Reset Password


Change Password

Old Password:
New Password:
We have completed your request.
Climate Change Hero

Climate Change Blog

  • 23
  • December
  • 2014

Share on:

Liquidity Challenges in the Shanghai Emissions Trading Scheme

In an effort to improve market liquidity, China’s pilot carbon markets are taking steps to encourage increased involvement by institutional investors in the country’s emissions trading schemes.

On December 11, the Bank of Shanghai announced a five million yuan loan to Treasure Carbon New Energy Environment Protection Technology Company (“Treasure Carbon”), a Shanghai-based carbon asset management company. Treasure Carbon will use the funds to set up domestic projects that cut carbon emissions. These domestic projects will allow Treasure Carbon to collect offset credits, known as Chinese Certified Emissions Reductions (“CCER”), that it can sell on the Shanghai Energy and Environment Exchange, the trading platform for the Shanghai Emissions Trading Scheme (“ETS”). At the same time, the Bank of Shanghai announced a cooperative agreement with the exchange and pledged to invest three billion yuan in Shanghai’s carbon market over the next three years. So far, details on how the money will be spent are sparse.

The Shanghai ETS, launched in November 2013, is one of seven emissions trading pilot programs currently underway in China. It currently covers just under 200 entities in the city’s electricity, industrial, commercial, and transportation sectors. Under the pilot implementation plan, obligated parties can use CCERs to satisfy up to five percent of their allowance obligation in a given compliance year. Initially, financial institutions could not participate in allowance trading, but on September 3, 2014, regulators announced that qualified institutional investors would be allowed to participate. Shortly thereafter, at least a dozen institutional investors registered with the exchange and, since that time, several commercial banks have begun offering new financial products to finance investment in cutting carbon emissions and to hedge against risks associated with carbon trading. 

Shanghai regulators’ decision to open up allowance trading to institutional investors was likely motivated by the desire to boost market liquidity. Trading volume briefly rose in the month leading up to the June 30, 2014 compliance deadline, but the total number of allowances traded in the first compliance period was only a small fraction of available allowances. There was virtually no trading in the three months following the June 30 deadline.

Early signs indicate that the regulators’ efforts to boost liquidity are having some success. In late November and early December, prices and traded volumes reached record levels. In the first week of December, a total of 54,691 allowances were traded.

A similar trend is underway in the other pilot jurisdictions. For example, the Industrial Bank Co. Ltd. recently launched a yield-enhancement product for the Shenzhen carbon market.  Other banks have accepted emission allowances as collateral for loans to obligated entities. Additionally, the Shenzhen market recently became the first Chinese carbon market to allow foreign companies to participate in trading.

Despite these recent positive developments, some observers question how far policies to encourage greater involvement by financial institutions can go in curing the market’s liquidity challenges. They worry that some of the underlying causes of low liquidity remain and will continue to impact market behavior. One of the primary causes of low liquidity has to do with how allowances are allocated in the Shanghai ETS. For most of the covered sectors, allowances were allocated up front on the basis of historical emissions levels for the entire pilot implementation period (2013–2015). However, regulators retain the discretion to adjust the initial allocation before the end of each compliance period based on an individual entity’s actual production compared to a benchmark. For example, if an entity’s emissions are lower than anticipated, regulators can withdraw some of the allowances initially allocated to that entity. As a result, obligated parties learn their final allocation shortly before they have to retire allowances. As such, many choose not to trade extensively outside of that compressed time period. On the other hand, some attribute low liquidity to a lack of expertise among participants, which suggests that liquidity will improve over time. Either way, liquidity has been a challenge for all seven of China’s pilot carbon markets and will need to be a focus for the National Development and Reforms Commission in developing plans for the nationwide ETS. <

Sign Up for Updates

Receive email news and alerts about Climate Change from V&E