When last we checked in on them, China’s regional pilot carbon markets weren’t doing so well. Traders were complaining that the system was confusing for companies, the volume of trades has been lower than expected, and the prices of carbon permits in five of the seven markets had recently plunged. Now the test markets have just wrapped up their first trading year, and while almost every company complied with the scheme’s rules, Reuters reports that many did so by getting flexible with deadlines:
More than 99 percent of companies covered in Shanghai, Beijing, Guangdong, Shenzhen and Tianjin met their targets on time, but compliance has been achieved by bending the rules.
Only Shanghai and Shenzhen stuck to original deadlines, with the remainder giving firms as long as six extra weeks to avoid defaulting. In Hubei, 26 firms failed to comply by the second deadline of July 10. Chongqing has yet to publish results. […]
The markets remain affected by oversupply as well as the availability of 10.8 million offset credits at much cheaper prices of between 7-23 yuan.
That last part is crucial. The most important—and by far the most difficult—job of any carbon market is settling on a Goldilocks price for the greenhouse gas. If the market has too few permits, prices will rise to levels that will encourage companies to outsource especially energy-intensive production, hurting the local economy without actually combatting the emissions the system was meant to target. But on the other hand, if the market has too many permits, the price will hover at a level too low to incentivize companies to change their behaviors, because selling unused permits won’t cover the so-called mitigation costs companies have taken on to reduce their carbon output.
This is the problem China’s markets, like Europe’s before it, are currently facing, and because of that the country’s state-owned oil company, Sinopec, isn’t seeing the economic rationale for going green these days. “The decline to merely 20 yuan for each permit is a result of the government easing supplies. Our mitigation costs are much higher than that”, said Sinopec’s environmental protection chief Ge Chengui, as quoted in Reuters.
China is no stranger to fudging the numbers in order to hit targets set by its central planners. Moving the goalposts for its regional carbon markets may give Beijing a chance to celebrate, but it doesn’t indicate a healthy system. With the country ready to transition to a national market by the end of next year or early 2017, that’s a major red flag.