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Carbon Traders Stung by Rout Try Again in China: Energy Markets

January 18, 2013

Carbon Traders Stung by Rout Try Again in China

From windfarms in Inner Mongolia to hydropower plants in Yunnan, China has almost half of the 4,200 projects registered worldwide supplying offsets in the UN system, according to data compiled by Bloomberg. Source: ImagineChina va Bloomberg

Carbon traders are backing China to revive a global emissions market that lost 34 billion euros ($45 billion) last year as it shrank for the first time in history.

Investors from Climate Change Capital in London to Climate Bridge Ltd. in Melbourne said this month they are seeking involvement in what may become the world’s largest emissions market. Beijing’s worst-recorded air pollution has renewed pressure on the government, which aims to cut carbon dioxide emissions by as much as 45 percent before 2020.

Falling European Union and United Nations prices shrank the value of carbon emissions traded around the world by 36 percent to 61 billion euros last year, Bloomberg New Energy Finance said Jan. 3. Seven exchanges are scheduled to start pilot programs this year in China, the world’s most polluted country, establishing the biggest cap-and-trade program outside the EU.

“Bad air quality will be putting a lot of pressure on the government to protect the environment,” said Qian Guoqiang, a former Chinese climate negotiator and now strategy director at SinoCarbon Innovation & Investment Co., a carbon consultant in Beijing. “China is very willing but not fully prepared to make carbon trading work because it is such a complex system.”

Foreign Expertise

Most of China’s pilot programs will tap foreign trading expertise by relaxing rules that would ban their participation, said Qian, whose company counts Alstom SA (ALO), the French power- equipment maker, among its clients. Foreign investors may be especially welcome in the trade of credits known as offsets, which China envisions as a successor to the UN’s Clean Development Mechanism, said Milo Sjardin, the Singapore-based head of Asia-Pacific analysis for Bloomberg New Energy Finance.

From windfarms in Inner Mongolia to hydropower plants in Yunnan, China has almost half of the 4,200 projects registered worldwide supplying offsets in the UN system, according to data compiled by Bloomberg. The offsets are so named because they reduce a polluter’s responsibility for undertaking more costly clean-ups of its own operations.

Developers have produced more than 1 billion more offsets than emitters will need before 2020, according to Sjardin, driving prices to record lows. Certified Emission Reductions, or CERs, in the UN’s CDM program, created by the 1997 Kyoto Protocol, have dropped 92 percent from a year ago, trading today at an all-time low of 31 euro cents on the ICE Futures Europe exchange in London.

Partial Replacement

For investors, the benefit of a Chinese offset market is a new outlet for projects that are no longer viable under the CDM. For China, the pilots set up an alternative way to fund emission-reduction projects outside the seven regions with limits on greenhouse gases.

“It will partially replace the CDM,” Qian said.

The glut of UN credits has grown as fresh sources of demand failed to materialize. While Australia joined New Zealand and the EU last year among offset buyers, new markets in South Korea and California ruled out UN credits at least through 2020. Russia, Japan and Canada dropped out of the agreement at last year’s climate summit in Doha to extend their commitments to the Kyoto Protocol.

A surplus of emission permits has also driven EU prices to a record low of 5.05 euros a ton on London’s ICE Futures Europe exchange. The European Commission is considering a plan to delay additional permits in coming years and has clamped down on offsets. Starting this year, Europe won’t acknowledge UN credits awarded for removing some industrial gases linked to climate change. Europe is also banning offsets from projects registered after 2012 in all but the least developed countries, which no longer include China.

‘Effectively Dead’

The value of global carbon trading tumbled last year from 95 billion euros in 2011, New Energy Finance said. While it estimates the market will rebound to 80 billion euros this year, the price of UN offsets through 2015 will remain in a range of 15 cents to 50 cents a metric ton, Sjardin said.

“The CDM as a source of new emission-reduction projects in the developing world has effectively been dead for 12 months now, with the very low CER price making it almost impossible to justify developing a new CDM project,” said Alex Wyatt, chief executive officer for Climate Bridge, which started seven years ago in Shanghai. “China is by far the most interesting market in the world.”

China is the largest emitter of greenhouse gases. The World Bank estimates it has 16 of the world’s 20 most-polluted cities. Beijing, home to more than 20 million people, began to release real-time air quality data measuring pollutants of less than 2.5 micrometers in diameter in September, the official Xinhua News agency said Dec. 28.

Restricted Access

China limits outside involvement in most of its securities and commodity markets, fueling speculation that the National Development and Reform Commission, or NDRC, will restrict foreign participation in carbon trading.

At least three of China’s seven pilots have asked to allow traders, including foreigners, to buy and sell permits alongside newly regulated emitters, according to four officials helping to manage the projects. They need overseas help because China lacks trading experience, said the officials, asking not to be identified because they aren’t authorized to speak to the media.

“China already has experience with the CDM and the carbon market in general, so there is nothing stopping a Chinese investment bank hiring knowledgeable people to trade carbon,” said Christian Ellerman, the Beijing-based representative for Ecofys, an energy consultant based in Utrecht, the Netherlands. “However, it’s not clear yet what degree of involvement that foreign brokers will be allowed in this market. They may be allowed only in some areas and with conditions.”

Trading Guidelines

The NDRC, the main economic planner, will let the regions set their own guidelines for trading, including roles for banks, investors and foreign entities, Jiang Zhaoli, the director of National Policy and Compliance at the NDRC’s Department of Climate Change, said by phone from Beijing.

“Pilot regions encourage every aspect of investors, including foreign investors, to participate in voluntary emission trading, based on projects such as renewable energy and carbon sequestration in forestry,” Jiang said. “Some regions will only allow non-financial companies to trade mandatory emissions, while Beijing encourages financial institutions.”

Largest Market

The Chinese capital of Beijing, as well as Shanghai, its biggest city, and Guangdong, its largest manufacturing center, are among the pilot programs. The other regions are Tianjin, Chongqing, Shenzhen and Hubei. They are expected to regulate 800 million to 1 billion tons of emissions by 2015, Sjardin said. That compares with 331 million tons in Australia, 439 million tons in California and Quebec, and 2.18 billion tons in Europe.

The China Beijing Environment Exchange is among those to be allowed by local authorities to trade voluntary emissions credits, it said in a statement posted Jan. 15. China considers voluntary credits to be the precursor to domestic offsets, Sjardin said.

“By 2020, China will be the world’s largest marketplace for emission reductions,” James Cameron, co-chairman of Climate Change Capital in London, said in an interview. “The CDM has proven that it’s possible to cut greenhouse gases without undermining economic growth. These lessons have been learned by the Chinese authorities.”

Record Pollution

China was issued more than 703 million metric tons of CERs, according to UN data. They were worth about 7.4 billion euros, based on the average CER price of 10.50 since 2008.

China shut dozens of factories and pulled government cars off the roads after pollutants in Beijing reached records three days this week. Levels of PM2.5, airborne particulates that pose the largest health risks, rose to as much as 993 micrograms per cubic meter on Jan. 12, compared with World Health Organization guidelines of no more than 25.

“The government will be empowered to some extent to use market mechanisms to solve the problem,” Qian said. “There is little reluctance on the government side or on the investor side. The main obstacle as China tries to start its pilot program is its lack of expertise and trading infrastructure.”

To contact the reporters on this story: Pratish Narayanan in Mumbai at pnarayanan9@bloomberg.net; Mike Anderson in Singapore at manderson34@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net


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