China’s New Carbon Emissions Plan Could Hit Profitability of Higher Emitters

China’s plan to create a national carbon emissions trading platform will probably hit the profitability of coal-dependent power producers with high emission rates over the long term due to increasing emission costs and lower power generation.

On the other hand, the platform will in the long term probably grow the profitability of renewable energy producers and coal-dependent power products with low emission rates thanks to higher power generation and carbon credit revenue, said Moody’s Investors Service in a new report. “The new platform will have no immediate impact on the ratings and outlooks of power producers rated by Moody's because any meaningful effects will likely come in 2020 or after when the platform becomes fully functional,” Moody’s analysts said. “But power producers may increase future capital expenditures if the government sets higher emission reduction targets, which will accordingly raise their leverage.”

According to China’s National Development and Reform Commission (NDRC), announced Dec. 19, the trading platform will be set up in Shanghai and Hubei provinces. The NDRC has a three-stage development plan, including a Pilot Run Stage that will take a year of testing. There’s no set time limit for the Perfection Stage to bring the platform up to required standards. No emission targets have been set so far.

The plan will begin with the power sector, Moody’s said. Producers with more than 26,000 tons of annual carbon emissions will be subject to the plan’s requirements, including approximately 1,700 entities with total emissions of over three billion tons and amounting to roughly 30% of China’s total emissions in 2016. More sectors are anticipated to be added to the plan later. Power producers with lower emission rates will be eligible to generate more power or sell surplus emissions permits for added revenue.

The national platform will complement the development of the Green Power Certificate program, Moody’s said. “In the longer run, Moody's expects the plan will encourage power producers to adjust power generation mix to optimize profitability based on prevailing emission levels of their coal-fired generation units. This will lead to lower carbon emissions for the entire sector.” The ratings firms also anticipates trading among coal-dependent power producers will likely be more active than it will between renewable energy producers and coal-dependent power producers due to the relatively large demand and supply of carbon quota.

– Nicholas Stern, managing editor

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