China lowers carbon floor price as CER prices crash

China has lowered the minimum price foreign companies must pay for Chinese carbon credits for the first time since 2008, but traders say the move is unlikely to have much impact as it will remain twice as high as current carbon prices. The National Development and Reform Commission (NDRC), the agency in charge of China’s participation in the international carbon market, has cut the floor price for Clean Development Mechanism (CDM) credits by 1 euro to 7 euros ($8.92) in response to EU and U.N. carbon prices hitting record lows, several sources told Point Carbon News. Officials at the agency were not immediately available for comment.

Despite the minor adjustment, China’s minimum asking price for U.N.-issued carbon credits, called Certified Emissions Reductions (CERs), remains twice as high as the current market price and is seen by most investors as a troublesome and bureaucratic barrier. “Lowering the price floor is not going to have any impact at all (as) nobody is really doing deals for that price anyway,” said one Beijing-based trader who preferred to remain anonymous. The floor price applies to projects that have not yet been registered under the CDM and was introduced by the government in 2005. The government has said it set the price to ensure that Chinese project owners weren’t taken advantage of by more experienced foreign investors. It has been kept stable at 8 euros – or even higher for some project types, such as wind power – since 2008.

The 8-euro floor price for Chinese credits was considered reasonable in 2008, when bottlenecked supply and high energy prices caused CERs to trade well above 20 euros. But since then a glut of credits and dwindling demand pushed front-year CER prices to an all-time low of 3.28 euros on Monday.

CER prices on the secondary market have been trading comfortably below 8 euros since September 2011, meaning buyers remain unwilling to sign new deals at or above the previous floor price. “It’s just too risky to do deals at a fixed price,” the trader said. Sources said that in recent months buyers have also put pressure on Chinese sellers to amend previous deals as they seek to renegotiate price. “Even if the floor price was set at current market price levels, buyers would still prefer to sign contracts with a floating price.” “In reality, buyers and sellers have their own arrangements,” a second trader said.

In most instances, parties have added a clause into contracts that would allow the CERs to be sold at a floating price instead of a fixed price, should certain circumstances occur, thereby rendering the floor price irrelevant, sources say. According to market participants, it is also not uncommon for parties to write up two different contracts – one shown to the NDRC that meets the floor price criteria, and the other containing the real price, which is kept confidential.

Meanwhile, the NDRC continues to approve new Chinese projects to help them win U.N. registration in time to supply EU buyers with CERs in the years through 2020. The NDRC said Monday it gave approval to 65 new projects that have a total generation capacity of 10 million CERs annually at a Jan. 5 meeting. This followed two December meetings when the NDRC approved a further 139 projects. Most Chinese CERs are sold to participants in the EU Emissions Trading Scheme, but from 2013 European companies will not be able to use CERs from newly registered projects located in countries that are not defined as least developed.