(Clarified ownership structure of trading firm throughout)

China Carbon Futures, owned by UK-headquartered trading firm Carbon Trading Capital, has borrowed 2 million Shanghai Emissions Allowances (SHEAs) from one of the city’s biggest power generators to use for speculative trading before returning them in late May, the first publicly announced deal of its kind in the city’s carbon market.

China Carbon Futures and state-owned Shanghai Wujing Power Corp. signed the deal at a ceremony in Shanghai on Thursday.

Under the agreement, a type of deal the Shanghai decided to allow in June last year, China Carbon Futures can use the allowances for speculative trading, but must return them to Shanghai Wujing before the June compliance deadline for 2015.

The two companies will share the potential profits from the trading.

The deal came as Shanghai carbon prices stand at 9.20 yuan ($1.40), marginally above the all-time low of 9 yuan, which was hit earlier this week.

“It is difficult say what will happen to the price, but we will see more trading activity in the coming months. Personally I think the price will pick up again too,” Kou Weiwei, China Carbon Futures’ director of carbon financing and structuring, told Carbon Pulse.

If all 2 million allowances come to market it would potentially have a huge impact on the Shanghai ETS, where only just shy of 5 million SHEAs have traded cumulatively since the market opened in Nov. 2013.

But the borrowing arrangement is just one of several rule changes Shanghai and some of the other pilot schemes have introduced in recent months in a bid to to boost liquidity.

“I’m hoping to see more structured deals. We can’t really do just spot, it’s too little and too risky,” Kou said.

By Stian Reklev – stian@carbon-pulse.com

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