As carbon trading is widely viewed as a market full of potential in China, Arthur D. Little (ADL), a global management consulting firm, warns of its technical risks to a well-functioning trading market.
"Introducing emissions into the commodities market will raise a number of business risks such as market distortion and delocalisation, both very real considerations for business leaders cultivating a strategic plan to engage in the second wave of carbon-trading schemes," Davide Vassallo, ADL's Sustainability and Risk Practice, said in a letter addressed to the Financial Times last month.
The European Union carbon trading schemes introduced in 2005, outlined in the article "Carbon trading grunts into life" (April 2), saw limited emissions trading conducted among a handful of large companies, and was used primarily as a training exercise. The second period will fully integrate emissions trading with other commodities, and a whole new set of rules will apply.
"With a shortage of credits likely, the volume of trading and prices will skyrocket in the second phase of EU emissions trading," Vassallo said. "Currently, companies taking advantage of carbon trading are doing so because it is a relatively low-cost abatement solution."
He explained, "However, as the price of carbon steadily creeps up, smart companies will begin moving away from emissions trading as nothing more than a short-term solution and increase investment in innovative technical solutions to reduce emissions and ensure their businesses’ sustainability in the medium to long term."
Made possible by the CDM, a mechanism that allows developing countries to sell their certified emission reductions (CERs) to developed ones, clean coal technology is being rapidly advanced in China.
By trading carbon credits, China has developed an additional revenue stream to fund domestic low-carbon projects. In 2006, the revenue from trading CERs totaled $3 billion.
Statistics from the Office of the National Coordination Committee on Climate Change in China show that as of October 9, 2007, the country had 120 CDM projects successfully registered with the United Nations and 20 issued with CER credits.