China : Shenzhen to launch carbon asset custody mechanism

A new carbon asset custody mechanism is expected to be launched in Shenzhen Emission Trading Scheme (ETS) by the end of 2014. It allows compliance entities to entrust professional agencies to manage their carbon assets to achieve better efficiency.

On Tuesday, Shenzhen Exchange told ICIS that the new system to be introduced is similar to the current EU ETS carbon asset custody practice. The compliance entities will entrust agencies with their carbon allowances and agencies will trade them under supervision from the ETS. When the trusteeship comes to an end, the involved parties will share the profits as agreed. The new mechanism has similar benefits with the potential “carbon credit borrowing” system of Shanghai ETS, which is increasing the market liquidity by transferring the carbon credits from compliance entities to traders.

A domestic carbon asset management firm told ICIS that the discussion on the new system had been going on for a while and they were quite confident about the carbon asset custody business. Although some of the largest compliance entities have founded their own team to manage their carbon assets, they still lack methodology and experience, and that is where agencies can contribute. For smaller compliance companies, the carbon asset custody service is more cost-effective, he added.

Meanwhile, there are some other traders who expressed their cautious optimism to ICIS. A manager of a foreign carbon company told ICIS that they would pay close attention to the specifics of the carbon asset custody mechanism. As the deposit and commission fee rate is still under revise, plus that the total number of compliance entities in Shenzhen ETS is limited, the profitability of the new service is to be verified. Therefore, companies will form their market strategies after the regulation is finalised. Regarding this, an official of Shenzhen Exchange told ICIS that a commission fee refund mechanism for carbon asset custody service might be introduced to motivate the agencies. Kun Yang