Carbon allowances from China’s pilot emission markets that are brought into the national ETS will be given a value depending on the degree of over-allocation and the price levels in the market from where they originated, a government official said Friday.

Allowances from the regional pilot markets that were over-allocated or where the price level is very low will be discounted in the national carbon market, Jiang Zhaoli, director of the NDRC climate change department, told a conference in Beijing.

He did not give further details on the formula that would decide how much each permit would be discounted, including how big a role price levels would play.

Surplus allowances in the seven pilot markets – likely to amount to tens of millions of tonnes – have for months caused headaches for officials drawing up rules for the national scheme, which is due to launch during the second half of next year.

Restricting their future use entirely would cause pilot prices to crash to near zero, while allowing holders to carry the units over would increase the chances of over-allocation in the national cap-and-trade system.

Duan Maosheng, the scheme’s main architect, said last month there likely would be a discount system, but that the details were not decided yet.

By giving surplus allowances from very over-allocated pilots a higher discount rate than those from the markets with only slight surpluses, the NDRC would go some way towards ensuring the new market is not flooded with permits from the existing ones.

And by adding a price element, allowances sold by emitters in markets such as Beijing and Shenzhen – where permits currently cost around 40 yuan each – would be worth more than those sold in Chongqing, where allowances are currently worth 10 yuan.

QUESTIONS

But Jiang’s comments on Friday raised as many questions for observers as they answered.

He gave no information on exactly what role the price factor would play, or if it would be based on either pilot prices at a specific point in time or the average price over a longer period.

Either way, it would invite speculation in the pilot markets based on expectations of what the NDRC will do, according to market participants.

“Ideally it sounds good, but it is hard to execute in reality. People are just going to drive prices up artificially,” one trader told Carbon Pulse.

For example, in Shanghai allowances are currently stuck in an all-time low range of 4-5 yuan, even though some speculators are buying allowances at those levels in the expectation that a stricter 2016 allocation plan will push prices back up.

But, depending on the NDRC’s final formula, that means that anyone buying allowances in Shanghai this week might be able to sell them at a profit in the national market if the local price bounces back up to 15-20 yuan.

Another issue is whether the NDRC will make its assessment based on exchange or OTC prices.

In Shenzhen, the exchange price moves in a 40-50 yuan range. However, a much larger amount of allowances trade OTC at around half that price.

“If I was the NDRC, I would use weighted OTC prices only. But the pilot [governments] would not like that,” one analyst said.

OFFSETS

Meanwhile, Jiang would not be drawn on whether the national ETS offset rules would allow pre-2015 offsets, as has previously been rumoured, but did indicate that there might be severe restrictions on project types allowed in the market.

“It is not necessary to increase subsidies to renewable projects by giving them carbon credits,” he said, without specifying further.

He also said that industrial gas projects should be phased out, and not funded by the ETS.

By Stian Reklev – stian@carbon-pulse.com

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