China’s central government should regulate China’s national emissions trading scheme but regional authorities should play a part in drawing up trading rules and ensure compliance, the China Emissions Exchange in Guangzhou said Monday.
The bourse, which hosts trading in Guangdong province’s ETS, released a report outlining a series of proposals for a regulatory system for the national ETS, which is slated to start in the first half of next year.
It said China’s carbon market is exposed to risk from insufficient regulatory rules, inadequate information disclosure, and trading-related risks.
In a charted proposed regulatory system for the national market (see p. 25 of the report), the China Emissions Exchange suggested the National Development and Reform Commission (NDRC) should regulate the spot market, with input from other ministries.
But local DRCs should assist in drawing up the trading rules for their region or province as well as keep focus on issues such as compliance and MRV, the proposal said.
Meanwhile, the China Securities Regulatory Commission (CSRC) should regulate trading of futures contracts and other derivatives, aided by proposals by the exchanges and possibly industry associations, as well as the NDRC, the chart showed.
It’s not yet clear whether futures trading will be allowed in the national ETS.
The CSRC is keeping tight control of commodity markets to avoid market manipulation or excessive speculation, and only a handful of products, excluding carbon, are allowed to trade on a forward basis.
However, the NDRC has been pushing for futures trading in the national ETS, arguing that a spot-only carbon market would be unable to provide an efficient price signal for CO2 emitters.
And in the absence of a futures market, the NDRC has encouraged China’s seven pilot emissions trading schemes to develop carbon-related derivatives in a bid to attract financial investors.
A number of the operating emissions exchanges, including Beijing, Guangdong, Hubei and Shanghai, have launched a suite of such instruments, including options contracts, allowance loan deals, custodial trading, and the use of CO2 permits as collateral for bank loans.
Their commercial success has been limited so far, but most of the seven exchanges eye greater opportunities when the national market opens, which will regulate 3-4 billion tonnes of CO2 and potentially attract traders from abroad as well as major Chinese trading houses.
Meanwhile, the Guangdong exchange on Monday also urged the NDRC to develop detailed rules and regulations for exchanges, permit sales or auctions, and OTC trading in the national ETS, but stopped short of providing any recommendations.
This story has been corrected to show the proposal said the CSRC should regulate the derivatives market.
By Stian Reklev – firstname.lastname@example.org