Download The Researches on China

The Researches on Strategies for Developing Carbon Finance in
China
TIAN Xuan, QI Zhenfa
School of Management, Shandong University of Technology, Zibo, China, 255049
[email protected]
Abstract: Carbon finance involves such factors as markets, institutions, products and services, etc. It is
an important innovative mechanism for combating climate change. To be exact, it refers to the financial
institutional arrangements aimed to reduce greenhouse gas emissions and the financial activities relying
on carbon trading. The development of carbon finance can promote low- carbon economic development
and accelerate economic restructuring. This article focuses on describes the concept of carbon finance
and probes into the ways for China to develop carbon finance on the basis of the study of the present
situation of the carbon finance market both at home and abroad.
Keywords: carbon finance, carbon market, carbon trading platform
1.
Introduction
Global climate change and its adverse effects are common concern of mankind. Low-carbon economy,
as a new development model, is quickly recognized and put into practice by all countries. A low-carbon
economy (LCE) is a concept which was first proposed in the UK Energy White Paper 2003, entitled Our
energy future: creating a low-carbon economy. A Low-Carbon Economy (LCE) or Low-Fossil-Fuel
Economy (LFFE) is an economy which has a minimal output of greenhouse gas (GHG) emissions into
the biosphere, but specifically refers to the greenhouse gas carbon dioxide. Low-carbon economy is a
new type of economy based on the purpose of harmony between economy and environment. China has
pledged to reduce the amount of carbon dioxide it emits for each unit of economic output by 40 percent
to 45 percent by 2020 from 2005 levels in the run-up to last year’s Copenhagen climate summit.
Meeting China’s emissions reduction targets and developing a low-carbon economy not only need to
address technical, legal and standard issues, but also call for financial support. Although it is necessary
for the government to grant fund and cut down on tax, the most forceful support is the financial support.
Financial support is an essential ingredient in technological innovation and economic transformation.
2.
Concept of Carbon Finance
Carbon finance results from the change of the global climate policy as well as two significant
international convention—the United Nations Framework Convention on Climate Change
(UNFCCC)and the Kyoto Protocol. The UNFCCC is an international environmental treaty with the goal
of achieving stabilization of greenhouse gas concentrations in the atmosphere at a level that will prevent
dangerous human interference with the climate system. The convention commitments, however, were
voluntary and did little to establish firm governmental targets. The Convention is complemented by the
1997 Kyoto Protocol, which entered into force in 2005, under which industrialized countries (called
“Annex I countries”) agreed to mandatory reductions of GHG emissions, totaling 5.2 percent, from 1990
levels by the end of the First Commitment Period of 2008 to 2012. Other countries, such as India and
China, have joined the Protocol, but without binding targets. Under the Treaty, countries must meet their
targets primarily through national measures. However, the Kyoto Protocol offers them an additional
means of meeting their targets by way of three market-based mechanisms-Joint Implementation(JI),
International Emissions Trading (IET), Clean Development Mechanism(CDM). These market
mechanisms are designed to help countries meet their targets in a cost-effective manner, encourage the
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private sector to contribute to Greenhouse Gas (GHG) emission reduction efforts, and encourage the
participation of developing countries as well as stimulate sustainable development, technology transfer
and investment in these countries. [1]
Currently, there is no unified concept for carbon finance. In a narrow sense, carbon finance is the term
applied to the resources provided to a project to purchase greenhouse gas emissions reductions. (World
Bank 2006) In a broad sense, it refers to market solutions to climate change.[2]Carbon finance involves
such factors as markets, institutions, products and services and plays an important part in the financial
system fighting climate change. It provides an cost-effective measure to achieve a triple environmental
objectives--- to maintain sustainable development, mitigate and adapt to the climate change and disaster
management. The World Bank Carbon Finance Unit (CFU) believes carbon finance provides a means of
leveraging new private and public investment into projects that reduce greenhouse gas emissions,
thereby mitigating climate change while contributing to sustainable development. [3] Thus, carbon
finance can be interpret as the financial solutions to climate change.
3.
