Chinese Central Bank Commits to More Policy Support for Carbon Targets, Warns of Risk Arising from Transition Away from Fossil Fuels

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The People’s Bank of China (PBOC) has reiterated its commitment to green finance initiatives as part of efforts to satisfy the country’s peak carbon and carbon neutrality targets, while also drawing attention to the risk created by a transition away from fossil fuels in the economy.

Speaking at a research forum held on 15 April, PBOC governor Yi Gang (易纲) said that the central bank plans to unveil carbon emission reduction support tools and provide low-cost funds for carbon emissions reduction efforts.

PBOC will also use channels including commercial credit ratings, deposit insurance fee rates and collateral frameworks for open market operations to provide vigorous support to green finance.

In 2020 the Chinese government set the targets of achieving peak carbon by 2030 and carbon neutrality by 2060, while at the start of the year green finance was made one of the key missions for 2021, as well as for the 14th Five Year Plan running from 2021 to 2025.

Yi Gang said that these peak carbon and carbon neutrality targets would impose greater demands and challenges upon the finance sector, as well as create risk during efforts to transition away from the use of fossil fuels.

“During the process of achieving the 30/60 targets, [we] need to pay close attention to risk in relation to the transition from fossil fuels,” said Yi.

“80% of China’s energy consumption structure is comprised of fossil fuels, primarily coal. According to forecasts, by 2060 the share of fosseil fuels will be less than 20%.

“Chinese financial institutions hold a number of high-carbon assets, and is worth paying attention to problems such as the risk of changes in the prices of these assets that green transformation will bring.”

PBOC outlined several work missions in order address these challenges including:

  1. Further using market-based methods to mobilise public and private sector funds to support green economic activities. PBOC forecasts that in order to satisfy carbon targets China will need to invest 2.2 trillion yuan per annum in carbon emissions reductions prior to 2030, while from 2030 to 2060 this amount will be 3.9 trillion yuan. “In order to achieve this investment, relying on government alone fund will be far from adequate, and it will be necessary to guide and encourage the participation of social capital,” said Yi Gang. “To this end, it is necessary to effectively engage in the two foundational work missions of strengthening information disclosures and improving as well as coordinating green finance categorisation standards.”
  2. Researching the impact of responses to climate change on financial stability.”To go from peak carbon to carbon neutrality will take the European Union 70 years, the United States 45 years, and China only around 30 years,” said Yi. “The time period will be short, the curve will be steep, and financial institutions will face salient risk. For this reason it is necessary to actively expedite the commencement of transition by financial institutions as early as possible. The central bank is currently exploring pressure tests of financial institutions, and giving systemic consideration to climate change factors, as well as including risk in relation to climate change in macro-prudential policy frameworks. The central bank is already making quarterly assessments of green loans and green bonds, and encouraging financial institutions to assess and manage environmental and climate risk.”
  3. Effectively employing the price discovery role of carbon markets. PBOC forecasts that China’s national carbon emissions trading market will commence operation prior to the end of June this year, with Chinese authorities currently in the process of soliciting opinions on administrative regulations. “The establishment of a carbon market should incorporate financial derivatives trading mechanisms, drive carbon pricing to fully reflect risk, and maximise the incentive and restraint role of carbon pricing.”

As of the end of 2020 China’s outstanding green finance balance was approximately USD$1.8 trillion, which was the largest in the world, while outstanding green bonds were worth approximately $125 billion, for second place globally.

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