Carbon Finance Must Focus on Servicing Actual Emission Reduction Projects

The Carbon Finance Roundtable jointly hosted by Tsinghua University National Carbon Market Research Centre, National Center for Climate Change Strategy and International Cooperation (NCSC), North China Electric Power University, Beijing CCUS Centre, University College London and University of Edinburgh was held in Beijing on September 2nd. The workshop discussed the effectiveness of emission reduction promoted by international carbon finance, the international experience on carbon finance development in China, and the prospects and challenges of carbon finance in China.

Dr. Gao Li, Deputy Director General of Department of Climate Change, NDRC, stated that, carbon finance is part of the green finance in which the national government and the finance sector are eager to explore. Thus, the development of carbon finance is fully motivated. The innovation in financial agencies and authorities should be in accordance with the low carbon development goal formulated by the government.

The initiation of the national carbon market is challenging as the 7 carbon market pilots experience was not sufficient and carbon market basis in the non-pilot area was quite vulnerable. Dr. Li suggested that China could learn from the experiences and lessons of EU and California carbon market, and stick to the principle that the purpose of the carbon market construction and the innovation in carbon finance was to promote the development of low-carbon technology and the cost reduction of the low-carbon emission reduction by exploiting the market. .

Following the release of Green Financial Guidance by State Council, the British Embassy Beijing worked closely with many organizations in China to cope with the financing barriers. The UK Green Investment Bank jointly published the China Green Investment Handbook with Chinas National CDM Fund. Mr Jonathan Farr, First Secretary of Climate Change in British Embassy Beijing, said: an international low carbon initiative system is required to ensure the funding is used in green projects; and a system of assessment, monitoring and reporting on those projects is also needed. Last but not least, the government should make incentive policies to ensure the funding is sustainable, so as to exploit more national and international social capital to further accelerate the low carbon transition.

Dr. Kitty Poon, Honorary Fellow of University of Edinburgh, hosted the discussions and said, “carbon finance is a very broad concept, including green credit, carbon trading, carbon future, carbon fund and other financial products. After the Paris Agreement, China plans to build the national carbon market in 2017, which will be the major driver for carbon emission reduction and could lead the current carbon trading pilots to a new stage.

Dr Xi Liang, Senior Lecturer in Energy Finance and Director of Centre for Business and Climate Change in University of Edinburgh, introduced, carbon finance includes carbon accounting, carbon market, climate policy and energy finance. Project financing includes debt financing, equity financing and risk management. He suggested that we should learn from Dr. Gao Li’s suggestion that carbon finance should focus on actual projects to reduce the financing cost; the Chinese government and organisations can work together to define climate bonds and climate equity, and formulate related policies in favor of financing low-carbon projects; carbon financing should also help industry in risk reduction and risk management.

Prof. Maosheng Duan, Director of Tsinghua University National Carbon Market Research Centre, pointed out, the concept, procedures and standards of carbon finance must be clear. Carbon finance is cross-sectoral and cross-industrial, it needs in-depth discussion and reasonable division of labor between the two sectors. The carbon trading in China is largely limited; whether for regulatory or business bodies, the awareness and capability of participating in or taking advantage of carbon finance should be improved. From the technical aspect, although the Ministry of Finance has published some guidance documents, there is still a long way to go before a set of reasonable rules is released." 

The issues of current pilot carbon markets exist in evaluation, liquidity, and relatively small market volume. Proper groundwork is needed in order to launch carbon finance work. These include the establishment and development of a carbon market, the improvement and supervision of carbon trading system, the publishment of carbon accounting standards, the setting of carbon pricing.” as Yiting Sun, Project Director of WWF China Sustainable Finance, said, “Carbon finance should precisely play its role, but not in terms of financing. Carbon finance generates cash flow to reduce risk properly, and it will play a role to give credibility to projects since past evidence shows projects with carbon finance has a good quality and also has a positive effect on the reputation of the enterprise. It is recommended to coordinate carbon finance with other financial instruments to increase the signal function of carbon finance. In addition, the function of carbon finance on government or public guidance is more obvious, and to make development financial institutions play their roles in carbon finance, the government should also regulate the price of carbon market. Carbon finance must be implemented in real economy while expanding its volume. Meanwhile, it should also consider the possibility of using a large scale carbon sink in carbon market to benefit the people.”

Prof. Michael Grubb from University College London, Electricity Regulatory Commission Chief Consultant, introduced UK policies, "the UK government would return part of the climate tax to industry to improve energy efficiency and promote low-carbon innovation, from which the Carbon Trust Fund was established to regulate the energy use in industry. On the other hand, they set up loan fund for industry to improve the energy efficiency. The current rate of return from government investment in private sector, e.g. investors funds, pension funds and insurance funds, is relatively low, while that from carbon investment can reach 4%-5% with great potential to increase. Reasonable legal framework is needed to promote this kind of investment activities. Carbon price should be set to promote investment ultimately."

In addition to Carbon Trust, Green Investment Bank and other institutions also made their contributions. Mr Tim Yeo, former Minister of UK Environment Agency, said “the UK's regulatory authorities use policy to guide the construction of some of the valuable infrastructure. In terms of climate finance, the UK has been encouraging the adoption of ETS to reduce the carbon emissions. China could learn from previous ETS experiences to promote emission reduction trading system. Carbon finance is still in the early stages and its actual role in emission reduction is very limited. Although we are increasingly aware of the importance of low-carbon business model, investors’ priority is still the return they could receive. The government needs to continue the policy intervention to maintain low carbon industry’s attractiveness despite policy makers might need to use the appropriate incentives to promote low-carbon investment. If this can be achieved, there will be great development in the next few years."  

Mr. Weimin Tang, Deputy General Manager of Bright Carbon Asset Management, said “there are mainly three target project categories for carbon finance: firstly is the projects that include carbon reduction effect in its implementation; secondly is the high risk projects that need to increase revenue and reduce risk through carbon financing; the third would be projects that cannot be progressed without low carbon technologies. The carbon market expectations in China include a clear and transparent policy and relatively stable carbon price. In addition, we would expect appropriate risk management for low-carbon investors. We hope the Chinese carbon market could be launched as soon as possible with a series of financial products to help investors with better opportunities to cope with risk management.”

Mr. Sheng Li from Institute of Engineering Thermophysics, CAS, said: "suitable market access standards, monitoring and measurement methods should be developed for carbon market. Also, we need a carbon pricing system to promote CCS technical and industrial development and innovation."

Dr. Kitty Poon concluded the workshop that there was still a long way to build up carbon finance capacity in China, and she suggested to focus further studies on two aspects: the relationship between finance discipline and carbon reduction, and secondly how should China take advantage of international experiences and lessons learned in carbon finance and whether foreign mechanisms could be adopted in the Chinese context.