Thread by @YanQinyq

⚠️First year of operation will not be smooth, but China's new national Carbon market is facing many more obstacles in run-up to looming compliance deadline.

'Free borrowing' practice and 'Unclear tax rules' could hamper the market #OCTT

Thread 🧵

What is Free Borrowing?

Ahead of looming Compliance deadline on 31 Dec, provincial Ecology and Environment authority is under pressure to ensure enterprises to surrender enough allowances in time.
However, allocation for 2019-2020 has not finalized

In addition, only some of the covered 2162 enterprises have got their trading accounts (or some do not want to trade either)

Shandong province reportedly issued notice to allow 'ETS entities borrowing allowances from each other, and pay back in 2022'

Borrowing among enterprises within one group is not a new thing, but it is NOT what a provincial authority shall do, i.e. interfering with allowance allocation process

First of all, this will reduce allowance trading volumes (why shall I trade if I get help)

'Regulatory intervention will have adverse effects on the carbon market'

Second, there is no clarity regarding 2021 allocation plan and benchmarks either, no idea when they will be handed out in 2022. Why should enterprise take this risk?

If I am a power plant owner in Shandong, I will lose confidence in the scheme 'since provincial authority can interfere with the market operation'

Ministry of Ecology and Environment is charge of the national Carbon market

Third, there is a severe risk with this 'regulatory intervention asking one enterprise to lend to another 🆓'
It is not clear if this allowance transfer will be registered in ETS registry,
...or Provincial authority just deduct allowance of A and add to B

If the latter, then this means this will not be registered in ETS registry (hosted by Hubei), and the entire allowance transaction record for China national ETS will be chaotic... #OCTT

One more adverse impact on #CNETS of the 'free borrowing' is that 'inefficient coal plants will be even unwilling to take upgrading measures to reduce emissions, because the provincial authority will offer help'

Thus, this is neither fair nor just

There is also a reason why this is happening in Shandong first.

SD has the largest captive power plant fleet, typically old and inefficient, facing allowance shortages given the current benchmark of 0.877t/MWh. They perhaps cried to the local authority...

In addition to the 'Free borrowing' of allowances, the unclear tax rules also created chaos regarding #CNETS prices.
Currently there is not clarity over CEA being 'intangible asset' or 'financial asset', making it hard to put tax rate and type.

Some now use 6% VAT as proxy, as confirmed in several CEA and CCER purchase inquiries.
Thus in recent weeks, #CNETS allowance price of around 42-43 CNY/t may include 6% VAT or exclude, drove large variations in traded prices especially on OTC trades