China’s State Council has approved the creation of a free trade zone in Guangdong province, a plan that includes setting up a new futures exchange for carbon permits, which observers say would make it easier for international traders to join China’s planned national ETS.

The State Council, China’ cabinet, announced the decision on Monday as part of initiatives to strengthen economic and financial ties with Hong Kong and Macao.

A feasibility study will now be conducted, although observers said a new carbon futures exchange platform would likely go ahead.

“They approved the free trade zone, and a futures exchange is part of the plan. Looking at the NDRC determination it is unlikely (the exchange) will be stopped, but it may be delayed as it depends a lot on current spot market liquidity,” one carbon trader told Carbon Pulse.

The NDRC, China’s carbon market regulator, is strongly backing the introduction of futures trading in the emissions market in order to boost liquidity and provide a price signal to help emitters make investment decisions.

China prohibits futures trading in many commodity markets to avoid major price fluctuations caused by speculative trading, but the NDRC is pushing the financial markets regulator to make an exception for carbon.

A futures exchange would also make China’s national market more attractive for foreign traders, according to Jeff Huang, managing director for Greater China at Intercontinental Exchange.

“Incorporating the new carbon futures exchange in the FTZ is meant, apparently, to create easier access for international participants,” he told Carbon Pulse.

The Chinese national market is set to become the world’s biggest carbon market by 2020 in terms of CO2 covered, and developments are watched closely by carbon traders and investors across Europe, North America and Australia.

However, only a handful have chosen so far to trade in the pilot markets amid poor market liquidity and a lack of transparency.

By Stian Reklev – stian@carbon-pulse.com