Expected to be China’s biggest, Guangdong carbon market begins briskly

Updated: Thursday December 19, 2013 MYT 2:17:59 PM

Expected to be China’s biggest, Guangdong carbon market begins briskly

GUANGZHOU: The first day’s trading in what will be by far the largest carbon market in China kicked off briskly on Thursday with pricing in line with expectations, as Beijing continues its drive to slow its rapid growth of heat-trapping emissions.Volumes in Guangdong’s carbon permit market, expected to be the world’s second largest in terms of carbon dioxide covered, in early trade surpassed full-day totals during the launches of the country’s three other carbon exchanges.

China, the world’s biggest emitter of greenhouse gases, wants to use markets to achieve its target to cut emissions per unit of GDP to 40-45% below 2005 levels by 2020 at the lowest possible cost.

Beijing, Shanghai and Shenzhen have already opened markets of their own, with Hubei province and the cities of Chongqing and Tianjin expected to follow in the next few months.

The debut trade on the China Emissions Exchange in Guangzhou went through in line with market expectations at 61 yuan ($10.04), with cement firm Hailuo buying 20,000 carbon permits from the new energy arm of state-owned power producer Huadian Energy Co Ltd.

That was followed by a raft of other deals for a total of 120,000 permits, known as Guangdong Emissions Allowances (GDEAs), in the first 20 minutes of the market, all at 60 yuan each.

China’s other emissions markets each saw around half that volume during their entire debut days.

The price level matched expectations, following a government auction of 3 million permits sold at 60 yuan, the official price floor for auctions, on Dec. 16.

But some observers warned against the risk of price volatility in the longer term. Emissions markets are often very price-sensitive in early stages, as seen in markets in Europe, New Zealand and Shenzhen.

“The biggest concern for companies is how to manage volatility risks. That’s more important than who and how much traded today,” said Jeff Huang, China director of the Intercontinental Exchange.

WORLD NO 2

Guangdong, home to over 100 million people and with an economy bigger than Indonesia’s, is set to become China’s central carbon trading hub in the near term as its number of carbon permits dwarfs the combined volume in Beijing, Shanghai and Shenzhen.

Globally it will trail only the European Union.

Guangdong’s carbon scheme caps CO2 emissions from 242 of the province’s major power generators and cement, iron and steel producers at 350 million tonnes per year, with a further 38 million tonnes set aside in reserves for new entrants and potential adjustments.

Companies are forced to pay for 3% of their expected emissions in the first year of the scheme, with that share gradually rising in the future.

The Guangdong government said this week that it would expand the market to cover five new sectors, including textiles, paper production and metals, although it gave no timeline.

In Shenzhen, permits currently trade at 73.50 yuan (US$12.10), with prices pushed up on small volumes by private speculators after the market opened at 28 yuan in June.

Beijing permits trade around 50 yuan (US$8.23), while in Shanghai they change hands at around 25 yuan (US$4.11).

In comparison, allowances in the EU market closed Wednesday at US$6.81.

Observers say the varying price levels in the Chinese markets do not necessarily reflect real differences in how scarce permits are.

Instead, companies are unclear whether they are long or short permits as this is the first year the markets have been in operation, and the data the allocation was based on is uncertain, experts say.

Combined, China’s seven markets will regulate around 800 million tonnes of CO2, roughly equal to Germany’s annual emissions – Reuters.