Could China follow Australia on a carbon price floor?

Price control mechanisms and tightly regulated markets are among the measures China is considering for its emissions trading schemes in a bid to avoid the price volatility and scandals that have hit Europe's $148-billion scheme.

As seven cities and provinces in China are preparing to launch the country's first emissions trading schemes to halt the nation's spiraling greenhouse gas emissions, the international carbon market is reeling from a huge over-supply and record low prices.

European permits have lost 80 per cent of their value since mid-2008 and 50 per cent in the last twelve months, spurring claims that the carbon market is becoming irrelevant in the EU's efforts to cut emissions.

"China will consider introducing both a price ceiling and a price floor to prevent the dramatic price fluctuation seen in the EU ETS," said Chen Jianpeng with the State Council's Development Research Centre, which is involved in studying the impact of a future Chinese ETS.

China, which accounts for almost a third of global CO2 emissions, plans to use the experiences from its pilot schemes to set up a national CO2 market later this decade.

The Beijing municipal government, which will host one of China's seven pilot schemes from 2013 or 2014, plans to implement a price floor and ceiling in the capital's CO2 market.

Restrictions

Volatility is just one of many challenges the EU market has faced since its launch in 2005.

Tax evasion, theft of permits and re-usage of credits have also damaged the reputation of the world's biggest carbon market.

China, which is generally skeptical about financial markets, is planning to keep its CO2 scheme under tight control.

After state-owned power company China Aviation Oil lost $550 million on speculating in oil futures in 2004, Beijing has ruled out forward markets in all but a handful of commodities.

Emissions trading will take place on government-approved exchanges, and recently announced regulations by the State Council means only spot trading with a five-day delay on delivery will be allowed.

Some observers said it would be beneficial to keep the market simple, at least initially, as Chinese compliance traders lack experience in emissions markets.

"The market is not ready to have carbon derivatives, green bonds and green funds in the pilot phase," said Shi Minjun, deputy director at the China Academy of Science's Research Center on Fictitious Economy and Data Science.

Determining value

But other observers were doubtful whether an emissions market could be effective if it did not provide a forward price, because companies would lack the information they need to make future investment decisions.

"Forward trading is necessary to determine the proper value of the credits that are traded," said Yu Xiang, with the Academy of Social Sciences.

"Without it, you risk getting an illiquid market for most of the year, then a rush of trading just before surrender."

But Qian Guoqiang, strategic director with project developer Sino Carbon, remained unconvinced that forward trading would guarantee the ability to make sound decisions for the future.

"Even in the EU ETS the price plummeted unexpectedly and the forward market did not provide any support," he told Reuters Point Carbon.

This article was originally published by Reuters. Republished with permission.