Trading volumes on China's seven emissions exchanges increased by 86.5% last year, but the financial value of the transactions rose by just 50% due to falling prices, an annual report on China's carbon markets said Tuesday.
A total 24.5 million allowances worth 656 million yuan ($100 million) changed hands via exchanges in China's seven pilot carbon markets last year, Richard Mao of consultancy Environomist said at an event in Beijing.
The event launched the China Carbon Market Research Report 2016, which was backed by the South Pole Group and the International Finance Corporation (IFC), the private sector arm of the World Bank.
A further 8.5 million allowances traded OTC as so-called block trades, while 33 million offsets, known as CCERs, were bought and sold, taking total carbon trading volumes in China to 66 million for 2015, the report said.
Hubei was the busiest market with 13.3 million allowances traded on its exchange, followed by Guangdong at 4.8 million and Shenzhen at 3.1 million.
Beijing had the highest average price at 48.35 yuan, followed by Shenhen at 24.93 yuan for its vintage 2014 contracts.
The lowest prices were recorded in Chongqing (17.22 yuan) and Guangdong (19.29 yuan).
Chinese trading volumes were minuscule compared to the EU ETS, but the report noted that progress had been made since 2014, when 90% of the year's total trading volume went through in the four weeks prior to the annual compliance deadline.
"The first marked increase in daily carbon trading volumes in 2015 came 70 days earlier than in 2014, meaning that enthusiasm for carbon trading in 2015 was much higher," the report said. Despite the uptick in activity, the report suggested that there is a long way to go before China's emitters are comfortable with carbon pricing.
A survey with 273 respondents included in the report showed that half the companies regulated by the regional pilot markets were unaware of the amount or value of carbon assets they held.
Prices in almost all the pilot markets fell to near all-time lows in late 2015, and have not since recovered.
While this was partly to do with most of the schemes being over-supplied, Jian Wei Lim, a former carbon analyst with ICIS-Tschach, said uncertainty over how the pilots will merge into the national market in 2017 was the main reason behind the drops.
"The NDRC has not released details on how the excess allowances in the pilot phase will be dealt with, i.e. will they be bankable to the national scheme or will they be voided," he wrote in the report.
"Due to this uncertainty, many compliance companies and investors are taking a conservative and cautious approach in the carbon market. Potential short players and investors are not demanding allowances while long players are aggressively selling their excess allowances … in fear that [they] will be scrapped."
NDRC officials have on several occasions publicly criticised the pilot schemes for allocating too many allowances, pledging to avoid the same situation when the national ETS launches next year.
Jiang Zhaoli, deputy director of the climate change department at the NDRC, told a side event at the UN climate talks in Paris in December that the emissions cap for the ETS would be more stringent than the country's overall emissions target of cutting CO2 intensity 40-45% below 2005 levels by 2020, and by 60-65% by 2030.
But as fossil fuel consumption is already showing signs of decline and China's GDP growth rate is dropping, concerns linger that authorities will hand out too many CO2 permits under a national market, especially as part of the allocation will be made based on historical emission levels.
"Over-allocation will happen," Environomist's Mao told the event, citing similar occurrences in the EU and US regional carbon markets in their first trading periods."You cannot expect the Chinese case to be different, but the degree can be controlled," he said.
This view was echoed by South Pole Carbon's Caspar Chiquet. "The stringency of the cap is not the top priority. The top priority is to get the system up-and-running, then they can work on the cap and liquidity," he said.
"If they want, they can take excess allowances out of the market without going through a complicated political process," he added, alluding to the EU's lengthy struggle to remove some of its allowance surplus, first through Backloading and then through the Market Stability Reserve.