China struggles to get the market mechanism right

Reuters

Some of China's biggest power generators are struggling to meet CO2-reducion targets via Shanghai's carbon market as a lack of supply means they cannot buy enough permits to cover their emissions, sources said.

The problem is the latest hurdle the country faces in its push to curtail the nation's spiralling greenhouse gas emissions, with over 60 manufacturers in the southern province of Guangdong already holding back from a market there.

The nearly 200 firms in Shanghai's CO2 market, one of six set up nationwide, have until June 30 to hand over permits to the government to cover for the CO2 they emitted last year.

The government distributed around 160 million permits to scheme participants in 2013, which was expected to be enough for them to meet their goals. Those who emitted more CO2 than covered by their allotted permits must buy extra in the market.

But sources said this was proving difficult for companies such as Shanghai Electric Power Co, a subsidiary of state-owned China Power International, and Huaneng Power International, another state-owned generator.

"We are trying to find someone who can sell in bulk, otherwise there is no way for us to comply and we will have to pay the penalty," said a China Power International official who requested anonymity because he was not allowed to speak to media.

Two officials in the company said CPI is short 400,000 permits for 2013. Even if that many permits were available, buying them at current market prices of just below 40 yuan ($US6.40) each would be much more expensive than paying a 100,000-yuan fine for non-compliance.

The CPI manager said the company's Shanghai emissions were higher than expected as it had been forced to use dirtier coal than normal.

"Power stations can't make independent decisions on electricity generation, it is up to the grid to assign production levels to ensure energy security," he said.

The company would also be unable to pass on the cost for CO2 permits to their customers as electricity prices are set by the government in China.

Caught short?

Potential sellers have been reluctant to come forward due to concerns that they could be caught short in the future.

The main participant in the Shanghai market is Baosteel, one of China's biggest companies.

It received 37 million permits for 2013, almost a quarter of the total in the Shanghai market.

The company said last week it had sold 10,000 permits in small deals, but was in no hurry to get rid of more.

"We have to prioritise compliance not only for this year but also for future years. Trading at a profit is not our priority," said a Baosteel manager who declined to be named.

He added current market prices were far lower than the investment it would take Baosteel to cut its emissions, and said the company was comfortable waiting for more attractive offers.

Several sources told Reuters that the local government in Shanghai on Thursday last week arranged a meeting for some of the biggest companies in the market to get feedback on why they were not participating.

They said companies complained that the government had not provided adequate guidelines for how to operate in the market or clear accounting rules.

On Friday, the Shanghai Environment and Energy Exchange, which hosts trading of the CO2 permits, brought together potential buyers and sellers to try and encourage trade.

"No one wanted to sell and it ended up turning into an appeal against the (permit) allocation process," said an exchange official.

Originally published by Reuters. Reproduced with permission.