Download The Discussion About Development of Emission Rights Pledged Loan Business

The Discussion About Development of Emission Rights Pledged Loan
Business
ZHANG Wei1, ZHANG Shijun2, ZHOU Luzhu3
1. University of Jinan, China, 250022
2. Shandong University, China, 250001
3. Shandong Jiaotong University, China, 250001
[email protected]
Summary: Development of emission rights secured loans business has a certain need, which is
conducive for the enterprises to expand their sources of funding, is conducive for the banking industry
to develop financial innovation, is conducive for the Government to implement green credit policy and
is conducive to develop emissions rights trading market. Development of emission rights secured loans
business has a certain practical conditions .It not only has the strong market demand and the ripping
basic conditions, but also has the policies and laws to support. Development of emission rights pledge
loan business need to sign a bank government cooperation agreement, need the bank to investigate
approve loans, need banks and borrowers to sign the contract, and need to manage post-loan. Of course,
the development of emission rights pledge loan business exist a certain degree of risk, so it is necessary
to strengthen the risk management.
Keywords: emission rights, pledge loans, green credit
The so-called emission rights quota refers to a variety of loans that are applied or given out regarding
emission rights as collateral. Zhang Wei (2007) considered if the industrial enterprises want to survive,
they must enjoy emission rights. The companies can use this as a pledge to apply for loans and the banks
could then lend to the business.
1 The necessary to develop the emission rights pledged loan business
1.1 It is conducive for the enterprises to develop the funding sources of "energy-saving emission
reduction"
At present, China's energy-saving emission reduction funds mainly come from the governments’
demonstration projects and enterprises’ self-financing. From the enterprise perspective, the development
of the enterprise itself has a great demand for capital. In the condition that the enterprises ‘financing gap
is difficult to solve , the energy-saving emission reduction projects would not normally be arranged
priory. So energy-saving emission reduction has the urgent need for other more effective sources of
funding. Because of the uncertainty of energy-saving emission reduction projects’ benefits, commercial
banks take risk and safety into account .It is often difficult to put in loans.
The development of emission rights secured loans business can be combined with China's actual
conditions .Through reasonably designing the financing method enabling enterprises to provide effective
guarantees to banks and greatly reducing the banks’ high-risk by giving loans to energy-saving emission
reduction projects, and improve the profitability and liquidity of loans, thereby mobilizing banks’
initiative to participate in energy-saving emission reduction. Development of emission rights quota can
effectively increase the opportunities for companies of energy-saving emission reduction to obtain
commercial loans, allowing a greater degree of energy-saving emission reduction to meet the corporate
demand for funds and alleviate the current difficulties of issuing finance.
1.2 It is conducive for banking sector to develop financial innovations
Financial innovation is an important force to promote the development of China's commercial banks.
Changes in the modern banking system are gradually developed in the game of financial innovation and
financial supervision. The core of financial innovation is the innovation of financial instruments and
product, which is the core power of survival and development for commercial banks. In recent years,
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some commercial banks closely integrate business needs, and actively explore new ways of bank loans.
For example the innovation of intellectual property as security for loans model, the export tax refund as
security for loans model. Emission rights quota is born out in this context. The development of emission
rights quota regards financial markets as a starting point and foothold and directed by environmental
market demand. It meets the needs of different groups in the circumvention of trading risk, lower
transaction costs, etc, and makes many can benefit from it. Pledged Loan in the form of emission rights
can not only expand the bank's business areas, enhance the service function of financial institutions and
improve risk-averse and profitability of financial institutions; but also can take the initiative to adjust
supply and demand factors in the green financial markets. It has a demonstration effect to improve
innovation of China's financial instruments fatherly.
1.3 It is conducive to implement the Government's green credit policy
Green credit policy is an environmental economic policy which integrates the environmental regulation
and control, and strives to curb high energy consumption and high pollution industries to develop
disorderly and expand blindly. First, banks grant emission rights quota, if the enterprise project was
terminated due to pollution reasons, commercial banks could be transfer the emission rights of the
company in the market to obtain part of the recovery of loans. Secondly, many small and medium
enterprises are difficult to obtain loans from banks, and therefore they have to take private financing or
self-financing mode. The implementation of emission rights quota makes a large number of SMEs in
their business activities supported by bank loans, thus enhancing the influence and binding of the bank
loans to SMEs. Giving loans support to the enterprises which control the pollution and giving sanctions
to the company which always has a high pollution can adjust the environmental behavior of corporate.
