The price of China's national carbon allowances (CEA composite) experienced a strong rebound, culminating in an 8.3% jump to CNY66.86 on November 19th, marking a 30% rally since the late October low. This upward movement is primarily driven by recent regulatory actions aimed at tightening allowance allocation and implementing price stabilization measures.
Two main factors contributed to this significant price surge:
- Tightened Allocation Rules for 2025: The publication of the final allowance allocation plan on 18 November for three major industrial sectors—Aluminum, Cement, and Steel—was a direct catalyst. The new rules for the 2025 allocation are tighter than previously anticipated, resulting in more enterprises facing allowance shortages.
- Increased Allowance Banking Quota: The final plan also included a significant increase in the basis allowance banking quota for newly included industrial sectors, jumping from 10,000 to 100,000. Brokers report that this change encouraged some industrial buyers to "buy the dip" in CEA and secure allowances for the next compliance period.
Around 1300 new enterprises from the 3 sectors are brought into the national ETS, adding to the existing 2500 enterprises in the power sector and boosting the coverage of the national ETS from 5 to around 8 billion tonnes. The basis banking quota for the power enterprises remains unchanged at 10,000.
Deeper intervention by the ETS regulator on the horizon
The primary driver for the sustained rally since October is the regulator's consideration of "allowance price stabilization measures." There have been several rounds of internal consultations and meetings with key stakeholders. This action was prompted by the CEA price falling to near the CNY50 mark (the market launch price in July 2021). The increase in the allowance banking quota (from 2019-2024 vintage to 2025) is confirmed as one of these initial measures, with more stabilization efforts expected.
Near-Term Outlook for CEA
The current regulatory tightening and focus on price stability suggest that the CEA price is likely to strengthen in the near term. Market participants have noted that the aggressive offloading of surplus allowances, which began in September and depressed prices, has started to fade. This natural market correction was already setting the stage for an upward adjustment in the CEA price.
However, this upward momentum is expected to be capped by the completion of the 2024 ETS compliance cycle. Once compliance obligations are met, buying pressure will temporarily subside.
In addition, any increased demand for CEA hoarding is likely to be minimal, since industrial companies will only be allocated allowances matching their verified emissions for 2024. Therefore, there may be limited interest in purchasing extra allowances, and only a small number of enterprises are financially equipped to conduct such transactions. Furthermore, there is uncertainty about the rules governing the banking of 2025 vintage allowances for use in 2026.
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