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Commodities 2023: China's carbon market to slow in 2023 as energy security, economy take priority


Carbon policy may be overshadowed by energy market, macro concerns

Expansion of compliance market, rebooting voluntary market uncertain

Compliance prices likely rangebound as market structure consolidates

  • Author
  • Ivy Yin
  • Editor
  • Aastha Agnihotri
  • Commodity
  • Coal Energy Transition Metals Petrochemicals
  • Tags
  • Asia Pacific
  • Topic
  • Asia-Pacific Energy Crisis Commodities 2023

China's carbon market development is expected to slow in 2023 as concerns about energy security and the reopening of the economy take precedence, but the tedious groundwork needed for long-term market evolution is expected to continue in the background, according to industry experts.

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What is important is that market participants in China now have a price indicator for carbon that allows them to factor in the cost of future decarbonization, as well as a rough trajectory of where these costs could be headed, even though coming months will focus on consolidating existing policies and refining the carbon market structure, both at the policy and the industry level.

The daily weighted average price of China Emission Allowances, or CEAs -- which represent the carbon price in the national compliance market -- was Yuan 51.23/mtCO2e (about $7.35/mtCO2e) at launch in July 2021, and averaged Yuan 58.07/mtCO2e ($8.34/mtCO2e) in 2022.

China's national carbon price largely hovered between $8-$9/mtCO2e in 2022 and is likely to remain rangebound in 2023 as further expansion into new, harder-to-abate sectors like industries, buildings, and aviation, as well as the entry of financial investors into the market are not on the immediate horizon, according to market participants.

China's Fudan University expects CEAs to reach as much as Yuan 65.42/mtCO2e ($9.39/mtCO2e) in 2023, up 17% from the current level of around $8/mtCO2e. Fudan University told S&P Global Commodity Insights that their forecasts are adjusted dynamically based on policy updates, and market participants' feedbacks in terms of positions and trading strategies.

The 2022 China Carbon Pricing Survey by Beijing-based consulting firm ICF International Consulting expected China's average carbon price to reach Yuan 87/mtCO2e ($12.49/mtCO2e) in 2025, Yuan 130/mtCO2e ($18.67/mtCO2e) in 2030, and Yuan 239/mtCO2e ($34.32/mtCO2e) in 2050, reflecting expectations that free emission allowances will be increasingly tightened over time.

Tighter benchmarks

Near-term drivers that could impact CEA prices include a recent proposal to tighten emissions benchmarks for coal-fired power plants for the second compliance period ended December 2023, implying more demand for offsets and higher prices.

The emissions benchmarks for coal-fired power plants will be tightened by 6.5%-18.4%, depending on the plant specifications, compared with the first compliance period, according to an environment ministry proposal circulated in November 2022.

It said tighter benchmarks were justified by improvements in emissions reporting and management capabilities of the power companies, a trend expected to continue in 2023.

ICF's survey showed 27% of respondents expect their companies to have surplus emission allowances to sell during the second compliance period ended December 2023, and 41% expect to buy allowances from the market in the same period.

The government is yet to clarify whether emission allowances issued during the first compliance period can still be used to meet the second compliance period's obligations, and any announcement to this effect could trigger trade volumes in 2023.

Among China's 'Big 5' state-owned generation utilities, surplus allowances from the first compliance period were around 16.2% for Huadian Group, 10.5% for China Energy Investment Corp., 10.4% for Huaneng Group, 9.5% for Datang Group, and 8.4% for State Power Investment Corp, Zhang Zhongxiang, founding dean of Tianjin University's Ma Yinchu School of Economics, disclosed at an event.

Expansion to new sectors

Currently, China's compliance market only covers the thermal power generation sector and the environment ministry's initial plan was to enroll new sectors by 2025 including refining and petrochemicals, chemicals, building materials, steel, nonferrous metals, paper, and aviation.

No official guidelines have been issued to these sectors in reporting emissions, although provincial level pilot exchanges cover these sectors locally. These sectors are expected to have more sophisticated emission accounting procedures than the power sector, according to a report by China's carbon think tank SinoCarbon.

ICF's survey indicated that the cement and steel sectors are more likely to be enrolled in 2023. Out of 465 stakeholders, 35% and 31% believed cement and steel sectors will be enrolled by 2023, respectively, and fewer than 25% of respondents expect the compliance scheme to be extended to other sectors by 2023.

The research arm of China's oil major Sinopec expects refining and petrochemicals, and chemicals sectors to be enrolled during the 15th five-year period (2026-2030).

China's voluntary carbon market

Besides the flagship compliance market, the rebooting of China's domestic voluntary carbon market called China Certified Emission Reductions, or CCERs, will be closely watched in 2023.

CCERs traded at Yuan 90/mtCO2e ($12.92/mtCO2e) as of Dec. 30, 2022, according to the pilot exchange Beijing Green Exchange. This price is notable as it provides an alternative carbon price discovery mechanism outside the regulated market.

Some of the key things to watch out in 2023 for will be the emergence of the Beijing Green Exchange as a centralized platform for the revamped CCER mechanism, any regulations that clarify the role of international voluntary carbon credits in China's emissions schemes, the cross-border trading of carbon credits under Paris Agreement's Article 6, and how imported credits will be used to meet China's emissions targets.

Given that the Article 6 is not fully ready for implementation, and trading activities in line with Article 6 are still developing, the likelihood for opening China's carbon market for international credits is limited in 2023.

So far, Hainan International Carbon Emissions Exchange and Hong Kong's Core Climate trading platform, both established in 2022, are expected to be the major channels for China's cross-border carbon trades and could see more activity in 2023.