Third, because China is still in the middle and late industrialization, some polluting industries and
enterprises develop very quickly in recent years. Only electric power, steel, nonferrous metals, building
materials, petroleum processing, chemical industry, energy consumption and carbon emissions is
seventy percent of the total industrial energy consumption and carbon emissions. But from a pure
business perspective, these industries and enterprises remain the focus of commercial banks loans. But
other industries and enterprises lack enough attractive to commercial banks funds. Through the
implementation of emission rights quota in all sectors for commercial banks, low-risk and high profits
will attract the banks’ capital flow to environmental protection projects. In addition, the standards of the
emission rights pledged loan is relatively easy-to-specific and can be more easily work out the relevant
supervisory measures and internal implementation details that have greatly increased the operability of
the green credit policy.
1.4 It is conducive to develop the emissions trading market further
1.4.1 Increase market-oriented of emissions trading
In the original emission rights trading, pollution trading enterprise is almost the only subject. The model
of the emission rights quota establish the emissions trading intermediaries such as investors and banks ,
build a co-operation platform for enterprises, banks and investors to transfer f emission rights between
each other. This mechanism allows banks and other investors can really benefit from emissions trading,
with incentives of involving in pollution control actively in this area. Therefore, emission rights trading
can make use of more market forces making the internalization of environmental damage cost is
resolved automatically in the economic system.
1.4.2 Reducing the cost of emission rights trading of enterprises
A mature and sound emission rights trading market need every parties to participate in transactions
where the parties have sufficient market information and take part in frequent transactions in a stable
price. To achieve this purpose the necessary transaction costs can not be ignored. The emission rights
quota model can reduce enterprise costs of emissions trading to some extent. Companies that pledge
emission rights can directly obtained the loan of sewage treatment from the bank, while the companies
has demand for emission rights could have pollution rights after paying the transfer fee to banks and
investors. As for market demand and supply and other basic information of emission rights, enterprises
no longer need to spend a lot of energy to seek, Emission rights reserve Center can play a more open,
fair environment for information transmission and trading hub role. Due to transaction procedures and
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the transaction time being greatly reduced, the cost of such companies participating in emissions trading
emissions trading will be reduced accordingly.
2. The actual conditions of developing emission rights secured loans business
2.1 The strong market demand
First, because local industry is more developed, and has a larger base of pollutant emissions, in the
restrictions of total pollutant control system, the newly-built enterprises, often because there is no
adequate sewage indicators they can not be settled, thus affecting the local economy and social
development; Therefore, it is necessary to establish a reasonable and lawful mechanism to make an
inventory of the local environmental capacity resources, under the premise of making it not increase the
total discharge of pollutants of the enterprise can be settled locally. Second, the purchase of emission
rights to enterprises is not a small sum of expenditure. Taking Jiaxing City as an example, various
pollutants price its SO2 emissions is 20000 / ton, heavy polluting industries of the COD is 80000 / ton ,
the general construction projects, COD is 60000 / ton, especially for with higher emissions speaking, it
is a heavier burden. Third, the enterprises not only require large inputs to improve production
technology and construct energy-saving emission reduction facilities, but also have a long construction
period, and economic efficiency is not obvious. Then it may give some enterprises the relatively heavy
financial burden,. And such concerns will affect environmental investment initiative of corporate. The
two sides are likely to increase business spending, affect enterprises’ production, operation and
development, particularly currently our country is facing pressure both on the environment and economy.
In the background of RMB appreciation and the ravaging international financial crisis, emission rights
quota can help enterprises to raise environmental funds and help companies to save energy and help to
reduce emissions, without placing an extra financial pressure on enterprises, as well as affect the normal
operations of enterprises. Today our country is facing the double pressure of environmental and
economic fields. It may be a good approach.
2.2 The basic conditions are mature
First a tool that meets requirements that markets play the role of regulating economy further. As the
continuous improvement of China's market economy system, the means of regulating the economy and
environment should more use market regulation spontaneously rather than administrative means, while
emission rights trading is such a suitable and economic means. In recent at home and abroad there are
many practical, international experience has shown that emission rights trading can simultaneously
achieve significantly environmental, social and economic benefits, while the domestic trial has also
made more obvious results. The emission rights pledged loan is an important means to improve the
emissions trading that should be encouraged and developed.
