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It’s widely known that China has a pollution problem and has been trying to control excess carbon emissions. The PRC government in Beijing has not only been aware of the CO2 emissions problems, but has been trying to craft comprehensive policies that would reduce pollution while at the same time not harming economic development. Also widely known are Beijing’s attempts at supporting and developing green technologies, whether an electric car industry or alternative energy in terms of the bigger picture of power generation, with solar, wind and geothermal. All this isn’t without difficulty, as the west has shown in its own similar quests.

Urban Green Rooftops In China

Source: ChinaDaily.com

China’s latest attempt at weaving another part of the integrated fabric of curbing the still growing emissions problem is to begin a carbon emissions trading system, much like the cap-and-trade systems which have begun in the west. Cap-and-trade in developed nations, however, has already received something of a bad name as being replete with not only difficulties but with opportunities for corruption which render the programs potentially less useful, or even useless, according to critics. So China has watched carefully the European Union’s system to avoid its pitfalls.

The European Experiment

The European Union’s system of trading carbon emissions credits as one part of the system to place financial incentive into curbing emissions has seen the permits for emissions lose most of their value in the four years they’ve been traded. Recently, the permits even lost additional value, with some estimates placing their value at about 10 percent of their original price. The European system originally valued its carbon permits and other features of the system at about $150 billion, though this figure would seem in question now. The European system utilizes trading with a forward market as well, though that hasn’t provided the hoped for price support.

The carbon emissions permit and price trading system was initially thought to be a way of introducing a market based system and therefore financial responsibility if not incentive to reduce carbon emissions, with the hope that the trading exchange method, via the European Energy Exchange AG (EEX) would promote the efficient use of the system’s features. The opportunity for investors, it was understood, to profit would be there. Since then there have been criticisms of widespread abuses, that there is an overabundance of permits available, permits stolen and re-used, and that ultimately investors too easily can lose fortunes in this market.

The original plan in 2005 was to reduce greenhouse gases by at least 6 percent per year, to achieve what NASA projected would be necessary to stabilize earth’s climate by the end of the 21st century. Although the trading market program has had its problems, European emissions have been curbed by 2 percent in the last year. The over allocation of carbon credits, which may be keeping emission reduction down, is one key target of critics of the European implementation of the plan.

Guangzhou Residents And Air Monitor

Source: ChinaDaily.com

China’s Way

China is planning on a more tightly regulated market with controls on pricing mechanisms so as to avoid the volatility and the potential ineffectiveness that the European carbon market system has experienced. According to Chen Jiapeng of the State Council’s Development Research Center, quoted in a Reuters report, China will “most likely consider introducing both a price ceiling and a price floor,” to prevent the volatility and price swings that have plagued the European system. China will also not utilize a forward trading market, as their aim is to keep the carbon market trading system simpler than the European model, especially in light of some unpleasant earlier ventures by China into futures trading. China will also utilize the rest of the decade to gradually roll out their system, which will be implemented on a trial basis in select cities and regions within the next two years. The systems would be a long way from any derivatives such as green bonds or even funds.

A Continuation

While this may be looked at as a scanty beginning, given China’s problem of producing nearly one-third of the globe’s CO2 emissions, it is only the beginning of the market based trading approach. Beijing has been and continues to move along with promoting the green fuels and green energy solutions, though the obvious realization that it’s a massive environmental problem has only been complicated with the retrenchment of the solar industry, for example, showing that green solutions still also face considerable economic headwinds.

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst