(Bloomberg) -- China announced new rules for its carbon market that will increase the number of free allowances that power plants can obtain, potentially cooling a rally that has sent permit prices to record levels.
About 8 million tons’ worth of additional emission permits will be created, according to the London Stock Exchange Group’s review of a long-awaited carbon trading plan that was published by the Ministry of Ecology and Environment on Monday. That’s more than the ministry had specified in an earlier draft.
The additional allowances could dampen a rally that on Monday pushed the price of Chinese carbon allowances to a record 104.14 yuan ($14.64) a ton. That was driven by a looming year-end compliance deadline that raised the prospect of a supply shortfall.
But even with that rally, carbon prices in the world’s biggest polluter are just a fraction of Europe’s, and the new plan will do little to narrow that gap.
“It will put slightly downward pressure on carbon prices,” Song Yutong, an analyst with LSEG, said of the new plan in an interview.
China’s carbon market, set up to encourage polluting industries to cut emissions, has struggled with muted trading and limited scope since it was launched in 2021. The scheme currently covers about 2,200 power utilities, and will be expanded to cover the steel, cement and aluminum sectors next year.
Lenient allocations for power plants have left the market with a surplus of more than 300 million tons so far, according to LSEG.
(Corrects currency conversion in third paragraph.)
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