China energy companies buy stakes in emissions exchanges

05 December 2013 12:05 Source:ICIS

Chinese state-owned energy groups are buying up shares in domestic emission trading systems, which analysts and lawyers say could invite conflicts of interest.

State-owned oil and natural gas company Sinopec is negotiating with the China Beijing Environment Exchange (CBEEX) to buy a stake in the exchange, a source from Sinopec told ICIS in a phone interview on Monday. CBEEX currently hosts the Beijing emissions trading system.

The source declined to reveal the size of the stake Sinopec sought to buy, how much the deal could be worth and when it could b concluded.

CBEEX confirmed Sinopec could potentially buy some of its equity to ICIS on Monday. “The two sides are negotiating the deal and our side will discuss this issue in details with the current stakeholders at the upcoming stakeholder meeting,” said Gong Junsong, the assistant to the president of CBEEX. He did not say when the next stakeholder meeting was.

Two other domestic energy conglomerates – China National Grid and CNOOC – already hold stakes in CBEEX, according CBEEX’s website. Each owns a 20% stake, Shen Lina, a research department senior manager of CBEEX told ICIS by email on Tuesday.

Shenzhen and Shanghai

CBEEX is one of the three Chinese emissions trading platforms that are open to investment from state-owned energy companies. In the Shenzhen emissions trading system, CGN Wind Energy and Datang Huayin Electric Power each owns 15% of the local emissions exchange, putting them in shared second place among the exchange shareholders.

The Shanghai emission exchange has China National Grid, Baosteel, Huaneng Power Group and Shenergy Group as stakeholders, it told ICIS without giving information on the size of each stake.

Carbon market experts say it could be problematic that traders in the market also hold stakes in the exchanges where the trading happens.

“In the EU emissions trading system context, the situation that a stakeholder of an emission exchange trades in the same scheme has never happened. It will be taken as conflicts of interests,” said Jeff Swartz, the international policy director of International Emissions Trading Association.

Sinopec made three carbon permit transactions in the Beijing and Shanghai trading systems last week. It is unclear whether it could still trade in the Beijing scheme after it becomes the stakeholder of CBEEX. It is also unclear whether the current stakeholders of CBEEX could trade on the exchange.

None of the Beijing, Shanghai and Shenzhen exchanges have banned companies from trading emissions allowances on platforms that they part own.

“The legal gap could create the possibility of insider trading. The exchange had better establish rules to forbid insider trading and require more transparency,” said lawyer Tan Guangliang of the Guangdong Hua Shang law firm, which offers legal advice to the Shenzhen Emissions Exchange (CEX).

Insider trading is banned under China;’s securities law, but as the carbon market is new it is still unclear to what extent it would be covered by this legislation.

Gong of CBEEX dismissed the risk of insider trading. “It is inappropriate to liken the stock market to the carbon market. CBEEX does not have any information on the amount or allocation of allowances et cetera at hand, so all the covered companies – no matter whether they’re stakeholders or not – need to trade on their own information about the market,” he said.

“Sinopec wanted to buy our stake, mainly because except offering the emissions trading system, CBEEX could provide Sinopec with energy performance contracting and advanced emission reduction technology to help it transform into a low-carbon company. Thinking of the long run is the base of our cooperation,” Gong said.

Tan said that if insider trading happens, it was unclear which Chinese institution would be responsible for dealing with it. It could be either fall under the remit of the China Securities Regulatory Commission, the National Development and Reform Commission, or both. Ling Ma

By Ling Ma