Repeating European Carbon Market Mistakes
BMI View: As China rolls out its pilot carbon markets, the risks that it will repeat some of the same mistakes that have been made in Europe appear to be growing. The issuance of too many permits at a time when both the economy and demand for power is slowing will depress carbon prices and do little to reduce emissions or deter coal use in power generation.
We continue to question the efficacy of China's plans to establish a nationwide carbon emissions trading scheme. Although there is considerable political pressure to reduce emissions and curb pollution, we believe there is a risk that China is already repeating some of the mistakes that have been made in Europe. The European Emissions Trading Scheme (ETS) has been ineffective because of a glut of permits - which has depressed prices and meant there is no real deterrent to coal-fired generation.
This glut of permits in Europe is a symptom of weak demand for power but also - critically - the issuance of too many permits in the initial stages of the ETS rollout. In our view, reports from China indicate that the government may be making the same mistake - giving out too many free permits as it seeks to establish its seven pilot carbon markets (Beijing, Guangdong, Shanghai, Shenzhen, Chongqing, Hubei and Tianjin) in an effort to ensure large polluting companies in both industry and the power sector sign up.
|Too Many Permits, Not Enough Demand|
|European Climate Exchange OTC 1st Year CO2 Emission EU ETS Px - Mid Price (EUR/Tonne of C02)|