A total 24.7 million CO2 permits traded across China’s carbon exchanges for the 2014 compliance year, more than six times 2013’s volume, showing that the country’s pilot markets are maturing despite ongoing problems involving permit over-allocations and a lack of transparency.
The number, a big increase from the 4 million allowances that traded for 2013 compliance, is based on exchange data collected by Carbon Pulse and analysts at Thomson Reuters Point Carbon.
It is comprised of carbon allowance transactions done between July 2014 and June 2015, though some July 2015 trades were also included where compliance deadlines were extended.
Some of the exchanges have included OTC volumes, others not, and the figure excludes government auctions or the 8.85 million CCER offsets that have traded this year.
The main reason for the increase was the launch of the Hubei market, whose exchange reported trades of some 13.8 million allowances from the April 2014 launch to its first compliance deadline on July 10.
The data shows that the five pilot schemes that started in 2013 also saw big increases in market liquidity in the 12 months to their June/July 2015 compliance deadlines.
Tianjin saw a 1,075% increase, Guangdong 370%, Beijing 195%, Shenzhen 71% and Shanghai 50%.
Chongqing’s market, which launched in June 2014, has transacted 246,000 units ahead of a July 23 compliance deadline that combines 2013 and 2014 emissions.
“More institutions have joined the market. It’s not just compliance entities anymore,” said Kou Weiwei, director of carbon financing and structuring at Carbon Trading Capital.
She said emitters regulated under the schemes are becoming increasingly involved as well as they become more comfortable with the burgeoning markets.
GOVERNMENT PUSH
The lack of liquidity in the pilots’ first year was identified by market regulators as a major stumbling block, leading most regulators to drop their “only spot permits, only compliance firms” approach while also loosening rules in order to attract trading houses.
The new Hubei market went the farthest in attempting to make its scheme investor-friendly, and that has translated into higher volumes than the other six pilots combined.
It has also helped Hubei’s ETS to become the focus of a 30 million yuan ($4.8 mln) fund set up by state-owned power company Huaneng, which on Wednesday announced it had made a 16.1% return on its first-year investments in the provincial scheme.
Interest is spreading to other markets as well.
A number of foreign trading firms have joined the Shenzhen market, and on July 15 the Guangdong exchange cleared a 1.8-million permit transaction that sources with knowledge of the deal said involved oil major Shell borrowing the units from Huaneng to trade with before returning them before next year’s compliance date.
OFFSETS
Market activity has also been helped by the introduction of an offset market, after the NDRC began to issue CCERs earlier this year. The first offset transaction took place in early March.
“The issuance of offsets also stimulates allowance trading,” said Chai Hongliang, a China analyst with Point Carbon.
The 8.85 million that have traded so far is minuscule compared to the annual theoretical demand of around 110 million.
And with only 20 million having been issued so far by the government, the low liquidity has helped give rise to spread trades between offsets and allowances.
This, however, combined with other aggressive trading strategies, has led the Hubei exchange to threaten to suspend some traders.
COMPLIANCE
Despite the huge increase in volumes, 24.7 million allowances traded across seven markets covering some 1.2 billion tonnes of CO2e remains modest, and the exchanges and local governments are expected to continue adjusting regulations to boost volumes ahead of the 2016/2017 launch of a national ETS.
But as long as regulators continue to give their emitters more allowances than required, prices and volumes are likely to remain relatively low.
For the regional governments running the schemes, getting companies, especially state-owned enterprises (SOEs), to comply with environmental regulations is top priority, meaning the 2014 compliance season has brought mostly good news.
Beijing, Guangdong and Shanghai all reported a 100% compliance rate, counting any post-deadline grace periods.
Shenzhen achieved 99.7% and Tianjin 99.1%.
First-timers Hubei and Chongqing, however, had some issues. The former’s compliance rate stood at 80% on its July 10 deadline day, while Chongqing recorded 70%, prompting the government to delay the deadline to this Thursday.
By Stian Reklev – stian@carbon-pulse.com
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