China's national ETS

During December 2022, the price of carbon emission allowances under national ETS (China Emission Allowances - CEAs) did not experience significant changes, trading within a range between RMB 53/t and 58/t (USD 7.8 to 8.5/t). The average daily closing price of CEAs was RMB 56.5/t, a slight decrease of 2.4 % in comparison with RMB 57.9/t in November. The CEAs closed the year at RBM 55/t, down nearly 4 % from the closing price at the beginning of January 2022.

As in 2021 the national ETS reached a new all-time high in traded volume during December. Compared to the rest of 2022, the national ETS gained some liquidity as many market participants continued to offload their allowance surplus due to their year-end adjustment of assets and business strategies. A total of 26.2 million tonnes CEAs changed hands during December, around 3.6 times higher than the November volume (around 7.3 million tonnes) and also higher than the combined total volume traded in the previous 11 months (25.4 million tonnes).

Similar with November, trade volume for December was supported by bulk transactions, which contributed nearly 96 % to the total traded CEAs (approximately 25.1 million tonnes). Bulk transactions occurred in 14 of total 22 trading days in December, mainly during the second half of the month. A block deal was sold for around 9.1 million tonnes valued at above RMB 0.5 billion on 21 December.

China ETS pilot - Average price (Nov and Dec-2022)

China ETS pilots - Allowance traded volume (Nov and Dec-2022)

China ETS - Daily price and volume comparision (Dec-22)

China ETS pilots - Daily volume comparison (Dec-2022)

According to the daily exchange data, the Beijing Emissions Allowances (BEA) experienced a highly volatile December. BEA prices steadily increased from RMB 119/t to RMB 149/t (from 1 to 7 December) and then maintained at RMB 145/t (from 8 to 16 December), followed by a precipitous fall to merely RMB 64/t (21 December) and a rebound to around RMB 125/t (from 27 to 30 December), thereby forming a significant V-shape during the second half of December.

It is worth mentioning that due to impacts of the COVID-19 pandemic, participants under the Beijing pilot were given one additional month to verify their emissions with the new compliance deadline of 30 November 2022. Furthermore, the Beijing government sold out over 960 thousand tons of allowances during an auction on 23 November 2022 with the sale clearing at the floor price to help companies acquire enough units before their compliance deadline. Following the completion of allowance surrendering, buying demand dropped, leading to the dramatic decline in price and trade volume of BEAs in December.

Meanwhile, the closing prices in other regional market pilots were relatively stable without much movement. In the Guangdong pilot, the biggest regional market, carbon prices closed at RMB 75-77/t during most of December, followed by the Shanghai pilot (RMB 54-58/t), the Hubei pilot (RMB 43-48/t), the Tianjin pilot (RMB 30-36/t), the Chongqing pilot (constantly nearly RMB 32/t) and the Fujian pilot (RMB 29-33/t). The closing prices in the Tianjin and Fujian pilots have seen a downward trend during the second half of December, respectively reaching the lows of RMB 30/t and RMB 29.03/t.

In general, the average prices in 8 pilot markets varied greatly. Notwithstanding its sharp fluctuation, BEAs ranked highest with its monthly average price of RMB 132.48/t in December, 3.5 % higher compared to November. In comparison, the monthly average price of Tianjin Emissions Allowances (TJEAs) dropped to merely RMB 30.61/ton, making TJEAs the lowest carbon price amongst the eight pilots for the first time.

During December, the total trade volume of eight regional pilot markets reached nearly 11.05 million tons, 2.49 times higher than in November. Except for the Beijing pilot, trade volumes of other markets soared significantly. The Hubei pilot ranked first with its transaction volume of 3.05 million tons, followed by the Fujian and Shanghai pilots with around 2.45 and 1.64 million tons each.

Meanwhile, there remains a lack of market liquidity in regional pilots. Transactions occurred on 10 trading days at the Tianjin Climate Exchange, and only 4 trading days at the Chongqing Carbon Emissions Trading Center during December. According to the daily exchange data released by the Beijing Green Exchange, there were merely 14 trading days in December, of which up to 6 days with BEAs volumes of only single or double digit(s). Traded volume in the Beijing pilot was merely around 116 thousand tons, a sharp decline from around 1.2 million tonnes in November.

CCER volume (Dec-2022)

The China Certified Emissions Reductions (CCER), the country’s voluntary offsetting scheme, has been suspended since 2017 and is not yet relaunched. This has limited supply and drained liquidity of CCERs across regional markets. Meanwhile, the offset market saw its liquidity improve during December, with around 594.6 thousand tons of CCERs trading across platforms, above 2.5 times higher compared to CCERs transaction volume in November (243.4 thousand tons). With 88.3 % of CCERs traded, the majority of volume was traded on the Tianjin bourse (530 thousand tons of CCERs). The CCERs transaction volumes in the Shanghai and Sichuan markets were 29.2 and 25.3 thousand tons, respectively ranking second and third. In December, no CCER was traded in the Guangdong, Hubei, Chongqing and Fujian pilot markets.

