Carbon trading boosters

As China kicks off carbon trading, Europe looks to kick-start its ETS. Elsewhere, a Chinese region mulls a cap on cars and solar groups look to bypass anti-dumping laws.

The world's largest carbon emitter kicked off a pilot emissions trading scheme in the south eastern city of Shenzhen last week even as the elusive search for a fix to Europe's emissions system continued. This is the first of the seven test markets that China hopes to roll out soon, and the smallest, with covered emission estimated at 32MTCO2e/year from 635 entities.

The buyers of allowances on June 18 – the day that trading officially began – included PetroChina and Hanergy Holding Group, at prices which were about a fifth less than European Union permits on the London's ICE Futures Europe exchange. Trading is likely to be muted during the year, but some spurt in volumes and price could occur close to the compliance date, which, according to Bloomberg New Energy Finance analysts, would be in early 2014. There is also some talk of linkages of the Shenzhen scheme with other markets, but these discussions are at an early stage.

Meanwhile, there was some straight talk about the European carbon market from the executive director of the International Energy Agency, Maria Van der Hoeven. In an interview in Russia, she said the EU carbon market "doesn’t work anymore."

The attempts to make it work moved another step ahead when the environment committee of the European Parliament supported the backloading proposal. There is now a higher likelihood of it being approved in the plenary vote on July 3.

Back in China, there was an interesting proposal from the city of Shijiazhuang – the capital of steel-producing Hebei province surrounding Beijing – that would control some emissions immediately. It plans to restrict the number of new vehicles to 100,000 this year, and limit cars per household to two. This quota will be cut to 90,000 in 2015, with a lottery being used to determine who can buy the cars.

The Chinese government was also in the news for promising support to its solar industry, urging lenders to ease financing and pushing for industry consolidation. In an online statement, the State Council said that China must aid the industry's "healthy development" through the current sluggish global market and slow domestic demand. It will encourage mergers and acquisitions among solar companies and curb blind expansion of capacity. It will also control the expansion of energy-intensive production to curb pollution.

Chinese solar companies like Trina Solar and JinkoSolar, singed by duties on solar exports to Europe and the US, are moving production overseas. The target countries include South Africa, Turkey and Portugal.

There is also another reason for production to move out of China: rising costs. US-based solar manufacturer Silevo, which produces cells at a 32MW factory in China, is in the process of financing a 200MW cell and module plant in the US.

“Water and electricity in China are much more expensive than in the US, and the labour cost is very close. In terms of production cost, it’s very comparable to North America,” said chief executive officer Zheng Xu.

There were two important financing announcements last week. PensionDanmark pledged $US200 million in funding for a wind farm in Nantucket Sound, in the first committed investment in Cape Wind Associates’ proposed 468MW offshore park. This will be the first offshore wind park in the US and has been 12-years in the making. The investment is conditional on a final decision this year to construct the farm.

In addition to pension funds, the renewable energy sector could also see some Islamic financing. Activ Solar is tapping into that source to expand into markets in the Middle East. The company's CEO said the predictable and steady revenue streams of solar plants could be a good fit for the growing Islamic financing market.

EU carbon

European carbon slipped last week after lawmakers voted – by only a small majority – in favour of a compromise plan to fix the region’s oversupplied market. European Union allowances (EUAs) for December 2013 lost 8.2 per cent over the week to close at €4.38/tonne on Friday, compared with €4.77/t at the end of the previous week. EUAs were trading as high as €4.90/t as the market opened last week.

They dropped on Wednesday to close at €4.39/t after the Environment Committee of the European Parliament (ENVI) passed an amended version of the European Commission’s proposal to delay auctions of some carbon permits. The committee carried the main compromise amendments with 38 out of 69 votes. This was the same result as in an ENVI vote in February on the original backloading proposal. The bearish price reaction on Wednesday may imply that market participants required a more clear-cut signal from ENVI to justify bullish bets.

UN Certified Emission Reduction credits (CERs) for December 2013 gained just €0.01/t last week to close at €0.47/t.

This article was originally published by Bloomberg New Energy Finance.

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