China Carbon Permits Trade 22% Below Europe on Market Debut

China traded its first carbon dioxide permits for 22 percent less than today’s price in Europe as the nation inaugurated the Shenzhen Emissions Exchange.

The permits were priced from 28 yuan to 30 yuan ($4.90) a metric ton, according to Chen Hai’ou, chief executive officer and president of the exchange. That compares with 4.70 euros ($6.30) a ton today for European Union permits on London’s ICE Futures Europe exchange, the world’s biggest carbon market by traded volume.

Shenzhen, the first of seven test markets to start in the world’s most populous nation, is one of China’s Special Economic Zones designed to promote market policies. Its new cap-and-trade program will initially include 635 companies as part of China's plan to limit heat-trapping gases linked to climate change. The Shenzhen exchange traded 21,112 tons of carbon in eight transactions valued at 613,236 yuan, according to a video presentation at today’s opening ceremony.

“The meager volume and pre-approved price level of today’s trades is likely to characterize the initial stages of all of China’s seven ETS pilots,” said Richard Chatterton, a London-based analyst for New Energy Finance.

China had planned to start all seven pilot programs this year, with Shenzhen’s market followed by Beijing, Shanghai, Guangdong, Tianjin, Chongqing and Hubei. Some of the markets may start in 2014, Xie Zhenhua, vice president of the National Development and Reform Commission, said at today’s ceremony in Shenzhen. He didn’t disclose which exchanges were behind their original schedule.

Buying Permits

The new markets are set to regulate 800 million to 1 billion tons of emissions by 2015 in the world’s biggest cap-and-trade program after Europe’s, according to Bloomberg New Energy Finance.

PetroChina Co., China’s biggest oil producer, and Hanergy Holding Group Ltd., a renewable-energy company, each bought 10,000 allowances today from Shenzhen Energy Group, according to the video presentation. PetroChina paid 28 yuan for its permits, while Hanergy paid 30 yuan, according to the presentation.

Shenzhen City Bao’an Water Services Co. and five individuals also bought permits. The names of the individuals weren’t disclosed.

Shanghai’s carbon exchange plans to reduce the supply of carbon permits when prices are low and sell more when they are high “to maintain relatively stable levels,” Xie said in an April speech on climate legislation. Xie is China’s lead climate negotiator.

Regulations governing transactions in Shenzhen are still being worked out.

Non-Compliance Penalties

The penalties for non-compliance with the new emissions program may be too low to pose a real threat, according to Tomas Wyns, Europe director at the Center for Clean Air Policy, who consulted on Hubei’s carbon market design. If profits outweigh the cost of flouting the law, companies have no incentive to reduce pollution. Concern of official corruption is also on the minds of regulators.

China’s emissions from energy use rose 6 percent last year to 9.2 billion tons, 27 percent of the world’s total, according to statistics published June 12 by BP Plc. That pace is less than 9 percent in 2011 and is the lowest increase since 2008.