Prices in Shanghai’s emissions trading scheme fell 10% on Wednesday, extending record lows as the scheme’s surplus allowances continued to weigh on the market even as some big sellers vacate the market.

Shanghai Emissions Allowances (SHEAs) dropped to 7.10 yuan ($1.10) on Wednesday, marking a second consecutive day of record lows, with just over 3,100 permits changing hands.

On Tuesday, prices had dropped to 7.90 yuan from 8.80 but with only 100 allowances changing hands.

The allowances have now lost two-thirds of their value since last June.

“I am inclined to think that [the price fall] is because of over-supply, though it might also be due to the borrowing of allowances,” one market participant told Carbon Pulse.

Several deals have gone through in recent months where investors have borrowed large amounts of allowances from emitters to speculate, bringing both liquidity and bearish pressure to the market.

Unlike the other pilots, the Shanghai government has set CO2 caps for the 2013-2015 trading period without the possibility of adjusting the allocation annually.

During that period, China’s economy has slowed down and the country is actively shifting away from fossil fuels, factors that have contributed to the excess amount of SHEAs in the Shanghai market.

Another market participant said several big sellers have already stopped selling in the hope that the government will tighten the allocation for 2016, which could see prices rebound.  But that’s unlikely to happen until after the June deadline for the 2015 compliance year, he added.

“I personally thought 7 yuan would be the bottom price, but if it is at that level already I really don’t know what will happen,” he said.

By Stian Reklev – stian@carbon-pulse.com

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