China: 2014 Annual Review

2014 was a milestone for the China carbon market. The first batch of emission trading schemes (ETS) completed the verification and emission quota settlement, and the second batch of ETS in Hubei and Chongqing followed their paths to get on board.

In general, the quota prices showed a downward trend in 2014 while most of the ETS remained stable. Great efforts have been made throughout the whole year regarding innovative carbon finance and market system construction, etc, which gave the market more confidence of the forthcoming year.

Shenzhen ETS

Shenzhen ETS performed well in 2014 with quota prices kicking off above yuan (CNY) 60/tonne, and exceeding CNY80/tonne in the second quarter, record-high level in the China carbon market. The prices went down after the settlement of 2013 compliance year was finished and 2014 Shenzhen Allowances (SZA-2014) entered the market. Shenzhen may include transportation in the ETS in 2015, which has a considerable emission, thus it should have a significant influence on the potential national ETS.

Shanghai ETS

The Shanghai market is relatively stable among all pilot ETS, with steady quota prices around CNY40/tonne before the settlement deadline of 2013 compliance year. But the market was blank for two months after that.

The market liquidity was replenished after the Shanghai ETS lowered its threshold of institutional investors and introduced secondary membership mechanism, which led to a wave of price rise in the fourth quarter. It is also worth mentioning that the Shanghai ETS was the only ETS without any default. In addition to the stability of the Shanghai market lately, its market design might be an important conference for the national ETS.

Tianjin ETS

The Tianjin ETS was inactive among the first batch of approved ETS with depressed quota prices over a long period. It is highlighted that the Tianjin ETS was only one without any regulatory punishment like the administrative penalty, which explained why the compliance entities showed little trading interest. The market behavior of Tianjin ETS in 2015 will largely depend on whether such new regulations will be introduced or not.

Beijing ETS

As one of the three ETS with the highest quota prices at the beginning of 2014, the Beijing ETS presented itself with the best stability in the whole year, supported by transparent and strict policies. For instance, the Beijing ETS first announced its regulation on carbon offsetting, which excluded the application of China Certified Emission Reduction (CCER) credits generated before 1 January 2013 and any CCER credits generated from hydro projects among some other restrictions. These restrictions kept Beijing ETS from the price shock caused by the entrance of the first batch of CCER credits.

Price of Beijing ETS, however, is temporarily the highest among the pilot ETS, which means that it will be under more downward pressure in 2015. Market participants should pay attention to potential policy signals that might have tangible influence on the quota price.

Guangdong ETS

The Guangdong ETS experienced a significant change in 2014, with the quota price down from CNY60/tonne at the beginning of the first quarter to slightly above CNY20/tonne in mid-December. The plunge could be attributed to the cancellation of compulsory participation of the quota auction and the cut in the floor prices for auctions. After the first auction was held in the third quarter, the spot market broke below the floor price of CNY25/tonne, and the market was lacklustre subsequently. The quota price movement of the Guangdong ETS is expected to be affected by relatively abundant market supply and steadily rising floor prices of auctions in 2015.

Hubei ETS

As one of the latecomers among the pilot ETS, the secondary market of the Hubei ETS was activated on 1 April 2014, and it has long kept leading position in terms of the daily trade volume. The quota price fluctuated stably between CNY21/tonne and CNY26/tonne. Besides, multiple pledge loans on carbon assets were settled in the Hubei ETS, which made a good example of carbon asset management of compliance entities.

One of the market highlights for the Hubei ETS in 2015 is the carbon derivative market. As the ETS with the largest average liquidity and stable spot market price, the Hubei ETS is probably an ideal testing field for carbon futures and carbon forwards. As the national ETS is expected to be launched in 2016, it is questionable whether Hubei ETS is able to launch its carbon derivative trading scheme in such short time.

Chongqing ETS

As the last approved pilot ETS, the Chongqing ETS has not completed the carbon emission screening of the compliance entities. The preparation should be accelerated in 2015 since the national ETS will be launched in 2016. Additionally, Chongqing introduced its low carbon certification mechanism on some key industries in the second of 2014. As a standard released by the government, it will dip its toe for the low carbon certification market in 2015. Kun Yang