Confusions of China's Carbon Market

Carbon markets trade in a virtual product, created by policy alone. And so policy stability is essential. The outlook for climate change talks is bleak; the EU and American economies are in the doldrums; and economic targets are taking precedence over climate goals. There is no question that China’s ability to provide a stable demand for emission cuts will be crucial to getting its carbon markets up and running.

The World Bank estimates that carbon trading globally could be worth US$3.5 trillion by 2020, meaning it would overtake oil to become the world’s largest market. Spurred by this rosy outlook, China had 100 carbon exchanges in operation or under preparation by late 2011. Most were quickly taken over by speculators, however, while genuine carbon trading remained rare. None of the three main exchanges saw a single real carbon trade in its first year of operation.

On 29 October last year, the National Reform and Development Commission (NRDC), China’s top economic planner, announced that carbon trading trials would run in seven of the country’s most important cities and provinces: Beijing, Tianjin, Shanghai, Chongqing, Guangdong, Hubei and Shenzhen. Each of these locations already has its own carbon emissions exchange. (Compared with the existing exchanges, these trial platforms will enjoy policy-created-demand and guaranteed customers, and so in theory be free from worry about their sales performance.)

But as part of a clampdown on dubious jaw crusher trading practices, on November 11 last year the State Council – China’s highest administrative organ – tightened regulations on all of the country's exchanges, from equity exchanges and commodities exchanges to those trading 'cultural artwork'. The rules, which were intended to reduce financial risk, included a ban on trading in shares of assets (except from stocks and permitted financial products) which effectively blacklisted the core business of carbon markets. cement making...