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As many of you may know, late last week China announced plans to implement a mandatory domestic cap and trade scheme.

 

While I welcome the move by the Chinese government, I have a hunch that it may take some time before we actually see movement and market creation. Though I would love to be proved wrong.

 

 

Announcement

Last week an unnamed participant to a closed door session of the National Development and Reform Commission leaked to the media that agreement had been reached amongst ministries, NGO’s, and business that a domestic cap & trade program will begin in the 12th 5 year plan (2011-2015). Further points:

  • Necessary to help China meet 2020 carbon intensity target
  • Will be self-imposed on NOT related to Kyoto or its successor

 

Analysis

Capacity

There is still some very intensive capacity building that will have to take place ahead of a carbon cap and trade program-for example, there are no carbon accounting rules in place that would be necessary as a precursor (e.g. MRR in the US or NGERS in Australia). That said, some capacity is present: a very small voluntary carbon market exists, though it had its first trade less than a year ago and itself is not terribly mature. There is  also an existing limited cap and trade scheme in place for SOx as part of an acid rain reduction program-though my understanding is that this has not been widely deployed, so not a huge infrastructure to leverage.

 

Scope

What I have seen so far suggests that the first phase of a carbon cap and trade program will likely first be rolled out as a pilot and only encompass a very specific industry segment, e.g. coal fired power generators. Certainly this will grow, but at least during the beginning it will represent a fairly small market.

 

Timing

First, there is still no consensus on what cap and trade would look like in China, though there is agreement that it is necessary. We are unlikely to get clarity on how the cap and trade market will function until the release of the 12th 5-year Plan, which is not likely to be made public until 2011. Given that there is still significant capacity building requirements, it is unlikely (in my opinion) that a cap and trade market could be launched at the beginning of 2011.

 

Track Record

In terms of China’s track record in this space, I would say it is shaky at best. The Chinese government had committed to a 20% reduction in energy intensity (flip side of carbon) between 2006-2010. All indicators point to this goal not being reached. Similarly, the acid rain and voluntary carbon markets mentioned earlier are still more at a pilot level and not very robust.

 

Dragon in the Room

To call it out, China can also be a bit of an unknown. They have the ability to create legislation and hence markets overnight given their approach to governance. So, it is possible that a market could be put together hastily and launched 2011, but this seems unlikely given that there is broader stakeholder involvement already (business, NGO’s, etc.).

If China really is committed to developing a carbon market and they want to have material impact on their 2020 carbon intensity we could be looking at something to contend with in the next 3-5 years. Contrast this with where the US is in their carbon markets: cap & trade formally dropped from climate/energy bill last week, Democrats likely to lose their congressional majority making it nearly impossible to push through cap & trade (Republicans being very against it—even though they invented it under George H.W. Bush for acid rain mitigation), put on top that there is a very good chance Obama will not gain re-election but even if he were re-elected he has no ability to push through cap and trade (as we already witnessed). So, I believe the US is looking at more of a 5-7 year timeframe for a national cap and trade market. And, besides, we all know China is a bigger emitter anyway. So this announcement to me signals that we all may want to shift resources towards the Chinese market carbon market, but expect it to take some time to reach maturity.

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