Second, China's current system allows. Some of the practice in other similar fields, such as forest, land
use rights and intellectual property as security for loans, etc., that all provides useful exploration and
guidance to explore emission rights quota form and processes.
Third, the government, enterprises and people give their support. First, the experimental areas such as
Jiaxing, Ningbo and other places get many supports from local government. They not too much focus on
the short-term impact on the local environment Investment and the GDP by introducing emissions
trading mechanisms, , while focus on society and economy future sustainable development of
environmental, promulgate number of rules and approaches, achieve remarkable results. Secondly, in
the existing environmental policy system and levels of national environmental awareness, this policy has
got a wide range of recognition and support from the people and enterprises. Enterprises not just focus
on the currently increasing expenditure, in order to assume more social responsibility; they make more
active investment in environmental protection. Third, the emission rights quota, broaden the corporate’
sources of funds, thereby reducing the pressure on corporate investment in environmental protection.
Fourth, the actual sewage disposal of various industries and enterprises permit. Currently the average
cost of pollution abatement in the industry, region, ownership composition and size exists the significant
differences between the nature of property rights which provides a realistic possibility for the
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implementation of emissions trading system.
In short, by the above analysis that the capacity of the environment is a natural resource, environmental
capacity surplus is collectively owned by local residents, sewage right is the use rights and income
rights of the spare environment capacity. The sewage is vested in the usufructuary of China's current
"Civil Code" that can do pledge financing. That is in our current legal system and ownership system, the
implementation of emission rights quota is feasible, reasonable, and at the same time does not violate
the law.
2.3 Policies and laws to support
2.3.1 China's current law support legal status of emissions trading
In order to ensure the smooth implementation of emission rights trading, it need to form a complete
system of laws and regulations, specifically including the identification of environmental capacity
resources, the total amount and quota allocation and such as the legal basis of emission rights trading.
But the current portion of the existing laws and regulations could provide some legal basis.
Total control as an environmental policy in China, in September 1996 at the State Department "" 95
"period the total discharge of major pollutants control plan" was formally proposed. The "Interim
Regulations on the Huai River Basin Water Pollution Prevention" in section 9 to 14, 1996 revised
"Water Pollution Prevention Law" and the 2000 revision of the "Air Pollution Prevention Law",
respectively, provide legal basis for the total control of pollutants in water environment and the total
amount control of atmospheric pollutants. It is equivalent with defining limitation and scarcity of
environmental capacity resources indirectly on a legal basis, laying a solid foundation for emissions
trading.
The existing legal basis for the total amount allocation of quotas is a waste discharge permit system.
China from the early 1990s began a pilot of pollutant discharge permit system. In 1992, it implemented
the emission permit system. Amended in 2000, Article 15 of "Air Pollution Prevention Law" made
detailed provisions about the total quota system of pollutants.
Classification in accordance with environmental economic instruments, emissions trading is a kind of
economic policy. China has corresponding provision about using economic policy to control
environmental pollution. Amended in 2000, article 15 of "Air Pollution Prevention Law" provides new
requirements about using economic policy to control the atmospheric pollution. Article 8 of the Act
provides that: States take action to help air pollution control and comprehensive utilization activities,
economic and technical policies and measures. This could include policies to encourage you to try
emissions trading.
Emission rights pledge loan is an important form of emissions trading. The permit and encouragement
on the emissions trading is the permit and encouragement on the emission rights quota.
2.3.2 The emission rights can be used as the subject matter pledged for loans.
In China, the provisions concerning the pledged subject matter are mainly "Guarantee Law" and
"Property Law." 1995's "Guarantee Law" provides that: the other property that can be arrived according
to the law can be pledged. This means that the laws and administrative regulations have not any
provisions that the property can not be arrived(pledged) or can not be arrived(pledged) can not be
arrived(pledged). The property listed in Section 34 that can be used to arrive (qualitative) custody of the
property, and there is no emission rights, so based on "Guarantee Law" emission rights can not be
pledged to act as subject matter.
