China proposes cutting carbon quotas to help meet climate goals

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Chinese regulators have proposed cutting carbon quotas as the government seeks to raise the cost of pollution in its nascent emissions trading market, according to a draft plan seen by Bloomberg.

Existing quotas have been quite lenient on polluters, creating a surplus of quotas that has weighed on prices. The tightening of quotas so soon after the launch of the national market in July suggests that Beijing wants to strengthen the role of carbon trading to help meet its promise to peak emissions by 2030 and reach net zero by here 2060.

The strictest proposal is to reduce allowances to 1% below the amount of carbon that market players should have generated, according to the project. This marks a shift in policy as the government seeks to reduce the oversupply that has built up over previous years.

The Ministry of the Environment consults electricity companies on quotas, which give coal and gas power plants the right to a certain amount of emissions. Polluting permits above these levels are traded on the Shanghai National Stock Exchange.

Allocations are retrospective, so those for 2021 will be set this year. The world’s biggest polluter has distributed allowances equivalent to about 4.5 billion tons of carbon in 2021 to nearly 2,200 power companies that account for about 40% of China’s total emissions.

Still, there are likely to be trade-offs between regulators, who want to balance national climate goals with setting credible targets for industry, and the power sector, which would prefer more flexible quotas and lower costs. lower carbon.

“Anything above minus 0.5% will not be readily accepted by the power sector,” said Qin Yan, an analyst at research house Refinitiv. She said an earlier version of the proposal called for a 3% reduction in quotas.

The environment ministry did not immediately respond to a fax seeking comment.

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

In its most optimistic case, UBS said this could reach 2 trillion yuan over the next few years as the market adds products and expands into new sectors, and the price of carbon rises to more. 200 yuan per ton, about four times its current level. .

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