China should link southern carbon markets ahead of nationwide scheme

Carbon trading experts in China have proposed linking two emissions exchanges in the southern province of Guangdong as a first step towards integrating all seven of the country’s pilot markets.

China aims to launch the first phase of a nationwide carbon trading scheme as early as next year, creating the world’s largest emissions trading scheme.

But integrating the seven pilot schemes already in operation will be challenging, with each operating under different trading rules, eligibility criteria and prices.

Researchers at Sun Yat-sen University have proposed to the government that carbon traders in the Guangdong and Shenzhen pilot schemes be allowed to trade on either exchange and to use permits from either region to meet their compliance targets.

The two markets have significant variations. Guangdong’s market covers the power, cement, iron and steel and petrochemical sectors. Shenzhen, though much smaller in size, covers 26 industries, but it sets targets based on the intensity of emissions, which are not easily compatible with the absolute emission targets used in Guangdong.

The researchers said the two markets could be linked by registering all of the nearly 900 emitting companies on both bourses and allowing them to trade permits on either exchange. Under this proposal, permits issued by one exchange would not be convertible to the other.

An alternative option would be to allow permits issued to those sectors included in both exchanges to be accepted across both markets.

The researchers said they could develop an exchange rate between the two markets’ permits to resolve the price divergence.  In addition, the government could play a role in reducing the pricing gap between the two markets. Guangdong has raised 600 million yuan through public revenues earned from its carbon permit auctions and plans to use the funds to invest in low-carbon projects.