In 2011, China’s National Development and Reform Commission (NDRC) approved the establishment of pilot emission trading schemes (ETS) in seven municipalities or provinces. The first of these pilot schemes will be launched in the city of Shenzen on Tuesday 18 June. However, analysis by Thomson Reuters Point Carbon (TRPC), suggests that without modifications to the programme design it is likely the scheme will be over-allocated.
The NDRC has assigned the region of Guangdong – in which Shenzhen is located – an emissions intensity reduction target of 19.5% from 2010 to 2015. Shenzhen, already the most energy-efficient city (in terms of energy intensity) within Guangdong, has been given a more aggressive target of 21% during the same period.
The scheme will include both direct sources of emissions and indirect emissions from power and heat consumption, and will cover 635 companies in the industrial sector. According to the local government, these companies accounted for 31.7 t of carbon emissions in 2010, 38% of the city’s overall emissions. For covered companies as a whole, the government has set a carbon intensity reduction target of “over 30%,” presumably over the years 2010 - 2015.
“While the official list of covered companies is yet to be published, big names such as PetroChina, CNOOC, China Resources and Huawei will probably be covered, due to their business in the city, which has a population of over 10 million,” said Hongliang Chai, analyst at TRPC. “Despite market uncertainties, we forecast the covered companies will reduce total emissions, largely because of the ambitious intensity reduction target set by the government,” continued Chai.
The Shenzhen ETS is the first pilot to come up with an adjustment plan aiming to avoid the risk of over-allocation, as seen in the EU ETS. Over the next three years, the local government will allocate around 100 million permits for use within the scheme, although the actual cap will be highly dependent on the city’s economic growth. Given the uncertainties of any economic forecast, the final allocation volume will be subject to an ‘ex-post adjustment,’ where the final allocation of a company will be adjusted in direct proportion to its actual output value.
TRPC calculates that the covered emissions will slightly decrease from 31 t in 2013 to 29 t in 2015. The total emissions over 2013 - 2015 are forecast to be approximately 90 mt, 10 t below the government’s intended free allocation. In other words, the Shenzhen ETS will be over-allocated by 10 t, prior to ex-post adjustment.
“We see a significant risk of over-allocation. The ex-post adjustment isn’t a cure-all and will probably not solve this issue, especially since the pilot will cover indirect emissions. Uncertainties on future emissions and allowance prices still loom large in determining the scheme’s futures success,” commented Chai.
Adapted from press release by Samuel Dodson
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