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China launches first regional carbon trading scheme

Shenzhen market risks over-allocation without further modifications

Oslo (14 June 2013) 

On Tuesday 18 June, the city of Shenzhen will launch as the first pilot emissions trading scheme (ETS) in China, but without modifications to the program design it is likely the scheme will be over-allocated, according to analysis by Thomson Reuters Point Carbon, the leading provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environmental markets.

China’s National Development and Reform Commission (NDRC) has assigned the region of Guangdong – in which Shenzhen is located – an emissions intensity reduction target of 19.5 percent from 2010 to 2015. Shenzhen, already the most energy-efficient city (in terms of energy intensity) within Guangdong, has been given a more aggressive target of 21 percent during the same period.

The scheme launched on Tuesday will include both direct sources of emissions and indirect emissions from power and heat consumption, and will cover 635 companies in the industrial sector. According to the local government, these companies accounted for 31.7 Mt carbon emissions in 2010, 38 percent of the city’s overall emissions. For covered companies as a whole, the government has set a carbon intensity reduction target of “over 30 percent”, presumably over the years 2010-2015.

“While the official list of covered companies is yet to be published, big names such as PetroChina, CNOOC, China Resources and Huawei will probably be covered, due to their business in the city, which has a population of over 10 million”, said Hongliang Chai, analyst at Thomson Reuters Point Carbon. “Despite market uncertainties, we forecast the covered companies will reduce total emissions due to such an ambitious intensity reduction target set by the government,” continued Chai.

 

Ex-post adjustment

The Shenzhen ETS is the first pilot to come up with an adjustment plan aiming to avoid the risk of over-allocation, as seen in the EU ETS. Over the next three years, the local government will allocate around 100 million permits for use within the scheme, although the actual cap will be highly dependent on the city’s economic growth. Given the uncertainties of any economic forecast, the final allocation volume will be subject to an ‘ex-post adjustment’, where the final allocation of a company will be adjusted in direct proportion to its actual output value.

Thomson Reuters Point Carbon calculates that the covered emissions will slightly decrease from 31Mt in 2013 to 29Mt in 2015. The total emissions over 2013-2015 are forecast to be approximately 90 Mt, 10 Mt below the government’s intended free allocation. In other words, the Shenzhen ETS will be over-allocated by 10 Mt, prior to ex-post adjustment.

We see a significant risk of over-allocation. The ex-post adjustment isn’t a cure-all, and will probably not solve this issue – especially since the pilot will cover indirect emissions­. Uncertainties on future emissions and allowance prices still loom large in determining the scheme’s futures success” commented Chai.

 

Note to editors 

·         In November 2011, China’s National Development and Reform Commission (NDRC) approved the establishment of pilot emission trading schemes (ETS) in seven municipalities/provinces: Beijing, Tianjin, Shanghai, Chongqing, Guangdong, Hubei and the city of Shenzhen, with a nationwide scheme earmarked to start in 2015.

·         Emissions intensity is measured by CO2 per unit GDP.

·         Indirect emissions are a consequence of the power and heat consumed, but not actually emitted by the covered source – and direct emissions from on-site fossil fuel burning and from industrial processes such as clinker production.

·         Allowances will be traded on a local exchange. There remains no sign that the China Securities Regulatory Commission (CSRC) will lift its ban on forward trading of carbon, in line with comments made last November by Jiang Yang, vice chairman of the CSRC, that China should start a carbon market with spot trading only. 

·         In China, the restriction of five working days interval for carbon trading still holds. This means a trader who buys allowances on June 18 will have to wait until June 25 to be able to sell his allowances.

 

For further information, or if you would like to speak to one of our analysts, please contact: 

Jake Hemingway 
PR Specialist, Thomson Reuters Point Carbon 
Mob: +44 (0) 207 542 5204 
E-mail:
jake.hemingway@thomsonreuters.com

Hongliang Chai

Analyst, Emerging Carbon Markets, Thomson Reuters Point Carbon

Mob: +47 48 22 64 86

E-mail: hongliang.chai@thomsonreuters.com