Brokers in Shanghai’s carbon market have pushed offset prices to some 20% above allowance prices, a premium that some participants say does not reflect the real value of CCERs in the municipal carbon market.
In the past couple months, the Shanghai carbon exchange has seen 20,000-40,000 CCERs trade daily, whereas interest in regular allowances, or SHEAs, has dropped to zero.
Tuesday saw nearly 60,000 CCERs transacted on the exchange, with prices peaking at 15 yuan ($2.36) before settling at 14.70. In comparison, SHEAs closed unchanged at 12.10 yuan, and not a single trade has gone through since Sep. 14.
In virtually all emissions trading schemes worldwide, offsets trade at a discount to allowances. This is because offsets are seen as a cheaper but optional route to compliance, and as such their usage tends to be limited to a small portion of an average emitter’s annual CO2 output.
Historically, CCERs have traded at a slight discount to SHEAs, but allowance prices tanked amid low demand earlier this year to fall roughly into line with offsets, despite the fact the emitters regulated under the city’s ETS can use offsets to meet just 5% of their annual compliance obligations.
In light of this, observers say Shanghai’s current market dynamics do not represent the real value of CCERs in the scheme.
“Shanghai’s CCER price is not a reasonable index because it is even higher than the price for permits,” one Shanghai-based project developer who wished to remain anonymous said.
Market participants say they regularly see CCERs in the broker-led over-the-counter (OTC) market trade several yuan below what the same offsets fetch on the exchange later, due to a lack of demand from compliance buyers.
Some sources suggested the on-exchange activity was driven by a desire to build a firm CCER price ahead of compliance buyers returning to market.
Offset prices in the different pilot markets vary somewhat but Category 1 CCERs – those from new projects, which are eligible in most markets and are expected to be allowed in the national ETS – usually change hands for 10-15 yuan but sometimes as low as 7.
Category 3 CCERs, so-called pre-CDM CCERs, which can’t be used in the pilots and whose eligibility for the national market remains doubtful, currently trade in the 3-5 yuan range.
However, the Shanghai exchange’s CCER price index does not define which category the traded offsets belong to.
“Some of the traded CCERs are not even eligible for compliance (in Shanghai),” the project developer said.
Meanwhile, the reported CCER price level is skewed further by the fact that several state-owned enterprises tend to buy offsets from companies within the same conglomerate, even though that means paying more for each CCER, sources said.
A number of the big SOEs have their own carbon-specialist subsidiaries, developing CCER projects at facilities owned by the parent company.
“They want to keep the money within the group, and buying cheaper offsets from other developers is against company interest,” one source said.
By Stian Reklev – email@example.com