Trading house Guotai Junan Securities on Thursday said it had inked a deal to borrow carbon allowances from Shanghai Electric Power Co. to use for speculative trading in the city’s carbon market, the second deal of its kind to be announced in a week.
Guotai Junan announced the deal without revealing any details, but sources familiar with it told Carbon Pulse 400,000 Shanghai Emissions Allowances (SHEAs) were involved, with some to be returned in March and the rest in May before the annual compliance deadline.
The deal, which reflects the increase in speculative interest in the Shanghai ETS, follows another agreed last week by China Carbon Futures, owned by UK-headquartered trading firm Carbon Trading Capital.
China Carbon Futures borrowed 2 million SHEAs from Shanghai Wujing Power, which is owned by Shanghai Electric Power Co., the lender in Thursday’s deal.
Such agreements typically involve an emitter lending part of its inventory of carbon allowances to another firm, which then uses the units to try to make a profit through speculative bets. The borrower agrees to incur any losses from its trades, whereas any profits made are shared by both companies.
Last August, power firm Shenergy said it had borrowed an undisclosed number of SHEAs from one of its subsidiaries, but the amount involved is thought to have been smaller according to market participants.
Under rules released by the Shanghai carbon exchange last year, trading houses can borrow up to 2 million allowances from compliance companies as long as they are returned before compliance. The units can only be used for trading purposes.
Liquidity in Shanghai’s regional pilot market is expected to pick up before the June compliance, but it remains to be seen whether there is scope for speculators to make money in a market that has only traded a total of 5 million SHEAs since it launched in Nov. 2013.
In the past two months, only 72,000 SHEAs have traded, with the price currently sitting at 11 yuan ($1.67), the lowest in China but higher than the market’s all-time low of 9 yuan hit on Jan. 25.
By Stian Reklev – firstname.lastname@example.org