China's compliance carbon market price hits record high of $11.74/mtCO2e

The price of China's compliance emission allowances, or CEAs, in the national carbon market hit a record high of Yuan 83.33/mtCO2e ($11.74/mtCO2e) on March 8, as companies rushed to meet a deadline for non-compliance and amid broader signals of tighter emissions regulations from the government.

This was the highest carbon price since China's national emissions trading scheme, or ETS, was launched in July 2021 with an opening CEA price of Yuan 51.23/mtCO2e or $7.22/mtCO2e, according to data from the Shanghai Environment and Energy Exchange, or SEEE.

CEA prices have been rising gradually over the past two years after hitting a low of $5.84/mtCO2e on Dec. 8, 2021, reaching a high of $11.41/mtCO2e in December 2023 but then dropping back below $10/mtCO2e by the end of January.

Carbon market participants in China started hoarding emission allowances after the country's main administrative authority State Council announced new legislation in February under which companies that have missed the Dec. 31 deadline to meet emissions obligations will face substantially higher fines.

The new legislation, to be enforced from May 1, has pushed companies to acquire CEAs within the span of a few weeks and resulted in prices rising to current levels, according to market participants.

"Companies that have not fulfilled their liabilities in the previous compliance cycle [ended Dec. 31, 2023] must be penalized. Under the ministry-level regulation, they only need to pay a fine up to Yuan 30,000 ($4,176) and take corrective actions, but this regulation will be replaced by state-level legislation in May," a China-based carbon asset manager said.

Companies under China's ETS have to surrender CEAs equivalent to their liable emissions in a given compliance cycle. Some ETS participants, mainly power generation utilities, failed to do this due to financial difficulties amid high fuel prices, slow economic recovery and regulated retail prices.

"Some companies haven't fulfilled the previous cycle's obligations. If they cannot get the job done before May, they will face a much stricter penalty – paying for the allowance deficits at 5-10 times of the average market price. That's why they rushed to the market and that's how the price went up," the asset manager said.

Two Sessions

Meanwhile, policymakers and advisors at China's biggest annual political gathering, called the "Two Sessions" or "lianghui" last week called for tightening emission allowances and expanding the ETS to cover new sectors, boosting bullish sentiment in the national carbon market.

"Two Sessions have sent a strong signal to the carbon industry. I saw 35 policy proposals about carbon peaking and carbon neutrality. Quite a few of these proposals touched on carbon market development, and they are submitted by senior policy advisors and influential entrepreneurs," a China-based policy analyst said, but declined to be named.

"These proposals called for faster ETS expansion to new sectors, tighter allowance supplies and higher carbon prices," the analyst said.

Market participants expect the expansion of China's ETS and the rising carbon prices to allow the government to take a stronger negotiating position in discussions related to the EU's Carbon Border Adjustment Mechanism, or CBAM.

China's ETS currently covers only the power generation sector and mainly coal-fired power utilities, and proposals to expand the scheme included CBAM-eligible sectors, mainly iron and steel, aluminum and cement.

Price trajectory

China's CEA prices are relatively high compared to voluntary carbon credit prices that are languishing at less than $1/mtCO2e, but much lower than EU ETS prices.

Platts CNC, which reflects nature-based credits including standardized contracts, was assessed stable at 31 cents/mtCO2e, although Platts CEC, which reflects CORSIA phase 1 eligible credits, was assessed stable on the day at $11.50/mtCO2e. EU ETS prices were back at Eur60/mtCO2e ($65.60/mtCO2e) after weeks of declines.

Whether China's high CEA prices can be sustained after May depends on two factors: policies for the current compliance cycle and price signals from China's newly rebooted domestic voluntary carbon market, namely the China Certified Emission Reductions, or CCER, market.

The environment ministry has neither announced the volume of emissions allowances for the current cycle nor confirmed whether the ETS expansion will happen this year. Such uncertainties around policy lead to an unclear price trajectory.

China's ETS market participants can use CCER credits to offset up to 5% of their liable emissions, so the voluntary market also impacts the compliance market's supply and demand balance. As of now, no project has been registered under this new regime and thus no CCER credits have been issued.

"If CCER supplies go up and their prices are competitive, there will be a lower demand for ETS allowances, and ETS prices may decline. However, if the CCER prices are much higher and the supplies are low, ETS prices will continue to increase," a carbon trader said.

CEA price

The weighted average CEA price rose 4.6% from the previous week to Yuan 83.33/mtCO2e ($11.74/mtCO2e) and the weekly trade volume fell 22% to 1.02 million mtCO2e, SEEE data showed.

For different vintages, as of March 8, daily weighted average prices were Yuan 85.78/mtCO2e ($12.09/mtCO2e) for 2019-2020 CEAs, Yuan 79.20/mtCO2e ($11.16/mtCO2e) for 2021 CEAs, and Yuan 85/mtCO2e ($11.98/mtCO2e) for 2022 CEAs, exchange data showed.

The SEEE hosts the trading system of China's compliance carbon market. It does not provide information on bids, offers or counterparties.

TABLE 1: China's compliance carbon market weekly data

Source: Shanghai Environment and Energy Exchange Co. Ltd.

TABLE 2: China's compliance carbon market historical data

*China Emissions Allowance Daily Weighted Average Price

**China Emissions Allowance Daily Trade Volume

Source: Shanghai Environment and Energy Exchange Co., Ltd.