China climate goals trigger launch of new derivatives

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China’s clean energy pledges are prompting a supply of new financing tools to fund the estimated 43 trillion yuan ($6.53 trillion) needed to switch from heavy, polluting industries to clean projects.

The Beijing Environment Exchange endorsed a call option backed by 20,000 local carbon permits on Thursday, the first of its kind in China, which was bought by trading firm CMB Sinolink.

Rival bourse, the Shanghai Environment and Energy Exchange, also plans to launch four forward contracts to trade over the counter (OTC), backed by Shanghai permits which expire in each quarter of 2017, according to the Shanghai Clearing House.

China, the world biggest energy consumer, wants to increase clean energy use in power generation to 35 percent by 2020 from the current 27 percent.

To try and meet the capital requirement for this economic restructuring, China plans a national carbon market by 2017 which will cover all provinces and nearly 10,000 of the most carbon-intensive companies mainly in power, steel and oil industries.

China currently has seven regional pilot carbon markets.

Market information provider ICIS forecasts China’s national market will open at 40 yuan for trading of the China Carbon Allowances in 2017, and increase to 65 yuan in 2021.

ICIS launched a weekly price assessment on Thursday, hoping to set a reference benchmark price for carbon credits to be delivered in March 2018 in the national market.

The German bourse EEX is in talks with its members interested in positioning in China, according to a development plan seen by Reuters.

The plan would offer cash settled futures contracts on Chinese carbon credits this year, denominated in renminbi or euros, and backed by the ICIS price index.

“European carbon traders hedge their power contracts as much as five years ahead, whereas China depends on progress in liberalizing its energy market in order to drive hedge trading by local utilities,” said a trader in an international company.

But China’s regional pilot carbon markets have seen prices come under pressure, due to over-allocation caused by worse than expected economic performance, and patchy liquidity.

Total turnover has been stagnant at 7.8 billion yuan in the three years’ pilot phase, Hubei Emission Exchange data shows.

“There must be strong demand for underlying spot products to launch futures,” Zhang Yubin, vice general manager of the China Futures market Monitoring Center, said on Thursday.

“The capital turnover for offering commodity futures are at tens of billion yuan.”

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