And implemented in 2007, "Property Law" Section 179 provides that: the property that laws and
administrative regulations that do not prohibit to be arrived (qualitative), which greatly broadens the
scope of collateral materials. "Property Law" changes the general prohibition to general allowance,
while the emission right is not prohibited. And Article 178 of "Property Law" provides that if the
provisions of "Guarantee Law" and "Property Law" is different with each other. It should applicable to
"property law". So based on the latest released The "Property Law", emission rights can do pledge loan
financing.
3. Risk management of development of emission rights secured loans business
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3.1 Risk distribution of development of emission rights quota
3.1.1 It is not easy to assess the emission rights pledged.
If we want to pledge the emission rights, we must first accurately measure the value of emission rights.
Our country has not formed universally accepted method of measurement of intangible assets. The
current accounting system does not fully and accurately reflect its value. Because intangible assessment
system, supervision and management system is not perfect, the assessment authority has yet to be
recognized. These shortcomings of Intermediary services make enterprises and banks can not determine
the exact value of intangible assets, which has become the biggest, causes that they reluctant to accept t
intangible assets as collateral. This is also the biggest obstacle to develop emission rights quota.
3.1.2 Intangibility of the emission rights pledged makes it difficult to be owned.
Emission rights belong to intangible assets. It is difficult to transfer or deliver the subject. After
transferring intangible assets, pledger of people could still continue to use it. The pledgee in fact is
difficult to control the pledged subject. The creditor can not directly take possession of emission rights
as taking possession of real or personal property.
3.1.3 large fluctuations in the value
Sewage is vested in intangible assets. The value of intangible assets reflects future earnings, expresses
the amount recoverable constrained and impacted by businesses geographical location, market, extrinsic
environment of economy and legal. Intangible assets do not have the physical form and easily ignored.
Different from other tangible assets, very few enterprises set up specialized agencies to conduct their
operation and maintenance, and lack the necessary attention to increase the value of intangible assets.
3.1.4 Liquidity is difficult to predict.
The key reasons that banks are unwilling to accept the pledge emission rights are that it is difficult to
realize the right of sewage. Once the companies have difficulties in operating and repaying the debt,
banks can not through the auction, lease, transfer and timely manner to recover the funds like dealing
with tangible assets as security for loans. Currently, there is a lack of professional's emissions trading
market, and transaction information is mostly closed, not open and transparent, which greatly affect
liquidity of emission rights on a great degree.
3.2 Risk control strategies of developing emission rights quota
3.2.1Establish a sound evaluation system
Emission rights are intangible assets, whose value is not easy to determine, therefore assessing the value
of emission rights is the premise of pledging emission rights .The results of the assessment issued by
bodies play a very important role to corporate and banks. Assessment agencies should stand in a fair
position and issue realistic and unbiased evaluation report. Therefore, the assessment industry standards
are essential to assessing body. Currently assessment of emission rights is not enough systematic and
standardized and industry management is weakness. We should make "Valuation of Intangible Assets
Management Rules" to regulate the evaluation system, strengthen the management assessing, strengthen
the assessment review, public assessment process, clear assessment responsibility, strengthen the
integrity of supervision, to ensure a fair evaluation. Strengthen legal education to raise the legal
awareness and operational level of the evaluators.
3.2.2 Standardized registration procedures
Emission rights pledge belong to rights pledge. China's "Property Law" provides the pledge is
established since documents of title are delivered to pledgee. Those who has not the documents of title
the pledge is established from registration of pledge by the relevant departments. But there are no
specific departments to register the emission rights pledge, and what’s more there is lack of specifically
registration management means, which resulted in the slow development of this business. Registration
system should be standardized as soon as possible, special registration units should be established, and
specific "Registration of management approach" should be introduced.
3.2.3 Strengthen contract management
With the rapid development of China's economy, intangible assets pledged are increasing. Intangible
assets pledged have different characteristics with the pledge of tangible personal property, If let it go it
could lead to confusion of the market order. So it is necessary to strengthen the management of the
emission rights pledged contract. We can dedicatedly establish a functional department, to manage the
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registration of intangible assets pledged contract, which include protecting emission rights excluding the
trademarks and patents. Intellectual Property Office can be combined with the Trademark Office. After
the merger of the departments they can set up a specialized agency to be responsible for registration and
management of intangible assets pledged contract.
