China's State Council has given approval for the establishment of a free trade zone in Guangdong province, which includes the creation of a new futures exchange for carbon permits. This move is seen as facilitating international traders' participation in China's planned National Emissions Trading Scheme (ETS).
Announced on Monday as part of initiatives to strengthen economic and financial ties with Hong Kong and Macao, the State Council's decision will be followed by a feasibility study. However, experts believe that the establishment of a carbon futures exchange platform is likely to proceed. While potential delays may depend on current spot market liquidity, it is unlikely that the exchange will be halted, according to a carbon trader interviewed by Carbon Pulse.
China's carbon market regulator, the National Development and Reform Commission (NDRC), strongly supports the introduction of futures trading in the emissions market. This move aims to enhance market liquidity and provide a price signal to assist emitters in making investment decisions.
While China generally prohibits futures trading in many commodity markets to prevent speculative trading-induced price fluctuations, the NDRC is urging the financial markets regulator to make an exception for carbon. The inclusion of a futures exchange would also make China's national market more attractive to foreign traders, providing easier access for international participants, as noted by Jeff Huang, Managing Director for Greater China at Intercontinental Exchange.
China's national carbon market is anticipated to become the world's largest by 2020 in terms of CO2 coverage. Carbon traders and investors across Europe, North America, and Australia closely monitor developments in the Chinese market. However, thus far, only a limited number of traders have chosen to engage in the pilot markets due to challenges such as poor market liquidity and a lack of transparency.