Last month, on 25 November 2022, the General Department of the National Energy Administration of China (NEA) released drafts for comments of 

“Basic Rules of Power Spot Market” and “Supervision Measures of Power Spot Market”

. Until the end of December, these two policy drafts have been in the consultation process and are currently under further revision. The upcoming official adoption of these two policy drafts - the first regulatory documents issued at the national level for the power spot markets - has been widely considered as a positive step to effectively regulate the power spot market, and further promote the establishment of a unified and competitive power market system in China. Although the drafts look broad, they certainly give a high-level signal that China aims to firmly push forward its power market reform with a more market-based power pricing, thereby improving the national ETS.

On 2 December, the National Development and Reform Commission (NDRC) issued a 

“Notice on the signing and performance of medium and long-term power contract”

. Accordingly, the Chinese government aims to optimize the medium- and long-term transactions, as well as further enhance the green power trading scheme. Particularly, the extensive section of the Notice regarding the improvement of the market-oriented price mechanism clearly underlines the imperative for the power transaction price to fully reflect the generation’s cost changes, an important step to implement China’s power market reform.

, the Ministry of Ecology and Environment (MEE) released the updated guideline for accounting and reporting of Greenhouse Gas Emissions (GHGs), as well as the technical guideline for GHGs verification for power generation facilities. These two guidelines replace the 2021 versions and take effect from 1 January 2023. Together with providing more specific technical details regarding the calculations of emissions, the updated guidelines aim to improve data accuracy and transparency by simplifying the accounting methods and clarifying responsibilities of competent authorities in data verification.

At a regional level, on 4 December, the Department of Ecology and Environment of Guangdong Province released 

. According to it, 200 companies with annual carbon emissions of above 10 thousand tons or coal consumption from 5 thousand tons will be regulated, an increase from 178 companies currently. As clarified in the plan, 266 million allowances will be issued, amongst which up to 95.1 % will be allocated to five sectors, including cement/steel, petrochemicals, paper, and aviation. Two auctions will be organized at the beginning of 2023 to sell 500 thousand tons. Details for the use of CCER units are however not included in the plan.

On 15 December, the Chongqing Municipal Bureau of Ecology and Environment issued 

. Accordingly, there will be two allocation methods, including free allowances and irregular auctions (up to 5 % of the total allowances). While there will be no pre-distribution of allowances, companies are allowed to use CCERs up to 8 % of their 2021 obligation. The draft has been under consultation phase until 4 January 2023.

On 22 December, the Shanghai Municipal Bureau of Ecology and Environment issued a notice regarding 

 of the Shanghai Emission Allowances (SHEAs) in 2022. This auction took place on 30 December with nearly 1.46 million tons of SHEAs being sold at the floor price of RMB 60.38/t, 1.2 times higher compared to the weighted average price of all SHEAs transactions from 1 October 2021 to 20 December 2022.

Notwithstanding the lack of a detailed timeline, there were some positive signals that the MEE is currently working on the relaunch of CCERs. On 4 December, during the 2022 Global Annual Conference of the International Finance Forum (IFF), 

, the Director of the Climate Change Department of the MEE underscored in his keynote speech that China has been striving to restart China’s CCER market as soon as possible. In the same vein, 

, the chairman of the Beijing Green Exchange mentioned during the Caijing Sustainable Development Summit, a well-known ESG Forum on 

, that China has been accelerating the construction of a national voluntary offsetting scheme, revealing that the development of the registration and trading systems undertaken by the Beijing Green Exchange has been nearly accomplished.

With the compliance deadline being twelve months away, traded volume in January is expected to drop sharply compared to the previous month. Although the CEAs price in January is expected to slightly decrease from December, this would not constitute a significant downward price trend. We expect the CEAs price to remain stable, and the volatility will likely be decreasing as trading activity will dry out. Also for the regional systems and the CCER market, we expect prices and trade volumes to follow a downward trend due to the low trading activities during the Spring Festival in China which will take place at the second half of January.

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Whereas the CEA price was stable, trade volume reached a record high during December 2022

In most regional pilots, closing prices experienced no big fluctuation and trade volumes increased significantly (exception was the Beijing pilot)

The majority of CCERs were traded in the Tianjin pilot, no CCER was traded in the Guangdong, Hubei, Chongqing and Fujian pilots

In January, the prices and trade volumes in all markets are expected to follow a bearish trend during the time of the Spring Festival in China

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