3.2.4 Strengthening the management of pledge
The pledge we're usually talking about refers to the pledger will transfer the moveable property to the
pledgee and the pledgee keep it personally. This is carried out entirely based on the voluntary of the
parties, and therefore does not involve collateral management. Emission rights pledged make intangible
right as pledged objects. It is different from tangible movable collateral. And the emission right is a kind
of economic means to coordinate the relationship between the economy and environment. Therefore, if
want to regulate emission rights pledged, China should change its laissez-faire situation, the establish
specialized institutions to manage the emission rights pledged. More feasible approach is to add
emission rights by the relevant environmental protection department in the process of managing
emission rights. For example the certification of emission rights management, the emission rights
pledged contract and the realization of the emission rights and so on. This will ensure that the emission
rights to pledge emissions are in a unified and orderly environment, realizing the harmony development
of economy and environment.
3.2.5 The implementation of emission rights quota securitized
The uncertainty weak liquidity of emission rights’ value decides that the pledge of emission rights must
be taken into implementation that differs from the collateral mortgage. The rise of securities of foreign
assets gives us a new perspective. Asset securitization is the process of transferring the stock of
non-negotiable or the foreseeable future income of original beneficiary to financial products that can
sale and circulates in the capital markets. The assets that are suitable for asset securitization are those
lack of liquidity, but can produce predictable and stable cash flow assets in the future. The liquidity of
emission rights is not strong, so it can produce a predictable future cash flow. And quality and credit of
asset is good (including the cash flow stable income and low default rates and losses), which has the
basic characteristics of asset securitization transactions.
The securitization of emission rights quota can enhance its liquidity and liquidity, so that the exchange
value which is the basis of collateral is easily achieved to reduce risk of the bank loans. In the process of
asset securitization , loans banks are always transferring a certain amount assets that consists of
collateral credit assets to the institutions who has special purpose to securitize their assets, so that the
proposed securitization of assets can isolate from other assets of the lending bank, even if the bank
becomes insolvent and will not affect the interest of securities investors’ securitized assets; Secondly,
the intermediary institutions issue securities based on transferred asset; Finally, the credit enhancement
institutions and credit rating agencies on the asset-backed securities do credit enhancement and credit
rating, so that Asset-backed securities can be sold and circulated in the stock market. From a legal point
of view, the core concept of asset securitization financing structure is asset split, that is to separate assets
to be securitized from credit risk of the capital requirements. Bank of its intellectual property as security
for loans secured credit claims can be expected to recover the principal and interest of the future cash
flows obtained the right to claim transfer of the transfer of funds, which allows banks to recover loans
ahead of schedule, thus eliminating the risk of long-term loan debt, and enhance the efficiency of bank
capital operation.
3.2.6 Promote intermediary organizations to provide security for enterprises pledged
Since the emission rights have the nature of intangibility, large fluctuations in the value and liquidity
difficulties, emission rights pledge is at higher risk. For these characteristics of emission rights, we can
use the intermediary organizations to provide guarantees for businesses pledged, to provide a stable
environment for the emission rights pledge and to increase people's confidence in the pledge of the right.
A feasible approach is that we can establish the insurance for emissions right pledge. The payer a certain
amount of insurance, and the insurance agencies guarantee the risk of decreasing emission rights’ value.
Moreover, we can also set up a professional certification body. The institutions through the expertise
and ability to estimate the risk certificate the emission rights to determine the value, in order to provide
corresponding guarantee for pledge enterprises.
3.2.7 Develop the emissions trading market vigorously
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Emissions rights pledge are part of emissions trading, it is necessary to improve the emissions trading
market in order to implement emission rights pledge policy, thus to solve the problem of realization of
the sewage rights. Sound emissions trading system for emission rights can to provide accurate and
efficient supply and demand information for the two sides who has pledged, and promote the
development of emission rights pledge; the development of emissions trading market, can provide
convenient way to trade and a stable market place for the emission rights pledge, thereby promoting the
emission rights pledge to develop orderly in a stable environment.
References
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of the Canadian International Development Ageney(CIDA),1999.
[3]. Sonia Labatt, Rodney R.White. Environmental Finance[M]. New York: John Wiley and Sons,
2002.
[4]. Jose Salazar, 1998. Environmental Finance: Linking Two World, presented at a workshop on
Financial Innovations for Biodiversity Bratislava, Slovakia.
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