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Global turbulence slows expansion of China's compliance, voluntary carbon markets

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Global turbulence slows expansion of China's compliance, voluntary carbon markets


New sectors unlikely to be enrolled in compliance market this year

Compliance market liquidity drops, recovery may be pushed to 2023

Voluntary carbon market in limbo as restart delayed

  • Author
  • Ivy Yin
  • Editor
  • Manish Parashar
  • Commodity
  • Coal Energy Transition Natural Gas Metals
  • Topic
  • Energy Transition Environment and Sustainability War in Ukraine

Overarching concerns about the economy, a global energy crisis and a COVID-19 resurgence have slowed China's push to expand its carbon market, and industry experts expect the pace of growth to continue to decelerate until conditions improve.

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So far, Beijing has delayed the announcement of several key policies in both the compliance and voluntary carbon markets, such as the enrollment of new industrial sectors into the national carbon market and the relaunch of the domestic China Certified Emission Reductions, or CCERs, mechanism.

In the near term, trading volumes in China's compliance carbon market have dried up as both provincial governments and power companies are preoccupied with managing fuel supply inventories and hedge against global disruptions in coal, gas and oil trade flows.

This is in line with the decline in liquidity and prices in global carbon markets as countries prioritize immediate energy security over energy transition. While the Russia-Ukraine conflict could roil winter energy supplies, companies are bracing for a drain on cash flows due to a looming economic recession.

In May, Li Keqiang, Premier of the State Council, said China's key economic indicators made significant reductions in March-April, and, to some extent, the nation was facing even more difficulties than in 2020 when COVID-19 initially broke out.

His speech was delivered at a meeting titled 'Stabilizing the nation's economic base' and was widely seen as a call to save China's economy. Consequently, China has shifted focus from curbing energy consumption and intensity to growth and stability for this year.

Compliance market delays

China's national compliance carbon market was launched July 16, 2021, with over 2,000 power companies, accounting for over 40% of the nation's CO2 emissions. Coal and gas-fired power generation utilities were the first batch of participants, but these firms are also the backbone of the country's current efforts to maintain stable energy supply.

New industrial sectors, which were the next batch to be enrolled, are the backbone of China's economy and are equally preoccupied with fighting an economic slowdown.

Lai Xiaoming, chairman of Shanghai Environment and Energy Exchange, which hosts China's national compliance trading platform, said in December 2021 that there was a plan to enroll non-ferrous metals and building material sectors in the national carbon market in 2022.

But after six months, no concrete policies or trading rules have emerged, and companies in these sectors have no idea how emission quotas will be allocated.

The enrollment of new sectors is more likely to take place later in 2023, starting with cement and electrolytic aluminum, Zhang Xiliang, a professor with Tsinghua University and the main architect of China's emission trading scheme told state media Jiemian in April.

Trading slowdown

The current emission trading system is also facing delays.

Under China's ETS, power companies reported annual emissions for 2021 to provincial government agencies, who then verified this data and announced which companies had emissions above the threshold level of 26,000 mtCO2e/year and came under the purview of the emissions trading scheme.

These eligible companies can buy or sell emission allowances called China Emission Allowances, or CEAs, depending on whether they have met their targets or fallen short. This list of companies was expected by June 30 but the central government has extended the deadline to Sept. 30.

As both the eligibility and emissions verifications have yet to be completed, China's power companies remain unsure whether they need to trade emissions allowances for 2021, and the amounts to buy or sell.

This uncertainty has suppressed liquidity until at least fourth-quarter 2022, or possibly even later, and the environment ministry said the decision to extend was "made after considering the impacts of COVID-19".

China Fudan University, which published carbon price forecasts, said in a June 30 report that China may combine 2021 and 2022 into a single compliance period, following the mechanism adopted in 2021 when 2019-2020 was combined into a single reporting period.

This pushes decision making to 2023, the Fudan University report showed. A two-year reporting period also means market liquidity may remain low for a prolonged period.

Meanwhile, the daily average trading volume of CEAs dropped sharply to 119,766 mtCO2e as of July 14, from 1.57 million mtCO2e for the whole of 2021.

Voluntary market in limbo

China has been planning to revive registration and issuance of voluntary carbon market certificates, or CCERs, after a five-year hiatus, but this seems to have been delayed as well.

The complex nature of voluntary carbon trading requires high level decision making and policy planning on cross-border trading of carbon credits, but authorities have more pressing issues at hand to resolve.

CCERs in circulation are from projects registered before 2017, and the market needs to expand the supply of credits to meet demand in the compliance market and companies with voluntary net-zero plans.

According to the environment ministry's arrangement, Beijing Green Exchange is expected to eventually host CCER emissions registration and trading platforms. Despite the lack of a centralized marketplace, CCERs can still be traded on several provincial exchanges, and prices have soared several times that of compliance market allowances due to limited supply.

For the week ended July 8, the weighted average CCER price on the Sichuan United Environment Exchange hit a record high Yuan 92.50/mtCO2e ($13.79/mtCO2e), according to Singapore-based digital exchange MetaVerse Green Exchange. The Sichuan exchange accounts for nearly two-thirds of total CCER traded that week.

In comparison, the weighted average price of CEAs was Yuan 57.02/mtCO2e ($8.50/mtCO2e) as of July 8, official data showed.