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Shanghai CO2 market flounders as supply glut hits prices, trading
[BEIJING] Shanghai's carbon market ended its compliance year on a subdued note on Tuesday, with not a single transaction on the last day and permit prices near record lows after shuttered firms covered by the scheme dumped their permits onto the market.
The firesale of permits by several firms in economic distress over the last two weeks removed the need for any last-day transactions, and also allowed firms to meet their carbon mitigation obligations cheaply.
But it also further eroded investor confidence in China's nascent CO2 markets, which have been damaged by regulatory uncertainties and a huge supply surplus.
Permits in Shanghai's pilot market were quoted at 15.5 yuan on Tuesday, 61 percent lower than at the end of the last compliance year in June 2014.
Before the deadline, companies are obliged to surrender permits to cover their total emissions for the whole of the compliance year.
China's economic slowdown has slashed emissions from industrial sectors, leaving many companies with a surplus of permits and little incentive to trade.
Carbon prices in Shanghai fell to a record low of 12.5 yuan in mid-June, hitting the downside limit. The rapid drop forced the local exchange to narrow the daily fluctuation range from 30 percent to 10 percent in order to curb panic selling. "The price plummeted because some bankrupt companies were dumping permits at all costs. Their remaining permits are useless because they have closed down," said a trader in Shanghai.
Shanghai requires the withdrawal of only half of the permits allocated to companies that have ceased operating for more than half of a year, making it even harder for the supply surplus to be eased, said a staff member at the Shanghai Environment and Energy Exchange.
Shanghai has traded 2.6 million permits in the second trading year ending on Tuesday. Under the scheme, companies aiming to cover their emissions targets can either buy permits or offset credits from eligible mitigation projects.
Shanghai has been struggling to improve liquidity in the market, and said last week that it would allow speculative traders to borrow permits and trade them on the exchange, but with demand weak, few have taken advantage so far.