China's enhanced efforts to curb pollution through market mechanisms could risk failure without appropriate emission permit allocation and market liquidity, according to analysts.

Provincial and municipal five-year plans for 2016-20 show that local governments, including Beijing and 11 provinces, are looking to establish market mechanisms for rights transactions including carbon emissions, waste discharge, paid energy use and water resources.

Experts predict that by the end of the 13th Five-Year Plan (2016-20) period, China will be "well-capable" of establishing a national-level trading scheme for all four types of rights transactions. "Establishing a national trading scheme is really a good idea, but it does not help reduce emissions if it fails to attract enterprises to join," said Zhou Dadi, a senior researcher at China Energy Research Society.

A notable example of this can be found in the pilot carbon emissions trading scheme adopted by the municipalities of Beijing, Tianjin, Shanghai and Chongqing in partnership with the city of Shenzhen, and Guangdong and Hubei provinces.

Although promising at first, the program's trading price and liquidity fell short of expectations, experts said.

Data from the China Carbon Pricing Survey shows that year-on-year carbon prices dropped in 2015, failing to send an encouraging signal for investors expecting short to medium-run payback from the program.

Li Zhiqing, an economics professor at Shanghai's Fudan University, said the lower carbon price was a result of excessive permit allocation at the beginning of the pilot period.

"Trading will not take place if all participants find themselves able to emit without having to pay for it," Li said. "As it is a top-down approach, the trading scheme's designers should have done more thorough calculations of the emissions levels so that it was able to revive but not overheat the market."

Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, said participants had little incentive to take part in emissions trading given its high cost.

"Economic downward pressures pose challenges for both supply and demand sides," said Lin. "Heavy polluters in danger of closure cannot afford to buy permits while potential sellers are not willing to pay large sums of money for technology upgrades when they can profit from selling their unused permits."

Before the national system debuts next year, the government should introduce policies to help cash-strapped companies obtain financing, Lin suggested.

To inject confidence, Lyu Xuedu, an adviser on sustainable development and climate change with the Asian Development Bank, suggested that market regulators "allow local permits to be valid after a nationwide market is established".

"In the long term, permits should become something like property or assets protected by law," Lyu said. More than 2,000 companies had traded under the emission trading scheme by the end last year, with the number expected to further increase as the government play its role in reviving the market, said Lyu.

wangyanfei@chinadaily.com.cn

(China Daily 04/18/2016 page7)