Shanghai carbon fell further on Tuesday as small sellers continued to offload surplus permits, while some buyers were willing to pick up parcels in the hope that prices will bounce back.

Shanghai Emissions Allowances (SHEAs) closed at 4.70 yuan ($0.73), down 6% on the day with almost 20,000 permits changing hands, setting yet another record low in the Chinese pilot markets.

“Traders are shorting because of over-allocation, and the carbon borrowing mechanism has added fuel to the fire,” one observer told Carbon Pulse.

In January, two trading houses borrowed a large amount of allowances from emitters to use for speculative trading, adding liquidity into a market already awash with surplus units due to over-allocation.

A number of smaller ETS participants have come to market in recent weeks to sell off their annual surplus after finishing their annual verification reports last month.

Prices have fallen to current levels from around 10-11 yuan three months ago, but have dropped more sharply over the past week-and-a-half amid a pick up in liquidity.

Over the past three sessions more than 60,000 of the benchmark 2015 SHEA allowances have traded, compared to 190,000 changing hands over the prior period since the beginning of November.

According to market observers, some of the demand is coming from the few emitters that are short, while some is from traders betting the price will rebound after the June compliance deadline, when the government is expected to release a tightened allocation plan for 2016.

By Stian Reklev – stian@carbon-pulse.com

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