Chinese traders keep keen eye on new domestic emissions trading system

Traders in China have been keenly tracking the newly launched emissions trading system with a lot of interest. This despite the fact that trading is as of now limited to select emitters, unlike the earlier pilot ETS where there were fewer barriers to entry.

The ETS is being closely monitored by traders who hope to be able to participate at a later stage when trading is opened up to institutional investors. The ETS, which has been 10 years in the making, was finally launched July 23.

Day 3 volumes, on July 20, were 162,000 mt of CO2, a slight increase from Day 2, but nowhere near the volume of 4.1 million mt CO2 seen on Day 1.

"Liquidity is still not that good," said a Beijing-based developer. "Only compliance companies are allowed to do trading so volumes are not that high."

The prices, however, have been substantially higher than pilot ETS prices.

"Many of us thought it would be around [Yuan] 30-40, but it crossed 50," the developer said. "It has exceeded expectations. A lot of companies are trading for publicity as there is so much hype around the launch. We cannot take the current trends as a yardstick for how the ETS will pan out later."

Higher-than-expected prices are mainly due to participants being "nervous and excited" about the launch of trading, said Yan Qin, lead carbon analyst at Refinitiv.

"It also shows the emitters are eager to stockpile allowances in anticipation of tighter rules going forward," said Qin, who is based in Oslo. "The current compliance cycle only covers 2019 and 2020 emissions, but most enterprises shall have two-year forward looking horizon. With China's thermal generation +15% in H1 2021, many coal plants will expect their generation to rise more in 2021 and even old units have to be fired up now. Thus some of the enterprises could expect shortage for the 2021 compliance year and are stockpiling allowances for future."

The prices are still substantially lower than other global ETS prices like the EU ETS. Experts and traders are of the opinion that the lower prices are to prevent resistance from the Chinese power lobby.

Sustaining prices

The carbon price of about Yuan 50/mt is "just a fraction" of EU ETS prices, Qin said.

"Overall, China national ETS has adopted very generous allocation rules in the beginning and most enterprises shall have sufficient allowances," she said. "In addition, given that China's power prices are still highly regulated and carbon costs can not pass through to power prices, the regulator will face strong resistance from power producers if the initial carbon costs are too high."

If the prices are too high, it will be difficult for the Chinese power sector to sustain them, said a China carbon trader.

"Power players won't be too happy," the trader said. "But, they are too low, it will be ineffective. I'm expecting the price to stabilize between [Yuan] 40-50. For the first year at least, there is adequate supply,"

The trader was hopeful of being able to participate in the ETS soon.

"We are one of the leading trading companies actively involved in the pilot ETS," the trader said. "We hope to continue in the national ETS as we have hands-on experience. We have a portfolio of [Chinese Certified Emissions Reductions] credits, yet cannot participate. Maybe they will allow more participation next year."