Chinese carbon allowances are likely to trade around 40 yuan per tonne ($6.30) when the country’s national ETS opens in 2017, and climb slowly towards 70 yuan ($11) by the end of the decade, market analysts ICIS Tschach Solutions have forecast.

The forecast is the first made on China’s national market by any of the major carbon market analysis firms, but fell in the same range as a survey conducted by non-profit group China Carbon Forum earlier this month.

ICIS Tschach stressed that the forecast was scenario-based, given that details on how the market will look is scarce so far, adding that Chinese offsets are also expected to have a modest impact on allowances prices.

“In our base case scenario price simulation, we expect (the allowance) price to start trading at around CNY40 in Q2 2017 and gradually rise to almost CNY70 in 2020 due to NDRC’s gradual tightening of the allowance cap,” it said.

EXPECTATIONS

The forecast was based on the information and signals that have come from the NDRC so far, although huge uncertainties remain.

Among the expectations ICIS Tschach used in the forecast were:

– The market will start in the first half of 2017
– From the start it will cover the power, metallurgical, non-ferrous metals, building materials, chemical and aviation sectors, and potentially also car manufacturers and paper producers, as announced last month by a senior NDRC official
– Regions covered will include at least the seven existing pilot markets, plus provinces that have done a lot of groundwork in collecting emissions data, such as Jiangsu, Shandong and Zhejiang
– Offset use will be limited to 5% of total emissions
– Forward trading will be allowed from the beginning, while a futures market will emerge towards the end of this decade

FLUCTUATIONS

Rather than a forward curve moving steadily upwards, ICIS Tschach said the price level is likely to fluctuate in early years.

“We expect to see seasonal price movements for (allowances) where prices are expected to peak in Q2 (compliance deadline), while prices soften right after compliance due to weaker demand,” it said, a trend seen in the pilot markets as well.

“This seasonality will be less prominent when the market develops and compliance companies start to change their trading behaviour and engage in more hedging strategies.”

The market is likely to be predominantly spot-oriented in the early stages, while forward trading will gain popularity as companies develop their strategies, explained Jian Wei Lim, ICIS’ director of Chinese carbon markets.

Forward trading may be additionally hampered early on by the fact that Chinese state-owned enterprises – the country’s biggest emitters – tend to be selective with their trading partners, he added.

Early liquidity may also be affected by this trend, as has been the case in the pilot schemes’ inaugural trading periods.

OFFSETS

The report forecast two different price scenarios for Chinese offsets (CCERs), depending on the restrictions put in place by government.

If tight rules are put in place as to offset scope, type and origin, CCERs may trade in the 20-35 yuan range, ICIS Tschach predicted.

But if there are few or no restrictions, and the NDRC deems pre-CDM CCERs eligible, prices could drop to 5-8 yuan during the first trading period.  They may then rise somewhat towards the end of the period if a significant amount of sectors and/or regions were to be included from the start of the second trading phase, the analysts added.

“The CCER rules will affect allowance prices but to a small extent. Primarily because we expect around a 5% offset limit and in both scenarios there is an oversupply of CCERs,” Lim told Carbon Pulse.

By Stian Reklev – stian@carbon-pulse.com

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