Caixin
Apr 16, 2021 08:00 PM
FINANCE

China’s Carbon Market Will Play Key Role in Climate Change Fight, PBOC Chief Says

Yi Gang, governor of the People's Bank of China. Photo: VCG
Yi Gang, governor of the People's Bank of China. Photo: VCG

China’s national carbon market, which will be up and running by the end of June, should be a financial market that serves to fully price risks so that the market can act as an incentive to reduce carbon emissions, central bank Governor Yi Gang said.

“The carbon market has to play a greater role in price discovery,” Yi said in a speech Thursday at an online seminar on green finance and climate policy co-hosted by the People’s Bank of China (PBOC) and the International Monetary Fund. “Only when carbon emission is priced in, can we achieve effective resources allocation. China’s carbon market is still in its initial stage, and its financial nature needs to be further clarified.”

Yi said the carbon market should be a financial market in nature and allow carbon financial derivatives trading which will make sure that all risks are fully priced in so that the carbon price plays a better role of serving either as an incentive or a constraint.

Yi’s speech reiterated the PBOC’s pledge to play an active role in meeting the country’s ambitious goals to achieve peak carbon emissions by 2030 and carbon neutrality by 2060.

Attaining these targets requires mobilizing the private sector to pour more funds into green investment in a market-oriented way, as government funding alone is far from enough, Yi said.

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In Depth: How China Plans to Harness Market Forces for Carbon Neutrality

Economists with investment bank China International Capital Corp. Ltd. (601995.SH) estimated in March that China will need to invest 22 trillion yuan ($3.4 trillion) by 2030 to reduce carbon emissions and promote green development, with another 117 trillion yuan over the following 30 years.

According to Goldman Sachs, China will need to invest $16 trillion in new energy and pollution control-related projects over the next 20 years to reach its carbon neutrality goal. At least 75% of the investments will need to come from the private sector, the investment bank said.

Yi outlined a series of challenges the country faces in meeting its goals, including the need to raise public awareness of emissions reduction, ensuring better disclosure of climate information by institutions and paying more attention to risks related to the transition away from fossil fuels.

“Financial institutions have invested heavily in carbon-intensive assets, and the risk of asset price adjustment caused by the green transition must be closely monitored,” Yi said.

The PBOC plans to strengthen information disclosure, set up a mandatory disclosure system with uniform standards, and promote greater information sharing between financial institutions and companies, Yi said. It also plans to offer policy incentives, for example by providing low-interest funds for the use of carbon emissions reduction.

Yi reiterated a warning he gave in March that climate change could pose challenges to financial stability. The PBOC is studying how to incorporate climate change factors into its stress tests of financial institutions, and gradually incorporate climate risk factors into the prudential management framework.

“It will take 70 years for the European Union, 45 years for the U.S., and about 30 years for China to move from carbon peak to net zero. The time is shorter and the curve is much steeper for China,” Yi said. “It means our financial institutions are faced with grave risks and should begin their green transition right away.”

China is already the world’s largest green financial market. By the end of 2020, the country had outstanding green loans of about $1.8 trillion, ranking first in the world. The outstanding value of green bonds was about $125 billion, the second highest.

Wang Liwei and Peng Qinqin contributed to this report.

Contact reporter Luo Meihan (meihanluo@caixin.com) and editor Nerys Avery (nerysavery@caixin.com)

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