China’s Central Bank Governor Calls for Greater Cooperation with US and UK on Green Finance and Carbon Reduction

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Yi Gang (易纲), the recently re-appointed head of the People’s Bank of China (PBOC) has called for greater international cooperation on efforts to reduce carbon emissions via the development of green finance in a speech delivered at the 2023 Boai Forum.

“Climate change is a global issue that requires global efforts to reduce carbon emissions,” said Yi on 29 March at the “Carbon Neutrality: Dilemmas and Breakthroughs” sub-forum of the 2023 annual meeting of the Boao Forum.

“International cooperation is extremely important, and all parties are using communication and the formulation of common standards to expedite the interconnection of green products on a global scale.”

In a speech on the topic of “Green Finance Development and International Cooperation on Green Finance,” Yi committed to further international cooperation on green finance, particularly with respect to China’s Belt and Road initiative.

“We will continue to deepen green cooperation between central banks and regulatory agencies, develop green finance standards for the Belt and Road’ initiative, and guide the launch of the ‘Green Investment Principles for the Belt and Road.’

“As of the end of last year, this principle had received endorsements from more than 40 institutions, and members invested and certified in accordance with the ‘Green Investment Principles for the Belt and Road.'”

PBOC steps up cooperation with US and EU on green finance

Yi highlighted efforts by PBOC to expand cooperation with monetary authorities and government bodies in advanced economies on green finance.

“Under the G20 framework, PBOC and the US Department of Treasury have jointly completed a number of key projects as part the Sustainable Finance Working Group,” ,” Yi said. In 2021, the working group led the development of the “Sustainable Finance Roadmap” that was approved by G20 leaders at the Rome Summit.”

“Last year, we promoted the development of the G20 Transformational Finance Framework, guiding market funds to support the low-carbon transformation of high-emission industries in a steady and orderly manner, which was passed at the G20 Bali Summit.

“This year, the working group will focus on promoting financing related to the Sustainable Development Goals (SDGs) and promoting the development of complete policy measures, roadmaps, and timetables.”

PBOC has also engaged in cooperation with the EU on green finance. The Chinese central bank has entered a partnership with the European Commission to establish a joint working group for the development of a common classification catalog for green finance and promoting international mutual recognition of green product certification systems.

In November 2021, PBOC and the European Commission released the first version of the “Common Classification Catalog,” followed by an updated version in June of last year that added 17 more economic activities.

“Currently, the definitions and classification catalogs for green finance in various parts of the world are not yet unified. If central banks and regulatory agencies can promote convergence of green finance classification catalogs, it will be possible to achieve mutual recognition and trading of green finance products and pricing in the global market, which is very important,” Yi said.

“The convergence rate of the China-Europe Green Finance Common Catalog is 80%. Banks such as China Construction Bank and Industrial Bank have issued ‘Common Classification Catalog’-labeled green bonds, while some developing countries have also used the catalog as the basis for issuing bonds and developing products.”

PBOC employs monetary policy tools to drive green finance

Domestically, Yi highlighted efforts by the Chinese central bank to drive the growth of green finance in China via the use of monetary policy tools.

“PBOC will comprehensively use incentive mechanisms and policy tools, including carbon emission reduction support tools, to promote the financial system to help China to achieve carbon peak and carbon neutrality, by means products and tools such as green loans and green bonds,” Yi said.

PBOC launched two new financial tools to support carbon reductions in November 2021 – one focused on clean energy, energy conservation, environmental protection, and carbon emission reduction technology projects, and the other supporting the clean utilization of coal. The tools offer funds at low interest rates, while still requiring that financial institutions independently bear risk.

As of the end of 2022, the carbon emission reduction support tools had provided over 300 billion yuan in funding and supported financial institutions to issue nearly 600 billion yuan in carbon emission reduction loans.

In addition to the first 21 nationwide Chinese state-owned banks that participated in the program, seven foreign-invested banks and dozens of local banks have made use of the carbon emission reduction support tools.

“We treat Chinese, foreign, and private financial institutions equally,” Yi said. “The carbon emission reduction support tools have played a positive role in guiding and motivating the financial system to support green and low-carbon development in a market-oriented manner.”

“In terms of effectiveness, the support tools have driven a carbon emission reduction of approximately 100 million tons in 2022. After careful evaluation, the People’s Bank of China will continue to implement support tools to encourage the financial industry to support carbon emission reduction.”

According to Yi, China’s green loan balance currently exceeds 22 trillion yuan, accounting for around 10% of all lending, while the outstanding balance of green bonds has expanded to over 2.5 trillion yuan.

Yi said the carbon reduction support tools play the role of the “carrot” in a “stick and carrot” policy approach to fostering green development.

“Achieving carbon peak and carbon neutrality requires both ‘carrots and sticks.’ High carbon prices or carbon taxes are the ‘sticks,’ while moderate carbon prices are the ‘small stick’ or ‘medium stick.’

“The support tools provided by the People’s Bank of China are the ‘carrot,’ serving as an incentive mechanism.

“We provide refinancing to financial institutions at low interest rates, and financial institutions that accept low-cost funds must support carbon emission reduction projects while undertaking the obligation to disclose relevant information to society. Carbon emissions have strong externalities, and disclosure is more important than carbon prices and carbon taxes.

“The ‘carrot’ support tool focuses on requiring commercial banks to disclose information on carbon footprints, interest rates for carbon emission reduction loans, and corresponding carbon emission reduction effects on a quarterly basis, as well as accepting verification from independent third-party institutions.”