By David Stanway
China launched its first pilot carbon emissions exchange on Tuesday, though plans for a nationwide rollout 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 aluminum 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, campaigners said.
"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.
State oil giant PetroChina and private power generator Hanergy conducted the first two trades on the Shenzhen exchange, buying CO2 permits for 28 yuan ($4.57) and 30 Yuan per metric tonne respectively, Thomson Reuters Point Carbon reported.
That is around three quarters prices on Europe's Emissions Trading Scheme (ETS). Front-year EU Allowance futures, trading on ICE Futures Europe, ended Monday down 4.8 percent at 4.54 euros ($6.06).
Under 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 the ETS in Europe 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 metric tons (33.07 million tons) of CO2 emissions. But that is still a drop in the ocean compared to the country's total emissions of around eight billion metric 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.
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