Present situation of Carbon Markets
Carbon trading is a market mechanism intended to tackle global warming. There exist two conceptually
different categories of carbon transactions. The first is that of allowance-based transactions, where the
carbon units are allowances, or units of “right to pollute”, created and assigned through various systems,
including free allocation and auctioning, by regulators under cap-and-trade regimes. The second
includes project-based transactions, where the carbon units are carbon credits, also referred to as carbon
offsets or emission credits. The Kyoto Protocol CDM and JI schemes are examples of project-based
mechanisms and the carbon units traded within those market segments are known as Certified Emission
Reductions (CERs) and Emission Reduction Units (ERUs), respectively. [4]
As an emerging financial market, carbon market developed rapidly in recent years. According to the
State and Trends of the Carbon Market report, the global carbon market grew to US$ 144, up 6% from
2008 despite enduring its most challenging year to date. [5] It is estimated that global carbon trading in
2008 to 2012, the market size of up to 50 billion euros per year, in 2012 global carbon trading market
capacity of 140 billion euros (about 190 billion U.S. dollars), is expected to surpass the oil market has
become the world’s largest market.
With the expansion of the size of the carbon market, carbon emissions rights have developed into
financial assets of the investment value and liquidity. Therefore, on the issue of carbon emissions rights,
developed countries have formed a carbon-supported financial system which includes the carbon-trading
currency, as well as direct investment, financing, bank loans, carbon indicators of trading, carbon futures
options. The current global carbon exchange system includes the EU’s emissions trading system (EU
ETS), the UK’s emissions trading system (ETS), the Chicago Climate Exchange (CCX), as well as the
Australian National Trust (NSW), which are all dominated by the developed countries. National
currencies are striving to be the leading currency in the carbon market. It seems that the euro is far ahead
in carbon trading settlement of the currency valuation issue. The United States is also actively engaged
in bringing U.S. dollars into carbon economy’s commanding heights. The monetary valuation of carbon
trading rights and the monetary binding mechanism enable developed countries to have strong pricing
power.
For China, carbon trading market and its derivatives has a broad prospect of development. China has
huge resources of carbon emissions. United Nations Development Program statistics show that China
now accounts for carbon emission reductions of about one-third of the global market, ranking second
worldwide. However, although China is the greatest potential supplier in the future low-carbon chain, it
is still not the price-setter. As the carbon trading market and the corresponding standards are not in
China, China’s large quantity of emission reductions created for the global carbon market are purchased
by developed countries at a low price, and then packaged and developed into more expensive financial
products for trading abroad. China has experimented with the establishment of domestic carbon-trading
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systems in the past few years in several major cities including Beijing, Shanghai and Tianjin, all having
opened carbon-trading exchanges where emission rights are traded. All three exchanges are still in the
exploratory stages, currently focusing on emissions trading of sulfur dioxide (SO2) and water pollutants
rather than carbon dioxide (CO2). However, the local exchanges provide a new trading platform for
foreign buyers to purchase emissions credits, bypassing CDM project developers.
Despite the recent surge of environment exchanges, China still faces a number of obstacles when
constructing the carbon markets. According to Dr. Eric Zusman, a climate policy researcher at the
Institute for Global Environment Strategies in Japan, China faces two main obstacles in creating its own
cap and trade system. [6] First, China lacks the mature financial market and human capacity to handle the
trading. Second, as a non-Annex I party, China does not face the responsibility of reducing greenhouse
gas emissions. Thus, there is no internal demand for carbon credits. It is expected that the launching of
local environmental exchanges can bring transparency to carbon pricing and help Chinese companies
gain better positions in the carbon market.
4.
Strategies for Developing Carbon Finance in China
Carbon finance, as a carrier of the innovative financial system, will have a wide and profound impact on
the global economy and financial patterns after the financial crisis. A new pattern of carbon emissions
has brought unprecedented opportunities as well as challenges. Therefore, it is vital for China to seize
the opportunity to meet challenges, explore new strategies of development of carbon finance and strive
for the initiative in the new global financial framework.
Firstly, the corresponding incentive mechanism should be built for the development of carbon finance.
Developing carbon finance is a systematic project which requires the government and regulatory
authorities to set a series of standards, rules under the principles of sustainable development, provide the
corresponding supporting policies such as investment, taxation, guidance of credit, encourage financial
institutions to participate in investment and financial activities in energy reduction in support of
low-carbon economy. Policies should be formulated to encourage financial institutions to develop the
green financial products such as green credit, green securities and green insurance. It should be
recognized that there are many problems in the process of promoting green credit products, such as lack
of standard and guidance directory of green credit and environmental risk rating standards, which are all
needed to be addressed by the government.
