China launches national carbon market; first CO2 trades at $8.20/mt

China's national carbon market started trading on July 16 with the first CO2 trade done at Yuan 52.80/mt ($8.20/mt), a relatively low carbon price compared with regulated markets in the US and Europe.

The highly anticipated launch of China's carbon market paves the way for the decarbonization of its industries, starting from the power sector, and will help meet the country's long-term 2060 carbon neutrality goals.

Initial carbon prices, however, were relatively low due to a generous allocation of allowances in an effort to familiarize the industry with carbon pricing. Going forward, allowances are expected to be tightened as China's carbon policy takes shape and after cost-effective abatement technologies are developed.

The first online transaction of China's Carbon Emission Allowances, or CEAs, was priced at Yuan 52.80/mt ($8.20/mt) and the transacted volume was 160,000 mt of CO2 at 9:30 am July 16, according to state broadcaster China Central Television's Weibo social media account.

China's nationwide carbon trading officially started at the Shanghai Environment & Energy Exchange on July 16, and the first transaction was done immediately after the official launch, according to CCTV.

"Shanghai Environment; Energy Exchange now manages the online trading. How the other pilot exchanges will participate; depending on the government's further announcements," the spokeswoman for Beijing Environmental Exchange, one of the pilot exchanges for China's carbon trading, said.

In comparison to the Chinese market's initial $8.20/mt CO2 price, European carbon prices were around $61.92/mt on July 15, while California's cap-and-trade prices were at $24.30/mt at the end of last week.

In voluntary markets, the S&P Global Platts CORSIA-Eligible Carbon Credits was assessed at $3.05/mtCO2e on July 15, while Platts Nature-Based Projects Carbon Credits and Platts Household Devices Carbon Credits were assessed at $4.79/mtCO2e and $6.17/mtCO2e, respectively.

The participating power companies collectively account for over 4 billion mt of CO2 emissions, according to the environment ministry. The European Union ETS has around 1.6 billion mt of circulating allowances, according to European Commission's official website.

Related factbox: China rolls out national carbon market in power sector

Cracking down on coal

"It is the largest such program in the world – and China will look to gain experience with its operations, strengths, and shortcomings before relying on it as the primary mechanism to drive decarbonization. The last thing they want is massive volatility impacting the broader economy," Roman Kramarchuk, Head of Future Energy Analytics at S&P Global Platts, said.

Kramarchuk said given China's caution very modest carbon prices can be expected with minimal impact in the near to medium term.

"A wide-ranging carbon price can work best where there are clear market price signals that can be passed across the economy for key players to react. This is not universally the case in China," Kramarchuk added.

Platts Analytics anticipates a positive push for fuel switching away from coal.

"The benchmark [emission rate] for the coal plants is essentially tied to the weighed-average efficiency of China's coal fleet," Bruno Brunetti, Head of Low-Carbon Electricity Analytics at Platts, said.

A large number of coal-firing generation units in China have been commissioned recently and over 40% of the fleet are very efficient supercritical and ultra-supercritical units, however, the carbon market appears to be designed to promote a better optimization of China's coal fleet, Brunetti added.

He said it will be interesting to see if China's carbon market leads to retirements of inefficient coal plants, which have been already in a difficult financial position, given shrinking load factors, especially if they are unable to pass through the costs of the needed carbon allowances, in a context of very elevated coal prices.

This could further boost renewables integration, keeping renewables output curtailments at low levels, and further incentivize utility-scale renewables newbuild.

Mark Mozur, Lead Analyst for Energy Transition with Platts, estimated that 18% of these coal plants are potential candidates for early, non-economic retirement in an outlook that is consistent with China's 2060 net zero target, or even a 2050 two-degree warming outlook in line with the Paris Agreement.

"A carbon price could make this 18% figure economic based on the lack of cost competitiveness rather than a policy force out," Mozur added.

However, gas-fired power plants do not need to buy CEAs even if they emit more than their allocation, but can sell the surplus CEAs if they emit less than their allocation, which is supportive for gas consumption.

Launch of carbon trading

"According to our nation's arrangement, the nationwide trading of carbon emission allowances will start on July 16. All participants of the national carbon market please arrange your work according to this," the Shanghai Environment Energy Exchange, which hosts the online trading platform, said in an announcement late July 15.

In a second announcement dated July 15, the exchange said that a public account on the social media platform Wechat had been created for the national carbon market to post the latest market updates, including policies, announcements, and trading data.

Shanghai Environment Energy Exchange was in charge of opening trading accounts for the carbon market as well as the operations and maintenance of the platform prior to the launch of China's carbon market.

China's government agencies have been preparing for the launch of a carbon market for nearly a decade, in what is expected to be the world's largest carbon market by volume of carbon allowances traded.

The first batch of participants will include 2,225 power companies with coal-fired and gas-fired generation units, collectively accounting for over 4 billion mt of CO2 emissions, according to the environment ministry's previous statements.

The day-to-day deviations in China's carbon market prices are to be limited to 10% for transactions below 100,000 mt of CO2 and 30% for larger transactions. The market will open for trading 9:30-11:30 am and 1-3 pm, Monday to Friday in Shanghai, the exchange said July 16, citing previously announced trading rules.

A national carbon emissions trading agency will eventually be responsible for organizing and carrying out centralized trading of carbon allowances, and in the interim the Shanghai Environmental Energy Exchange will handle carbon trading tasks such as account opening, operations and maintenance.