Historic Day in China: Cap-and-Trade Begins

On Tuesday, China made history with the launch of its first pilot cap-and-trade program in the city of Shenzhen.

It didn’t start with a bang, but that’s to be expected.

Although the program requires 635 companies to participate, which are responsible for about 40% of Shenzhen’s emissions, the number that did was embarrassingly small – there were just 8 transactions.

China’s biggest oil company, PetroChina, and Hanergy Holding Group each bought 10,000 carbon permits from utility Shenzhen Energy Group, which had extra allowances. Shenzhen City Bao’an Water Services and five undisclosed individuals also bought permits, reports Bloomberg. 

Since so few participating, the price for carbon permits was also very low at about $4.90 per metric ton. That’s even less than the rock bottom prices at Europe’s exchange by about 20%.

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"The meager volume and pre-approved price level of today’s trades is likely to characterize the initial stages of all of China’s seven pilots," says Richard Chatterton of New Energy Finance.

When critics referenced Europe’s longstanding difficulties with its program, Xie Zhenhua, who is in charge of China’s climate policies said, "This will not deter China. Addressing longstanding inefficiencies and environmental issues are now a ‘domestic requirement’ and don’t depend on other nations, or even on the state of the economy."

How Shenzhen’s program will function is still being worked out, and that’s the point of the program. How they will entice all the companies to participate without hurting their bottom line is a dilemma right now.

Penalties for non-compliance are pretty low, making it easy for companies to flout the law. Carbon-intensive industries like aluminum and steel are trying to cope with tepid demand and shrinking margins.

By the end of next year, pilot cap-and-trade programs will be up and running in seven cities, with a goal of integrating them into a national program starting in 2015. Shanghai’s program is also supposed to begin this month.

Right now there are more questions than answers. Since each city is designing its own program, it’s far from clear how they will be integrated and how emissions will be measured, among many other issues.

Last year, the central government chose seven manufacturing centers to begin cap-and-trade pilot programs as part of its 12th Five Year Energy Plan to cut greenhouse gases 45% per economic unit by 2020.

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