Shanghai allows trading of borrowed CO2 permits to boost liquidity

Published 13:05 on June 23, 2015  /  Last updated at 13:05 on June 23, 2015  /  China, China's Pilot Markets  /  No Comments

Shanghai carbon traders will be allowed to borrow CO2 allowances from ETS participants and trade them in the market, the local carbon exchange announced Tuesday, in an attempt to infuse some liquidity into the market.

Shanghai carbon traders will be allowed to borrow CO2 allowances from ETS participants and trade them in the market, the local carbon exchange announced Tuesday, in an attempt to infuse some liquidity into the market.

Each company can borrow up to 2 million Shanghai emission allowances (SHEAs), and they can only be used for trading, not for compliance or as collateral against commercial loans, the Shanghai Energy and Environment Exchange said.

Borrowers would have to pay a 30% margin to the exchange as a risk deposit, and would also have to agree on a profit split with the lender.

“In theory, this would allow investors to profit by short-selling. But considering how opaque the fundamental data is, I have a hunch that without more transparency and stricter market enforcement, this will have only a modest impact on Shanghai’s carbon trading,” said one observer who wished to remain anonymous.

The feature appears similar to repurchase (repo) agreements seen in the EU ETS.

Shanghai, China’s financial capital, has struggled to attract liquidity in its emissions trading scheme.

Since the market started in November 2013, fewer than 3.7 million SHEAs have traded, worth a combined 118.3 million yuan ($19 mln). That’s less than than Shenzhen’s pilot market has recorded, even though Shanghai’s covers some five times more CO2.

Even the Hubei ETS, which opened half a year later than Shanghai, has seen three times the volume.

Tuesday’s move is an attempt to draw more speculative traders to the market, but allowance borrowers will have to pay a deposit to the exchange to cover risk and part of the profit to the lender.

It remains to be seen whether traders will be tempted to run that risk in a market where prices have recently tumbled to all-time lows, in part due to over-allocation and in part because Shanghai’s emitters are cutting their CO2 faster than required.

Shanghai is the first of China’s seven pilot schemes to introduce permit borrowing for trading purposes.

In Tuesday’s trade, SHEAs slumped 10% to 18 yuan, with a mere 493 permits changing hands. Participants in the scheme have until June 30 to hand over allowances to the government to cover their 2014 emissions.

By Stian Reklev – stian@carbon-pulse.com

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