The decision to set up seven emissions-trading pilots sent media into a tizzy about Chinese climate policy. But Wang Tao has other concerns: from accurate data to a stable carbon price, there are tests ahead.
China’s three main carbon markets – the Beijing Environment Exchange, Shanghai Environment Energy Exchange and Tianjin Climate Exchange – were all formed within two months of each other, towards the end of 2008. At that point, the European Union’s Emissions Trading System (EU-ETS) was still struggling to recover from a crash a year previously, which had seen the price of carbon allowance plummet from 30 euros to just a few cents.
The World Bank estimates that carbon trading globally could be worth US$3.5 trillion by 2020, meaning it would overtake oil to become the world’s largest market. Spurred by this rosy outlook, China had 100 carbon exchanges in operation or under preparation by late 2011. Most were quickly taken over by speculators, however, while genuine carbon trading remained rare. None of the three main exchanges saw a single real carbon trade in its first year of operation.
On 29 October last year, the National Reform and Development Commission (NRDC), China’s top economic planner, announced that carbon trading trials would run in seven of the country’s most important cities and provinces: Beijing, Tianjin, Shanghai, Chongqing, Guangdong, Hubei and Shenzhen. Each of these locations already has its own carbon emissions exchange. (Compared with the existing exchanges, these trial platforms will enjoy policy-created-demand and guaranteed customers, and so in theory be free from worry about their sales performance.)
But as part of a clampdown on price manipulation and dubious trading practices, on November 11 last year the State Council – China’s highest administrative organ – announced a ban on trading in shares of assets except from stocks and permitted financial products, effectively blacklisting the core business of carbon markets.
The two almost parallel announcements highlight the government’s lack of coordination on carbon-markets policy. As there is no physical commodity, carbon emission allowances are always traded as shares. The State Council proclamation was in clear conflict with the fortnight-old NDRC document. But, in February, state news agency Xinhua reported in a local news that “The Shanghai United Assets and Equity Exchange has been designated by the NDRC as an environment and energy trading platform,” indicating that the threat posed by the policy restrictions of the State Council document had been overcome.
But those licensing issues are nothing compared to the real problem facing carbon markets: how to make tradable emissions permits appropriately scarce. The 2007 crash in the EU-ETS market was caused by a glut of allocated emission rights, far exceeding demand. There was next to no scarcity.