Launch of New Derivatives in China

images-1China’s clean energy promises are facilitating a source of new financing tools to fund the projected 43 trillion yuan ($6.53 trillion) required to control environmental pollution.

The Beijing Environment Exchange authorized a call option backed by 20,000 local carbon permits on June 16th, 2016 (for the first time in China), which was purchased by the trading firm – CMB Sinolink.

The Shanghai Environment and Energy Exchange is also planning to introduce four forward contracts to trade over the counter (OTC), supported by Shanghai permits, which expire in every quarter of 2017, according to the Shanghai Clearing House.

China, the main consumer of energy globally, aims to increase clean energy usage in power generation to 35 percent by 2020 from the existing 27 percent.

In order to meet the capital requirement for this economic reform, China plans to launch a national carbon market by 2017. It would cover all provinces and almost 10,000 of the most carbon-intensive firms mostly in power, steel and oil sectors. At present, China has seven regional pilot carbon markets.

ICIS (provides market-related information) estimates that China’s national market would open at 40 yuan for the trading of the China Carbon Allowances in 2017. It is expected to increase to 65 yuan in 2021.

ICIS established a weekly price valuation on June 16th, 2016, expecting to set a reference benchmark price for carbon credits to be distributed in March 2018 (the national market).

The German stock exchange –  EEX is communicating with its members who are keen in positioning in China. The strategy would offer cash-settled futures contracts on Chinese carbon credits in 2016, designated in Renminbi or euros, and backed by the ICIS price index.

Carbon traders in Europe hedge their power contracts nearly five years ahead, while China is seeking to restructure its energy market in order to facilitate hedge trading by regional utilities.

However, the regional pilot carbon markets in China have seen prices come under pressure because of over-allocation triggered by unexpectedly bad economic performance and insufficient liquidity.

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