New projects set to dominate China’s offset market

Published 08:13 on March 13, 2015  /  Last updated at 12:17 on May 12, 2016  /  China, China's National ETS, China's Offset Market, China's Pilot Markets, Kyoto Mechanisms  /  No Comments

China’s emissions market is unlikely to be flooded by cheap offsets from ex-CDM projects as developers stand to gain bigger profits from supplying new projects, markets participants say.

China’s emissions market is unlikely to be flooded by cheap offsets from ex-CDM projects as developers stand to gain bigger profits from supplying new projects, markets participants say.

Market designers in China have long worried that the domestic carbon price would be suppressed if the thousands of Chinese projects in the CDM were allowed to leave the international market and offer their offsets to domestic emitters instead.

The UN last month agreed on rules for CDM deregistration though the National Development and Reform Commission (NDRC), the Chinese market regulator, has yet to rule on whether the projects would be welcomed back home.

But the majority of developers – a mix of state-owned power companies, domestic carbon specialist firms and foreign developers – have already switched their focus to launching new projects that will fetch far higher prices, leaving a limited role to be played by ex-CDM credits.

A wide spread has already opened up in the CCER market. So-called Category 1 CCERs, from new projects, are generally valued around 18-25 yuan (€2.72-3.78), while Category 3 CCERs – stemming from emission cuts done by CDM projects before they got registered – trade around 5-8 yuan (€0.76-1.21).

LOW RISK

Offsets from most ex-CDM projects would likely trade towards the lower end of that scale, not much higher than the €0.40 they can get in the European market.

Given the cost and lack of certainty associated with successfully taking projects out of the CDM and applying for domestic approval, some developers may not find it worth the trouble, some analysts say.

“I believe before 2016, the major concern for developers is how to cash out on their existing low-risk CCER projects, not how to add old CDM projects into their CCER portfolio,” said Chai Hongliang, an analyst with Thomson Reuters Point Carbon.

Chai was doubtful ex-CDM projects would win approval in the Chinese market at all.

“From the NDRC’s point of view, why risk inflating supply, considering the domestic emissions reduction market has already burgeoned?” he asked, referring to the steadily growing pipeline of new projects seeking approval.

TRICKLE, NOT FLOOD

There is no doubt that some project owners will try to make the switch, though.

Last week, Dutch developer China Carbon said it would seek to bring 20 of its 64 Chinese projects into the domestic market.

Karl Upston-Hooper with Finland’s Greenstream Network told Carbon Pulse his company would also attempt to move a limited number.

“We are looking at flicking a couple of our existing CDM projects, in a good region which has a pilot, more for ‘learning by doing’ and adding optionality to our existing portfolio of the post-2012 funds,’ he said.

“But the majority of our China carbon work is focused on new CCER projects and assisting clients with their allowance allocations.”

2016 DEMAND

There is good interest in CCERs at the moment, although the extent of demand is uncertain. Most of the seven pilot markets are long, even though there are segments of shortage in some, especially in Beijing, Hubei and Shanghai.

Some of the markets have implemented rules that would disqualify CCERs from most ex-CDM projects even if they were to be approved by the central government.

But Peter Ebsen, an advisor on the Chinese carbon market with Blue World Carbon, was optimistic some ex-CDM projects could do well in the Chinese market from next year, especially when the national ETS begins.

“I think that the nationwide carbon market will ultimately generate sufficient demand for the CCERs from ex-CDM projects at price levels significantly above current CCER prices in the regional schemes,” he told Carbon Pulse.

“I also believe that there will be good demand for the right type of CCERs in some of the regional schemes in Q2 2016,” he added.

He said projects meeting the eligibility requirements for use in the Beijing ETS would be a good bet. Beijing has some of the strictest CCER restrictions in China, banning credits from hydro projects and from emission cuts done prior to Jan. 1, 2013.

That would allow a fair number of ex-CDM projects into the market, but at the same time rule out the majority.

By Stian Reklev – stian@carbon-pulse.com

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