CO2 allowance prices in the Hubei ETS plunged to 20.03 yuan ($3.15) on Tuesday, extending a record low for the third time within a week as liquidity in China’s most traded market is quickly drying up.
The Hubei market has been the most commercially attractive of China’s seven pilot markets since it launched in Apr. 2014, generating nearly 20 million allowances in trade – almost half the total volume traded in the pilots – with prices relatively stable within a 22-28 yuan range.
Tuesday’s new all-time low followed records set at 20.50 yuan on Monday and 21 yuan on Nov. 3.
Last week’s total volume of 195,000 allowances traded was the lowest since the post-compliance lull in early August, and a measly 1,203 permits changed hands the first two days of this week.
Market participants struggled to explain the trend. There are market rumours that the Hubei scheme ETS was over-allocated by nearly 3 million tonnes last year but that would represent a surplus of less than a 1% surplus and observers doubt this is sufficient to hit prices.
POLICY V FUNDAMENTAL SIGNALS
Prices in the Chinese pilot schemes have tended to start off on a political signal from the local government and move mostly on speculative behavior and policy signals, while fundamental drivers such as coal consumption or manufacturing data have barely any impact at all.
The Hubei price has slowly drifted since reaching a high of just over 28 yuan ahead of the July compliance deadline, which some observers said might have hit appetite.
But others said the government’s eagerness to regulate the market may have had an impact.
“I think traders are freaking out over the price, they are not allowed to speculate,” one observer told Carbon Pulse.
The comparatively big volumes seen in Hubei have been primarily driven by speculators hoping to make a profit in a market that has relatively loose financial trading regulations compared to the other pilots.
But on Nov. 3 the provincial government released guidelines for how and when it might intervene in the market, which promptly sparked a 7.9% price drop on the day.
“The Chinese carbon market is an offset market, at least until the inception of the national scheme. The Hubei command-and-control approach to traders doesn’t work,” the observer said.
Another observer was more careful. “Let’s see how it goes the next few days,” he said.
By Stian Reklev – email@example.com