BP in 4m Shenzhen permit buy-back, China’s biggest carbon deal to date

Published 04:40 on March 21, 2016  /  Last updated at 02:27 on March 24, 2016  /  Bavardage, China, China's National ETS, China's Pilot Markets  /  No Comments

BP has signed a buy-back deal with a Shenzhen-based energy producer for 4 million CO2 allowances in what is the biggest deal to emerge in China’s carbon market so far, as some traders look for ways to bank in on the uncertainty surrounding the transition to a national emissions trading scheme.

BP has signed a buy-back deal with a Shenzhen-based energy producer for 4 million CO2 allowances in what is the biggest deal to emerge in China’s carbon market so far, as some traders look for ways to bank in on the uncertainty surrounding the transition to a national emissions trading scheme.

The UK-headquartered oil major signed the contract with Shenzhen Energy Group at a conference on Saturday, according to an announcement by the China Emissions Exchange, which hosts trading in the city’s pilot ETS.

BP bought the Shenzhen Emissions Allowances (SZEAs) and will sell them back at a fixed price ahead of the June annual compliance deadline.

The companies declined to offer further details of the deal.

“I’m pretty sure it’s a bet on falling allowance prices. That is the simplest play with a borrow or buy-back transaction; you get them now, liquidise them, buy back later for cheaper, and sell back [to the lending firm],” one market observer told Carbon Pulse.

“The big question for me is how BP is going to work with such a huge volume in the context of Shenzhen trading volumes.”

The deal means BP holds allowances equal to around 13-14% of the total annual emissions regulated in the Shenzhen market, where rarely more than 60,000 permits change hands on a weekly basis.

SZEAs trade on the exchange in a 40-45 yuan ($6.18-6.95) range, but larger volumes tend to trade OTC at far lower prices that don’t get reported.

Market sources familiar with the transaction said the BP-Shenzhen Energy Group deal was done at 25 yuan per tonne, although neither of the involved companies would confirm that. A daily newsletter issued by the Hubei carbon exchange on Monday also stated that the price was 25 yuan.

The BP deal is similar to a transaction a Chinese trading firm owned by UK-headquartered Carbon Trading Capital did in the Shanghai market in January.

Several market participants told Carbon Pulse that an increasing number of trading houses are looking at doing these kinds of deals as prices in the seven pilot markets are expected to fall in coming months amid over-allocation and a lack of clarification over if and how the surplus permits will be migrated to the national ETS, which opens next year.

The Shanghai Energy and Environment Exchange announced a similarly structured transaction late on Monday. Zhixin Carbon Asset Management – owned by the State Grid Corp. – bought an undisclosed amount of allowances from low-cost airline Chunqiu that it will sell back later. The two will share any revenues Zhixin makes in the market.

That agreement also involved the China Industrial Bank, where Chunqiu’s revenues from the deal will be held.

This is the first time in China that a privately-owned airline has entered into a structured carbon transaction, according to the Shanghai exchange.

By Stian Reklev – stian@carbon-pulse.com

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