Zhou.

The nation should consider the costs of emitters already included in pilot exchanges when it builds up the carbon market, Ye added.

— With assistance by Feifei Shen

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