China’s top banks warn against over-supply in national carbon market

Published 11:41 on April 24, 2015  /  Last updated at 11:41 on April 24, 2015  /  China, China's National ETS  /  No Comments

China must ensure there is no over-supply of emission permits when it launches its national ETS next year, and should also set up a permit reserve fund to avoid major price distortions, a group of financial investors led by the People’s Bank of China said this week.

China must ensure there is no over-supply of emission permits when it launches its national ETS next year, and should also set up a permit reserve fund to avoid major price distortions, a group of financial investors led by the People’s Bank of China said this week.

The group, consisting of over 50 financial institutions including all major domestic banks and trading houses as well as foreign institutions such as the World Bank and UNEP, released a booklet with recommendations for the Chinese government as it prepares to launch next year what will eventually become the world’s biggest carbon market.

Among the recommendations were:

– CO2 caps for each province should be set by central governments, based on a unified set of rules and regulations;

– The central government should strive to ensure there is no over-supply of permits in order to avoid prices that are too low to be effective in curtailing emissions growth;

– The government should set aside a number of permits in a market reserve that could be released if prices go too high;

– The market should allow offset use, but there should be restrictions on quantity as well as eligible crediting periods according to the market size, mitigation target and balance forecasts. Restrictions on project types and geography should be gradually eased;

– The national market must be transparent in order to ensure predictability for market participants;

– To boost market liquidity, only two exchanges should be allowed to operate;

– The market should initially allow spot trading on the exchanges and forwards and swaps over-the-counter, then as the market matures, futures should be introduced on the exchanges;

– A carbon tax should be imposed on non-ETS companies;

– China should use internationally accepted MRV standards to boost data accuracy.

The market rules are being drawn up by the NDRC, China’s top economic planning agency, but a number of other major institutions, including the major financial institutions and regulators, are expected to weigh in as well.

The group’s recommendations were part of a research strategy under which they are seeking to develop a green financing system for China.

By Stian Reklev – stian@carbon-pulse.com

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