Chinese cap-and-trade programme sees first trades

10 February, 2010

US investment bank Citi and Gazprom Market & Trading (GM&T) have conducted the first trades in a municipal-based emissions trading programme in China.

The two companies have bought so-called Carbon Emissions Allowances (CEAs) through the Tianjin Climate Exchange (TCX), said Dan Barry, deputy director of global carbon at GM&T.

“We’ve both committed to up to a certain volume at a certain price, if the companies in the pilot phase exceed their target,” he told Carbon Finance. Without disclosing the exact size of the trades, Barry said they are valued at less than $100,000.

The allowances are for a mandatory emissions intensity-based trading programme in Tianjin, targeting municipal heat suppliers: those that beat their target, measured in coal consumption, will be able to sell surplus CEAs at the end of the heating season in spring to those that have missed their target, subject to verification. The targets are based on the emissions-intensity goals in the government’s last five-year plan; the next plan is due in 2011.

Barry explained “effectively, it’s cap and trade ... it’s akin to the early stages of the EU Emissions Trading Scheme [ETS], just emissions intensity-based.”

GM&T and Citi undertook the trades in roles similar to liquidity providers, Barry said.

“Banks, like Citi, focus on deploying capital and earning a return,” said Garth Edward, the London-based head of emissions markets at Citi.

Both Barry and Edward noted that the programme is in a trial phase, and will be rolled out to more companies in the city as time passes. “If and when there is a large-scale roll out, there will be a more ETS-like market,” said Barry.

However, both stressed that it is not necessarily a precursor to a national ETS, with Edward pointing out that – as with all trials – there will be lessons to learn before a wider programme is introduced. “That’s how the EU ETS came about,” he said, citing pilot programmes by the UK and Denmark.

Edward added: “China has the largest emissions in the world, and China will play a leading role in any meaningful response to global climate change.” He added that “if we’re going to see meaningful emission reductions across the economy then we will need a raft of policies such as regulation, technology incentives and cap and trade”, rather than the ad hoc project-based Clean Development Mechanism, which is currently the primary market-based mechanism for reducing emissions in China.

Barry said that it is more likely that other cities – such as Beijing and Shanghai – may look to create their own programmes before a national ETS evolves.

The Tianjin municipal government, TCX and Arreon Carbon jointly designed the programme. Arreon, an originator and buyer of carbon credits, said that it is hoping to expand the regime into China’s first “realistic, implementable carbon-intensity scheme”.