China's carbon trading market peaked around 2009, when companies were scrambling to fit their facilities with equipment that lived up to Kyoto Protocol standards. (Photo/Xinhua)
"Carbon prices in Europe dropped to 1.4 euros in the middle of a trading session ahead of Oct. 1 and closed at 2 euros," said Shi Chongqi, vice president of a counseling firm in Beijing. Shi has been engaged in clean development mechanisms for a decade.
"I've seen them maturing gradually, reaching a peak and eventually dropping to today's low," he told the China Business News.
Back in June 2003, the European Union passed an Emission Trading Scheme directive, which stipulated that 12,000 emission installations in various industries, from power plants, oil refinery, and cement to glass production, were allowed to emit greenhouse gases, but with permits.
The scheme is applicable to 27 EU member states, with Switzerland and Norway joining in 2007.
If a company's actual emissions are lower than the permitted limit, they can sell the rest in the market. On the contrary, if they exceed the limit they have to purchase a higher emissions limit or they will get fined.
China's carbon trading market opened gradually between 2003 and 2005, after many enterprises began eying the potential of the market. The country's development institutions began equipping themselves with the required facilities that would meet the prerequisites laid down by the EU and the Kyoto Protocol.
"The best phase emerged between 2007 and 2008 when a unit of certified emission reduction was worth over 20 euros," Shi said.
Chinese companies became familiar with the market and learnt how to negotiate prices. Shi estimated that most of China's bilateral clean development mechanism contracts had fixed prices.
However, "the second commitment period" of the Kyoto Protocol has not been chalked out, despite an approaching expiration of the "first commitment period" in 2012. Many contracts are slated to end on Dec. 31.
The contract expiration dates are a result of transactions made by different buyers. For example, many EU buyers signed deals for a collective block spanning a certain number of years, such as seven years, 14 and even 21. However, many Japanese buyers only agreed to sign contracts than ended on Oct. 31, because Japan opposes extending the Kyoto Protocol and has proposed that buying emission reduction permits should stop after 2012. Therefore, these companies are now looking for new buyers.
China's CDM industry peaked in 2008 and 2009, but began seeing a downward trend after that.
"Many small counseling firms and sellers could hardly hang in there because the results came out slowly, with a change in regulations and the imposition of a higher threshold. It was not that easy to have their transaction items certified," Shi noted.
The global carbon trading market has declined since 2011, with the "first commitment period" coming to an end and on account of the aftermath of the Eurozone crisis.
He believed that current prices existing in the global carbon market "were abnormally low."
The report also attributed this to a lack of vision and the ongoing economic downturn in the European Union. Also, the fact that EU still has 1 billion tons of certified emission reductions granted by the United Nations should be taken into account.
"How would prices go up when the supply far exceeds the demand?" Shi asked.
But it is very difficult for any developing nation to lower the cost of reducing emissions to as low as 2 euros. If trading continues at this price, companies and projects might face some difficulties.
"Almost all buyers are renewing their deals. This is the new trend," an executive at an energy company told the China Business News. For the time being, the global CER market is unlikely to rebound.
He Sheng, a co-owner of Hualien Law Firm, told other media outlets that re-negotiations would be potentially risky. The new contracts might prove to be invalid because the agreed prices, if they were lower than the minimum fixed by the government, could be seen as a violation of government policies, He said.
The companies did not seem to care so much. For them, what was important is having a good financial return.
In fact, the National Development and Reform Commission had not clarified as to how it will deal with such situations. Moreover, income tax can only be levied on carbon transactions after the sellers have received payment. Thus, the key for these companies is that they sell what the buyers can afford.
With the expiration date less than three months away, many new CDM projects and companies were busy working on striking more deals.
Chinese enterprises care not only about prices and affordability, but reputation and equal terms, which are more important because if the agreements followed the law existing in buyers' countries and not the one applicable in China, the Chinese companies would be at a disadvantage, said He.
Moreover, Shih said the global carbon trading market might not remain restricted to CDM transactions. However, further development would depend on the global community's mutual negotiations and policies, he added.
Lu Chun is president of the China Three Gorges Corp. Born in 1955, Lu is from Xinyang in Henan province and holds a doctorate degree in management from Tsinghua University's School of Business ...