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Carbon Finance Must Focus on Servicing Actual Emission Reduction Projects

Friday, September 2, 2016

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 2nd September. The workshop discussed the effectiveness of emission reduction promoted by international carbon finance, international experience on carbon finance development in China, and prospects and challenges of carbon finance in China.

Dr. Gao Li, a Deputy Director General of Department of Climate Change, NDRC, stated that carbon finance is part of green finance in which the national government and 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 goals formulated by the government.

The initial of national carbon market is challenging as the 7 carbon market pilots’ experience are not sufficient and the non-pilot areas’ carbon market basis are quite vulnerable. Dr Li suggested that China could learn from the experiences and lessons of EU and California carbon market, and stay true to the principle of exploiting the market for low carbon development and the reduction of the cost of emission reduction for the society when building the national carbon market and promoting innovation in carbon finance.

“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 China’s National CDM Fund.” Mr Jonathan Farr, First Secretary of Climate Change in British Embassy Beijing, said: “an international low carbon initiative system is needed 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 are sustainable, thus making advantage of more social capital at home and abroad to accelerate the low carbon transition.”

Dr Kitty Poon, the honorary fellow of University of Edinburgh and former undersecretary of Hong Kong Environment Bureau, hosted the discussions, she 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 continues the plan to build the national carbon market in 2017, which could be major drivers for carbon emission reduction and could lead the current carbon trading pilots into a new stage.”

Dr Xi Liang, senior lecturer in energy finance and the director of Centre for Business and Climate Change at the University of Edinburgh, introduced, “carbon finance involves 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 organizations can work together to define climate bonds and climate equity, and formulate relating policy in favor of financing low-carbon projects; carbon financing should also help industry in risk reduction and risk management.

Prof. Maosheng Duan from Tsinghua University pointed out, “the concept, procedures and standards of carbon finance should be made 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 document, we still have a long way to go before releasing reasonable rules." 

“The current issues existing in current pilot carbon markets includes evaluation, liquidity, and relatively small market volume. To implement work in carbon finance, a proper fundamental work is required, namely 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, the project director of WWF China Sustainable Finance said, “Carbon finance should play its role accurately, 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 carbon finance to cooperate 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 on carbon finance, the government should also regulate the price of carbon market. Carbon finance must be implemented into the real economy, to expand its volume. Meanwhile it should also consider the possibility of using a large scale carbon sink (forestation) through the carbon market, for the benefit of the people.”

Prof Michael Grubb from University College London introduced UK policies, and he said: "the government would return part of the climate tax to industry to improve energy efficiency and low carbon innovation, from which the Carbon Trust Fund was established to regulate the energy use of industry. On the other hand, they set up loan fund for industry to improve efficiency. The current rate of return from government investment in private sector as 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 can promote this kind of investment activities. Carbon price should be set to promote investment ultimately."

In addition to the Carbon Trust, Green Investment Bank and other institutions that have made contributions, the former Minister of the Environment, Mr Tim Yeo 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 carbon emissions. China could learn from the past ETS experience 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."  

Deputy general manager at Bright Carbon Asset Management, Mr Weimin Tang 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 in the Chinese Academy of Sciences said: "suitable market access standards, monitoring and measurement method 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 and suggested there was a long way to build up carbon finance capacity in China and she suggested further studies should consider two aspects: the relationship between finance discipline and carbon reduction, and secondly how should China take advantage of international experiences and lessons learn in carbon finance and whether foreign mechanisms could be adopted in the Chinese context. (UK-China (Guangdong) CCUS Centre)

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