China's carbon traders flock to Hubei in search for profits

BEIJING, April 21 Mon Apr 21, 2014 5:43am EDT

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BEIJING, April 21 (Reuters) - Expectations for a surge in carbon permit prices in China's newest emissions market of Hubei have sent speculative traders scrambling to make a profit, driving up trading volumes far in excess of the country's other markets.

Just two weeks after its launch, the emissions market in the central province of Hubei has attracted far more investors than any of its rival emissions schemes.

That highlights the chance it could emerge as the most liquid carbon market in the world's biggest-emitting nation, aided by low pricing of permits and an absence of capital thresholds for participants.

In the first 12 trading days after the Hubei carbon market opened on April 2, 1.6 million permits changed hands, compared to a total of just 66,000 permits sold on China's five other pilot carbon markets in the same period.

China has set up the pilot markets to build experience in emissions trading before it launches a national market later in the decade, as its key policy step to reduce emissions of climate-changing greenhouse gases.

Traders said they had kept in mind developments last year in Shenzhen, where prices rose to 130 yuan ($20.90) from 30 yuan within four months of the market's launch in June.

"The price spike in Shenzhen has attracted investors to pursue profits in Hubei," said Liu Xiang, a broker with Shenzhen Green Carbon Investment Company, which operates in both the Shenzhen and Hubei markets.

Opening price levels in the carbon markets have been directed by local governments. Traders have seen significant upside potential in markets where starting prices were set low.

But trading has been less enthusiastic in regions such as the southern province of Guangdong and the capital, Beijing, where prices started at 60 yuan and 50 yuan respectively.

In Hubei, the government set a minimum price of 20 yuan for emission permits, the lowest in China and a mere third of levels in Guangdong.

The low starting point drove expectations of a steep climb in prices. So far spot permits have risen by a quarter, to 25 yuan.

Hubei's current market price does not necessarily reflect the cost for companies to comply with the scheme, said Peng Feng, an official with traders Climate Bridge.

This is because it is as yet unclear by how much companies would need to reduce emissions, while daily price movements are driven by speculative traders, rather than compliance buyers seriously hedging positions.

The bull run in Shenzhen last year was also investor-driven, but on tiny volumes, often fewer than 10 a day, compared to an average daily volume so far in Hubei of more than 100,000.

Many speculators are attracted to Hubei because it sets no capital threshold to bar potential traders, Li Chen, technical director with trading house Treasure Carbon, told Reuters.

In comparison, the carbon market in the northern city of Tianjin demands that private individuals show financial assets of at least 300,000 yuan before they can trade.

Li said most of the almost 140 companies with compliance requirements under the Hubei trading scheme had taken a wait-and-see approach so far, though some of them had bought small parcels of fewer than 100 permits each.

Just half of the companies had opened permit accounts, said an official at the China Hubei Emissions Exchange, who asked not to be identified because he is not authorised to speak to media.

Some traders said fresh supply from a series of planned government auctions could hold down prices, although the full demand-supply balance of the market is likely to stay unclear until all participants report emissions next year. ($1=6.2190 Chinese yuan) (Reporting by Kathy Chen and Stian Reklev; Editing by Clarence Fernandez)

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