China Proposes Cutting Carbon Quotas to Help Meet Climate Goals

(Bloomberg) -- China's regulators have proposed cutting carbon allowances as the government seeks to raise the cost of pollution on its fledgling market for trading emissions, according to a draft of the plan viewed by Bloomberg.

The existing quotas have been quite lenient to polluters, creating a surplus of allowances that has weighed on prices. Tightening the quotas so soon after the national market was launched in July suggests that Beijing is keen to step-up the role of carbon trading to help meet its promise of peaking emissions by 2030 and getting to net-zero by 2060.

The most stringent proposal is to cut allowances to 1% below the amount of carbon that market participants are expected to have generated, according to the draft. That marks a shift in policy, as the government seeks to reduce the oversupply that has accumulated in previous years.

The environment ministry is consulting with power companies on the allowances, which give coal and gas-fired plants the right to a certain amount of emissions. Permits to pollute beyond those levels are traded on the national exchange in Shanghai.

The allowances are backward looking, so those for 2021 will be set this year. The world's biggest polluter doled out allowances equivalent to about 4.5 billion tons of carbon in 2021 to nearly 2,200 power firms that account for about 40% of China's total emissions.

Still, there's probably some horse trading to be done between regulators, who want to balance national climate objectives with setting credible targets for industry, and the power sector, which would prefer looser quotas and lower carbon costs.

“Anything beyond -0.5% won't easily be accepted by the power sector,” said Qin Yan, an analyst with research house Refinitiv. She said an earlier version of the proposal had called for a 3% cut in the quotas.

The environment ministry didn't immediately respond to a fax seeking comment.

UBS Group AG, for one, believes that carbon trading in 2022 “will start to become an essential market tool to carry out the difficult process of decarbonizing industrial sectors,” according to a note earlier this week. The bank said the new market could be worth more than 500 billion yuan ($79 billion).

In its most bullish case, UBS said that could rise to 2 trillion yuan in the next few years as the market adds products and expands to new sectors, and the carbon price rises to more than 200 yuan a ton, about four times its current level.

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