Supply shortages, poor data quality are main barriers for China’s carbon market


According to climate experts, poor quality data and supply shortages remain key hurdles for China’s national carbon emissions trading scheme (ETS). The world’s largest carbon market has seen lower-than-expected trading volume and weak carbon prices in the past year.

Carbon market in China is expected to see more liquidity later this year with the injection of new carbon allowances and the relaunch of its suspended voluntary carbon market, the China Certified Emission Reduction (CCER), said experts. But carbon prices will remain relatively low due to government management.

China’s ETS wrapped up its second year of operation on July 16 with the cumulative transaction volume of emissions allowances reaching 239.9 million tons, and market value hitting 11.03 billion yuan, according to the Shanghai Environment and Energy Exchange, the department that oversees the country’s ETS.

Tan Luyue, carbon analyst of data provider Refinitiv, indicated, “Key challenges for the national ETS include the Covid pandemic [which] postponed release of key policies and added to more market uncertainties, opaque fundamental data, and MRV issues.”

Trading activities slowed down in the second year compared to the first trading year for China’s ETS. From July 2022 to the last trading day on July 14 this year, only 45.9 million tons of carbon allowances exchanged hands with a corresponding market value of 2.54 billion yuan. This means that over 80% of total trading volume on ETS and market value come from the first trading year.

Carbon prices on the national ETS closed at 60 yuan per ton on July 14, the last trading day before the national ETS ended its second year of trading, compared to 51.23 yuan per ton on its first trading day on July 16 in 2021, and below the 65 yuan per ton forecast from Refinitiv in 2021.

The national ETS, which currently covers 2,532 main emitters from China’s power generation sector that contributed to around 4.7 billion tons of emissions in 2022, has continued to combat low prices and sluggish trading. This has hindered its role in helping the world’s largest carbon emitter reach net zero by 2060.

Officials at China’s Ministry of Ecology and Environment have pointed out the widespread problem of data fraud among power plants and consulting firms. The national ETS was expected to expand to the cement and aluminum industries in 2022, but this has been delayed to this year at the earliest, due to data quality issues, according to state media.

According to Tan, the current design of the national ETS, which distributes carbon allowances to emitters without charge, and a lack of an allowance auctioning mechanism like the EU ETS, has caused illiquidity and inefficiency in China’s ETS.

Market expansion will be one of top priorities for China’s ETS in 2023, and the long-awaited relaunch of the CCER will also boost liquidity, said Liu Hongming, director of carbon markets at non-government organization Environmental Defense Fund (EDF), which has been advising China on the launch of its carbon market.

According to a survey released by EDF this month of 465 stakeholders in China’s national ETS, including government officials, industry associations, key carbon emitters, research institutions and companies providing carbon market-related services, carbon prices are expected to reach 87 yuan per ton in 2025, 130 yuan per ton in 2030, and 239 yuan per ton by mid-century.

However, others see carbon prices being kept at low levels via government management of carbon allowances and emission targets.

Lucas Zhang Liutong, director of WaterRock Energy Economics, said, “The government has stated that the national carbon market is just one of the tools for them to decarbonize the Chinese economy, so they will not use a high carbon price to incentivize investment.”

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