China's carbon market tightening to boost RE demand

Press reports suggest that China is looking into reducing the free emission allowance.

The expected tightening of China’s national carbon market would drive the demand for renewable energy, as the potential increase in carbon prices would deem clean energy as more practical for manufacturers, according to Fitch Ratings.

“The potential cut in emission quotas is consistent with our expectation that the authorities will eventually scale back free emission allowances, as the profitability of thermal power gencos has been returning to normal on falling coal prices,” the report read. 

“This could increase the cost burden on the industry but we believe the impact on Fitch-rated thermal power gencos should be limited, as their gradual improvements in energy efficiency should mostly offset incremental emission costs in the near term,” Fitch Ratings added.

Fitch Ratings said recent reports show that the Chinese government could reduce the free emission allowance for key emitters and place a cap on the quote that can be carried over to the next year.

There are also plans to expand the market to cover more sectors such as aluminium and cement producers.

Fitch Ratings noted that the unit emissions of its rated power gencos are always below the latest benchmark level of 0.8177 tonnes of carbon dioxide per megawatt hour. They are expected to perform better as they replace their older and less efficient power plants with new ones.

Several of them have also sold their surplus emission quotas under the mandatory emission trading systems which suggests that they have further leeway when the quotas were reduced.

Fitch Ratings added that the rated thermal power gencos have also diversified theory fuel mixes and have grown their China Certified Emission Reduction credits by venturing into renewable energy projects.