ChinaCarbon.net.cn, November 17, 2016: Regulators of the Shanghai emissions pilot scheme finally announced allowance allocations to be distributed for the year 2016 ending the state of torpor that had prevailed in the market for the last four months. A total of 115 million tons were allocated to the city including both direct allocations and reserve quota.
Companies with emissions due to power generation, thermal heating, and automotive glass production were allocated allowances based on an industry baseline method. Aviation, ports, waterways, and other services received allocations based on historical emissions intensity. Given the complexities in estimating their emissions beforehand, shopping malls, hotels, offices, airport and other buildings, and other complex products/services were allocated allowances equal to their average emissions from 2013 to 2015.
CCER regulations were tightened as only non-hydro credits produced after 1 January, 2013 were proclaimed as compliance-eligible. CCERs can be used to meet no more that 1% of the annual obligation of an entity.
Allowances allocated for 2016 may be carried over for compliance in the next year. Shanghai will also allocate a specific batch of allowances for use in the national emissions trading scheme due to be launched in the second half of 2017.
Shanghai ended its first phase of emissions trading with a massive oversupply due to excessive allocation of allowances. As a result, prices for the emission credits plummeted before the compliance deadline causing regulators to intervene and restrict trading of surplus allowances. The lessons learned during the first period may cause regulators to use a more cautious approach in distributing allowances in the new phase.
As trading resumes, SHEAs are likely to rise above the minimal prices they traded at before the market closed in July. However, the full impact of the new allocations will be fully realized nearer to the compliance surrender when compliance demand is at its peak. Shanghai will also introduce forward contracts in 2016 which should abate price volatility to a degree and improve year-round market liquidity.
Rahul Rana (firstname.lastname@example.org)