China launches first carbon market in Shenzhen

China saw its first-ever domestic transaction in the right to discharge carbon dioxide at the launch of its first pilot carbon market on Tuesday, moving the world's largest CO2 emitting country closer to capping such pollution.

A power plant of Shenzhen Energy Group, a state-owned utility, sold an emission permit for 10,000 tonnes to the Guangdong arm of state oil group PetroChina for Rmb28 ($5) a tonne and another 10,000 tonnes to Hanergy, a privately owned power generator and solar-panel maker, for Rmb30 a tonne, according to the Shenzhen Carbon Exchange.

"This means that our country has taken a key step in establishing a carbon market," the exchange said in a statement.

Carbon markets allow companies to buy permits to emit carbon dioxide from those that burn less fossil fuels. They thus help set a price on emissions, a mechanism that aims to encourage companies to reduce such pollution and invest in cleaner technologies.

The trading scheme, launched in a grand ceremony in the presence of local and national policy makers, is the first among seven regional trading platforms to start operating this year or next to help the government decide in 2015 whether to set up a nationwide carbon market.

"This is further proof that China recognises the need to address climate change," said Dan Dudek, head of the China programme of the US non-profit group Environmental Defense Fund.

However, some experts say the scheme is little more than a drop in the ocean considering China's massive total emissions and the country's pressure to keep its economy growing fast enough to continue lifting people out of poverty.

The Shenzhen pilot involves 635 local companies which account for 26 per cent of the city's gross domestic product and 38 per cent of its CO2 emissions, or about 30m tonnes - a tiny amount compared with the 8bn tonnes China emitted in 2012.

The enterprises that participate in the Shenzhen scheme, which have been allotted permits for total emissions of 100m tonnes between 2013 and 2015, are set to reduce their carbon intensity by close to 7 per cent over the next two years, the exchange said.

But the pilot market starts at a difficult time for global carbon markets including the world's largest, the EU's Emissions Trading System, which is struggling with record price falls as the sluggish economy exacerbates an oversupply of emissions permits.

The prices of the first permits sold on the Shenzhen market were about 25 per cent lower than benchmark prices in the EU Emissions Trading System, where permits were trading for €4.65 a tonne at midday on Tuesday.

That is nearly 90 per cent higher than in April, when prices collapsed after the European Parliament voted down a bid to tighten the flailing market, but well down from July 2008 when benchmark prices were nearly €30 a tonne.

Chinese observers said the government was likely to move cautiously to avoid any adverse impact as China's economy is slowing as well.

"Progress will depend on the government's determination," said Lin Boqiang, an energy economist at Xiamen University. "The question is what impact it will have on the market - unlike other commodities, for example when you buy oil you get oil, here you spend money and the only thing you get is a contribution to the global climate."

Experts say what the Shenzhen scheme and the other regional pilots that are expected to follow can achieve is also limited by the lack of a nationwide legal framework. "Unless the government sets up a binding framework, it will be very difficult to determine fair transactions, and trading will be hampered," said Mr Lin.

Additional reporting by Li Wan

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