China's biggest oil company is betting that carbon trading has a future

According to industry news service Point Carbon, PetroChina has hired Garth Edward, an ex-Citigroup trader, to head a new UK-based emissions trading desk.

It's noteworthy that PetroChina is entering the market at a time when the future of the Kyoto Protocol, which provides the international framework for trading carbon credits, is in doubt.

Europe has the most vibrant carbon market, with many of the credits originating from investments in projects in China and India under the U.N. Clean Development Mechanism. CDMs have come under fire for helping fund projects that critics say shouldn't have qualified for international subsidies.

Still, there are plenty of reasons for PetroChina to move into trading carbon. China is the world's biggest energy producer and the world's biggest source of carbon emissions. PetroChina, meanwhile, is China's biggest oil producer.

Analysts predict that some form of carbon trading will still exist after Kyoto expires in 2012 - and there's talk of China setting up a domestic carbon market. 'Carbon markets will continue in Europe, emerge in Asia (Japan, Korea, maybe China later) even in the absence of a follower to Kyoto, which if it comes, will be weak,' Emmanuel Fages, head of power, gas and carbon coal research at Orbeo, the carbon trading arm of Societe Generale SA and Rhodia SA, wrote in an email to China Real Time. 'Dynamics will be much more regional and bilateral now.'

Even the much maligned CDMs will continue, Fages says, though the investments will be in 'small scale, more expensive renewable energy projects, organic methane capture or energy efficiency, dominantly based in poorer countries.' China, which has been so successful up till now, 'probably will not be able to keep on the same recipe post-2012.'

PetroChina has already shown a commitment to carbon trading. It was one of the first companies to invest in setting up one of the domestic carbon exchanges, even though there was no legislation (such as domestic carbon caps) to support markets. The exchange has had a few modest trades.

There are signs that China is contemplating using carbon credits as a way to reach its goal of slowing the pace of carbon emissions. A promise to cut greenhouse gasses relative to economic output between 40% to 45% percent by 2020 from 2005 levels will likely be part of the country's next five-year plan.

Already, companies in energy intensive industries that emit a lot of greenhouse gasses are investing in technology to reduce their emissions. If a domestic market is established, some companies with greenhouse gas emissions below their allotment could sell their credit to someone else.

If that market actually materializes â ' and it's a big 'if' at this point -- PetroChina, which produces a lot of emissions from its refining and chemical businesses, will need to know how to trade.