* China is battling to balance econ growth with environment
* Nationwide trading scheme still a long way off
* Country is world's main source of greenhouse gas
By David Stanway
BEIJING, June 18 China launched its first pilot
carbon emissions exchange on Tuesday, though plans for a
nationwide roll out and efforts to apply the scheme to some
polluting heavy industries could be undermined by a slowdown in
the world's No.2 economy.
High-emission industries such as aluminium and steel are
likely to resist higher costs as they are already battling weak
prices due to tepid demand and a persistent supply gut.
"It is a very big concern for Beijing and for local
governments - how to strike a balance between controlling
emissions and maintaining economic growth especially amid a
general slowdown in the economy," said Shawn He, lawyer and
carbon specialist at the Hualian legal practice in Beijing.
While the exchange in the southern city of Shenzhen will not
immediately lead to a big cut in China's emissions of
climate-changing greenhouse gas, now the world's highest, it
does still represent a statement of intent by Beijing,
"This is just a baby step when you look at the total
quantity of emissions, but it enables China to establish
institutions for carbon controls for the first time," said Li
Yan, head of environmental group Greenpeace's climate and energy
campaign in China.
Under such a cap-and-trade scheme, companies must buy
allowances from others if they want to exceed carbon limits. But
there is still a long way to go in China, and the design of its
pilot platforms - as well as the national scheme that would
eventually replace them - face economic and social pressures.
"Of course, decision makers have to look at the social
impact - the carbon market cannot be designed in an idealistic
way and you have to make sure the design of the mechanism will
address such issues as social stability," said Wu Changhua,
China director with the London-based Climate Group consultancy.
And the example of carbon markets overseas is not
encouraging, with the global financial crisis saddling Europe's
Emissions Trading Scheme with a crushing oversupply of carbon
credits and record low prices.
The Shenzhen exchange is one of seven pilot schemes due to
be launched this year or next, and will involve 635 local
industrial enterprises accounting for more than a quarter of
local GDP and more than 30 million tonnes of CO2 emissions. But
that is still a drop in the ocean compared to the country's
total emissions of around 8 billion tonnes last year
Other platforms due to start in 2013 include one in the
business hub of Shanghai, where leading steel mill Baoshan Iron
and Steel will participate, and Hubei province, home
of Wuhan Iron and Steel.
While giant oil firms like CNOOC and PetroChina
will take part in the Shenzhen scheme, few of the companies
involved will be from bloated but carbon-intensive heavy
industrial sectors such as steel or aluminium, and figuring out
how to include them is likely to be a bigger challenge.
Late last year, China's industry ministry told firms in
sectors like steel to reduce their 2010 carbon intensity rates -
the volume of CO2 produced per unit of output - by 18 percent by
2015. That was a massive burden for a sector already bruised by
rising input costs and minimal returns, with the country's
economy growing at its slowest pace for 13 years in 2012 and
data so far this year surprising on the downside.
But while it will add to the costs of struggling firms, it
could also give Beijing another tool to bring wayward industries
in line with state policies and force polluting firms to close.
Carbon trade will give local governments an alternative
source of revenue as well as an incentive to free up some of
their CO2 allocations by closing small steel mills.
Jiang Feitao, a researcher at the China Academy of Social
Sciences who has studied the impact of environmental policy on
the steel sector, said smaller companies would be hit hardest by
After Shenzhen, Shanghai and Hubei, four more pilot
exchanges are due to open in the capital Beijing, the sprawling
industrial municipalities of Tianjin and Chongqing, and the
manufacturing centre of Guangdong province on the southeast
coast, probably next year.
The National Development and Reform Commission said the
seven pilot schemes will begin a process of integration in 2015
and that a nationwide platform will go into operation some time
before 2020. But the seven regions were given considerable
leeway to design their own schemes and it remains unclear how
they will connect together.
"My guess at this moment is that they will set up a national
platform and gradually integrate the seven pilot schemes into
that one, but we don't know the architecture yet - this is very
new," said Climate Group's Wu.
He, the lawyer, said China still needed legislation to give
legal recognition to the concept of carbon trading. It also
needed to solve the longstanding problem of measuring emissions.
"I don't think it is possible to get to a national market by
2015 - there are many technical issues to be addressed to
integrate these islands into one continent," He said.
China also eventually needs to set a national limit on
emissions and allocate this to individual industries and
provinces to establish a full countrywide trading scheme.
"Realistically, we are looking at 2025 before we have a cap
- a few years ago some were saying 2040 or 2035 so we have
already made progress," said Wu.
"Growth will continue to be the No.1 priority. Cap-and-trade
will be one of the ways of trying to grow differently, but China
is still a developing country and we have to grow."
(Editing by Joseph Radford)