China to launch first carbon-linked financial product

China will launch its first carbon-linked financial product on Thursday, a debt note linked to the performance of carbon offsets on the Shenzhen Emissions Exchange, issued by a unit of China General Nuclear Power Group (CGN).

The launch will be a first test of financial market confidence in China's emerging emissions markets, as trading houses generally consider outright trade in carbon permits unattractive, since it is limited to spot deals.

CGN will invite investments of up to 1 billion yuan in the medium term note, the company said. The note will mature after five years.

China starts carbon trading in Shenzhen

?Future points to carbon trading

"We see a market potential for companies to finance mitigation activities with these new products," said Cui Xuelai, a broker at Shanghai Pudong Development Bank, which will sell the product.

"We are looking at carbon futures and other financing tools like green bonds, but it depends on how the carbon market performs," she told Reuters.

Shenzhen is among the six cities and provinces in China to have launched carbon markets amid efforts by the world's biggest emitting nation to cut climate-changing greenhouse gases.

By 2020, China aims to rein in greenhouse emissions per unit of GDP to 40 to 45 percent below 2005 levels.

In the Shenzhen market, companies whose carbon dioxide emissions exceed limits set in government permits must bridge the gap by buying permits from other participants.

But they can also opt for cheaper carbon offsets issued by the central government to projects that can prove they have reduced emissions.

The CGN subsidiary, a wind power unit, has five wind projects that can generate up to 377,000 offsets per year if approved by the government.

The product's future value will be decided by a combination of a fixed rate, to be announced on Thursday, and the floating price of offsets from the five wind projects, as traded on the Shenzhen Emissions Exchange.

Shenzhen-based CCAM and Australia-headquartered Climate Bridge, two carbon specialist firms, have bought the offsets from CGN on a forward basis at an undisclosed price, but will sell them on the exchange when they are issued.

China's domestic carbon offset market is brand new, with just two projects having won government approval to supply offset credits so far.

Emission permits trade at 70 yuan in Shenzhen, the highest price in all the Chinese markets, although officials have confirmed there was no shortage of permits in 2013.

Liquidity in the six regional markets, all launched within the past 10 months, is modest. But the national market China plans to roll out by the end of the decade is potentially the world's biggest.

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