The lack of transparency and liquidity in China’s pilot emissions trading schemes creates an unfair environment and is keeping foreign carbon traders out of the market, the European Chamber of Commerce in China said Wednesday.
In the Chamber’s annual position paper on China, its working group on carbon markets outlined a long list of recommendations for Chinese policymakers operating the nation’s seven pilot markets and drawing up the national ETS, which eventually will become the world’s biggest.
The business association pinpointed lack of transparency and poor liquidity as the biggest obstacles to making China’s market a success.
“So far, very few carbon traders and investors from Europe, North America and Australia have started trading in China’s pilot markets due to poor liquidity and a lack of transparency,” it said.
None of the seven pilots release fundamental data on ETS emissions and allowance allocation, meaning only government regulators (and potentially the exchanges) know the demand-supply balance in the markets.
According to the European Chamber of Commerce, this creates an uneven playing field for ETS participants.
“Although the launch of the pilot ETS represents a milestone in the Chinese environmental regulatory framework, the lack of fairness, openness and transparency in the system creates an environment in which fair competition is not guaranteed to all participants,” the report said.
“The lack of data not only harms the regulated community, but also makes markets more volatile and open to manipulation.”
The Chamber’s report did not go into detail about what it defined as lack of fairness”. However, market participants often privately express suspicions that state-owned enterprises are treated more generously than privately owned companies both in terms of information and allocation.
As long as all the basic ETS data remains confidential, market regulators will have a hard time soothing such concerns.
The report also urged China to allow foreign auditors to work in the emission markets.
To date not a single foreign company has been accredited as auditors in the pilot markets, while several domestic firms without any auditing experience have been included.
“This demonstrates that the accreditation rules, or the way in which they are being applied, create unfair market entry barriers for foreign entities and favour local DOEs,” the Chamber of Commerce said.
By denying access to internationally experienced firms, China is weakening the pilot schemes by leaving MRV vulnerable to distortions, it said.
It also urged China to let foreign firms trade CO2 allowances in China, both in the pilot schemes and in the national market.
Some of the pilot markets have awarded trading licenses to Chinese subsidiaries of foreign firms, but the market entrance process is cumbersome. Only a few foreign carbon trading firms have sought access to the markets so far, with the majority happy to watch developments for the time being.
The Chamber also recommended that China allow futures and forward trading in a bid to boost the poor liquidity that has haunted the pilot markets, and that future allowance allocation be based on benchmarking rather than grandfathering.
It stressed that China should design its national ETS primarily with the goal of making it an ambitious tool to cut greenhouse gas emissions.
“It is key that policy-makers continue to stress that emissions trading is a tool with the primary objective of abating emissions, and not a tool to make money – this distinction is not always clear in the Chinese carbon market,” it said.
By Stian Reklev – firstname.lastname@example.org