Price control mechanisms and tightly regulated markets are among the measures China is considering for its emissions trading schemes in a bid to avoid the price volatility and scandals that have hit Europe's $148-billion scheme.
As seven cities and provinces in China are preparing to launch the country's first emissions trading schemes to halt the nation's spiralling greenhouse gas emissions, the international carbon market is reeling from a huge over-supply and record low prices.
European permits have lost 80 percent of their value since mid-2008 and 50 percent in the last twelve months, spurring claims that the carbon market is becoming irrelevant in the EU's efforts to cut emissions.
“China will consider introducing both a price ceiling and a price floor to prevent the dramatic price fluctuation seen in the EU ETS,” said Chen Jianpeng with the State Council's Development Research Centre, which is involved in studying the impact of a future Chinese ETS.
China, which accounts for almost a third of global CO2 emissions, plans to use the experiences from its pilot schemes to set up a national CO2 market later this decade.
The Beijing municipal government, which will host one of China's seven pilot schemes from 2013 or 2014, plans to implement a price floor and ceiling in the capital's CO2 market.
Volatility is just one of many challenges the EU market has faced since its launch in 2005.
Tax evasion, theft of permits and re-usage of credits have also damaged the reputation of the world's biggest carbon market.
China, which is generally skeptical about financial markets, is planning to keep its CO2 scheme under tight control.
After state-owned power company China Aviation Oil lost $550 million on speculating in oil futures in 2004, Beijing has ruled out forward markets in all but a handful of commodities.
Emissions trading will take place on government-approved exchanges, and recently announced regulations by the State Council means only spot trading with a five-day delay on delivery will be allowed.
Some observers said it would be beneficial to keep the market simple, at least initially, as Chinese compliance traders lack experience in emissions markets.
“The market is not ready to have carbon derivatives, green bonds and green funds in the pilot phase,” said Shi Minjun, deputy director at the China Academy of Science's Research Center on Fictitious Economy and Data Science.
But other observers were doubtful whether an emissions market could be effective if it did not provide a forward price, because companies would lack the information they need to make future investment decisions.
“Forward trading is necessary to determine the proper value of the credits that are traded,” said Yu Xiang, with the Academy of Social Sciences.
“Without it, you risk getting an illiquid market for most of the year, then a rush of trading just before surrender.”
But Qian Guoqiang, strategic director with project developer Sino Carbon, remained unconvinced that forward trading would guarantee the ability to make sound decisions for the future. “Even in the EU ETS the price plummeted unexpectedly and the forward market did not provide any support,” he said.
In another development, China's Trade Ministry said it will open investigations into imported US and South Korean solar-grade polysilicon.
The Ministry of Commerce said that it would open anti-dumping and anti-subsidy probes on US imported polysilicon, as well as an anti-dumping probe on South Korean imports of the raw materials used to make solar products.
The Chinese ministry issued the decisions in two statements on its website, citing preliminary evidence from several companies - GCL Poly-Energy Holdings, LDK Solar and Daqo New Energy.
Chinese officials have threatened to impose trade duties on US shipments of polysilicon if the United States moved to penalize Chinese solar companies.
A spokeswoman for the US Trade Representative's office said the United States was disappointed with the Chinese move and would “vigorously defend its interests” in the case.
“As we have stated with respect to similar actions by China, we are concerned that China appears to have established a practice of using trade remedy investigations to retaliate against legitimate actions taken by its trading partners,” USTR spokeswoman Nkenge Harmon said.
Western solar companies have been at odds with their Chinese counterparts for years, alleging they receive lavish credit lines to offer modules at cheaper prices, while European players struggle to refinance.
China's move came a day after Germany's Environment Minister Peter Altmaier gave backing to German companies' efforts to launch anti-dumping proceedings in Europe. Germany is the world's largest solar market.
Earlier this year, the United States put two new import duties totaling about 35 percent on solar equipment from China, citing the country's unfair support of its industry and illegal dumping of inventories in the US market.
The Coalition for American Solar Manufacturing, the US industry group that sought duties on Chinese-made solar panels, blasted the new Chinese investigation as “an abuse of international trade rules.”
“Today's announcement by the Chinese government proves once and for all that it is intent on unfairly and illegally allowing its manufacturers to dominate the global solar industry,” Gordon Brinser, president of SolarWorld Industries America, said.
China's solar manufacturers such as Suntech Power Holdings, Yingli Green Energy and Canadian Solar have criticized the tariffs set this year as a threat to their young industry that will slow its growth by raising costs.
If punitive tariffs are adopted, it would likely impact importers such as US. polysilicon maker Hemlock, the world's largest, and South Korea's largest producer, OCI Corp. US-based MEMC Electronic Materials would also be affected.
Though not in a trade war, China and the United States are vocal in their criticisms over the other's trade policies.
Washington says China's attacks are largely tit-for-tat retaliation for valid US complaints, while China suggests the White House is simply “China-bashing” in an election year.
Beijing on Wednesday also appealed a recent World Trade Organization ruling against Chinese duties on US “grain-oriented electrical steel,” a case that the United States says is an example of China using its trade defense laws in a retaliatory fashion.
“The WTO panel in the grain-oriented electrical steel (GOES) dispute upheld US claims that China breached a number of substantive and procedural obligations under the WTO Agreement,” Harmon said.
Research firm JI Asia analyst Felix Fok said downstream customers, such as wafer manufacturers, would struggle if China passed on the import tariffs against polysilicon imports.
“China is doing this because some of its companies are basically on their knees,” Fok said, referring to more than a year of losses suffered by the sector.
China's solar companies hold more than 60 percent of the global market. The US market alone accounts for about 20 percent of sales of China's largest solar panel manufacturers.
The Coalition for Affordable Solar Energy, a US group that represents solar installers, urged both the US and China to avoid duties, saying tariffs from either end cost jobs and make solar energy less competitive against fossil fuels.
“Lowering, not artificially raising, the cost of solar should be a global goal,” the group's president, Jigar Shah, said in an emailed statement.