China launches first OTC renminbi emission derivatives in Shanghai

The Shanghai Clearing House launched China’s first forward contract on carbon emission allowances and related central counterparty clearing on Thursday.

This is the first forward product in China’s seven pilot carbon markets. The move fills a gap in the young, yet fast growing market.

The forward contract trades on the Shanghai Environment and Energy Exchange, with its daily mark-to-market price published by the clearing house.

After novation, the allowances will be delivered via the Shanghai Clearing House, which thus acts as the counterparty during any forward contract transaction.

The clearing house will fulfill the intermediary functions to guarantee that all transactions are completed as per the agreement.

Analysts said that the forward trading product will help to give full incentives to investors to join the market because forward trading can help investors to secure interests and enable emitters to see clear signals of future carbon emission costs.

“The new product will fill in a gap in the carbon trading market and will fully contribute to establishment of a nationwide, centralized carbon trading platform”, said Xu Zhen, president of Shanghai Clearing House.

Xu said the Shanghai Emission Allowance Forward aspires to become an international product that is exposed to global investors in the long run.

Analysts said that China’s carbon trading market is still small, but is fast-growing. Because policy makers have been encouraging financial derivatives for green development and driving economic growth in a greener pattern, carbon allowance trading is expected to become more active in the short term and will be one of core elements in the overall financial market in China.

China aspires to set up a nationwide carbon trading market in 2017, with transactions volume reaching some 400 billion yuan ($57.87 billion), according to a report on China’s carbon trading finance by the Green Finance Committee of China Finance Forum.

According to data from the World Bank’s market research outlook, global carbon emissions allowance trading is expected to reach a combined value of $ 3.5 trillion, the largest one of traded commodity, even surpassing petroleum.

Lan Hong, professor at the Renmin University of China, said that more types of participants in the market, such as wider range of emitters with different levels of emission demands and technologies, will make the carbon trading market in China more inclusive and more active.

The new product will fill in a gap in the carbon trading market.” Xu Zhen, president of Shanghai Clearing House