Secondly, financial institutions should highlight credit structure adjustment and expand green credit
scale. In China, 90% of the production and project development, construction of new projects, financial
support are all committed by the banks’ credit. While the banking sector is by far the biggest player in
the financial system in China, green-credit still only accounts for a tiny proportion of the overall market.
Therefore, guiding commercial banks towards participation in green credit, and building a sustainable
green financing system, should be the focus of future development of carbon finance in China.
Thirdly, China should accelerate the establishment of state emission quota institutions and the emission
quota trading market. China needs to develop its own carbon trading markets rather than simply copy
the European or the US markets. However, the development of carbon market in China is currently
facing both internal barriers such as China’s current energy policy and external barriers such as the
uncertainty of post-2012 climate regime. The inherent complexities of emissions trading mean that its
implementation involves adjustments in overall national strategic policies. Therefore, it is unlikely to
take place on a large scale in the near term. It is more likely that it will remain restricted to voluntary
reductions. It needs to create its own demand based on local emission issues and solutions. China has
initially established a voluntary carbon emissions trading mechanism and trading systems. Shanghai
World Expo is a voluntary emissions reduction Environment and Energy Exchange to establish a
voluntary carbon reduction trading platform is one important part.
Fourthly, intermediary services of CDM projects should be carried out. Most of our current carbon
emissions trading are project-based transactions. Therefore, carbon finance, to be specific, refers to the
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financial activities relying on CDM projects in our country. The development of CDM projects involves
more risk factors, so non-professional institutions do not have the capacity of developing and
implementing the projects. Intermediary market is the key to conducting CDM mechanism. Besides,
financial institutions can use their information resources, customer resources and channel advantages to
coordinate the business relationship among project sponsors, foreign investors, financial institutions and
government departments. They can also provide “one-stop” financial services such as CDM project
development trading and full management for the domestic enterprises which involve emission
reduction.
Fifthly, China should foster multi-level carbon trading market system, to carry out low-carbon swap
transactions, low-carbon securities, low-carbon futures, carbon funds and other derivatives of carbon
financial innovation. The World Bank has now established a total of up 10 billion dollars in eight carbon
funds. China should learn from international experiences, proceed with establishment of the China CDM
Fund, at the same time accelerate the development of various types of support to low-carbon economic
development in carbon derivatives and global carbon finance to strengthen the supervision and
cooperation.
5.
Conclusion
Carbon finance has been a new field in which global financial institutions compete fiercely. For the
purpose of gaining energy effects and sustainable development effects in carbon emission reduction
rights, it is the trend to establish the carbon finance system. The development of carbon finance should
be suited to China’s national conditions. China's carbon finance is just at the initial stage and market
maturity is not high. Therefore, it is necessary to build the effective market monitoring mechanism and
improve the risk control mechanism. The government should strive to build a incentive mechanism to
encourage financial institutions to participate in the field of energy-saving investment and financing
activities. Furthermore, it is essential to draw on the international experience, strengthen the
international cooperation and cultivate the talents of carbon finance. In short, it requires the extensive
participations of financial institutions, financial regulatory authorities and the whole society to provide
financial supports for the development of the low-carbon economy. Most important of all, the financial
institutions’ awareness of social responsibility should be raised.
References
[1]. Deborah Murphy, John Drexhage and Peter Wooders. International Carbon Market Mechanisms in
a Post-2012 Climate Change Agreement. Policy Dialogue with Civil Society on the UNFCCC
Negotiations, Montreal, Quebec, May 19, 2009.
[2]. Sonia Labatt, Rodney R. White (2007), “Carbon Finance: The Financial Implications of Climate
Change”, Wiley & Sons, 2007.pp12.
[3]. “About World Bank Carbon Finance Unit (CFU)”. [M/OL].World Bank Institute.[2009-1-28].
http://wbcarbonfinance.org/Router.cfm Page=About& Item ID=24668
[4]. Zeng Gang,Wan Zhihong. Iinternational Carbon Finance Market: Status, Problems and Prospects.
International Financial Research 2009 (10) (in Chinese)
[5]. Alexandre Kossoy, Philippe Ambrosi. State and trends of the Carbon Market 2010 .World Bank
Group, D.C. Washington, 2010.
[6]. Interviews with Eric Zusman October 11 and 29, 2008.
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