As China pushes for use of carbon quotas as loan collateral, banks seek more clarity about creditors’ rights

Name: China launches world’s largest carbon-trading scheme as part of 2060 carbon neutrality goal
Uploaded: 2021-07-23T09:15:12.000Z
Duration: 2 min 38 s
Description: China launches world’s largest carbon-trading scheme as part of 2060 carbon neutrality goal

China’s national emissions trading scheme has made US$32.9 billion worth of carbon quotas available for use by banks as collateral

It may be difficult for banks to resell quotas when they need to monetise them, analyst says

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A bank in Nantong, in China’s Jiangsu province. Banks might have to ensure that there will be buyers for carbon quotas before they start lending to borrowers, to make sure that they can monetarize these assets in the case of a default, an analyst says. Photo: Reuters

Georgina Lee

Published: 5:15pm, 23 Jul 2021Updated: 10:54pm, 23 Jul 2021

China’s national carbon exchange in Shanghai will allow banks to use carbon quotas as collateral, but bankers said that they needed more clarity on creditors’ rights, as well as more trading participants.

The country’s banking regulator called on banks to explore the provision of loans to companies against their carbon quotas. The Shanghai exchange, where trading kicked off last Friday, has widened the pool of collateral against which banks can lend, Ye Yanfei, the deputy director general of the China Banking and Insurance Regulatory Commission’s policy research bureau, said last week.

Traditionally, Chinese banks require small companies with weaker credit profiles to secure loans with real estate. But, with China’s national emissions trading scheme (ETS) allocating more than 4 billion tonnes of carbon quotas to a first batch of participants, about 213 billion yuan (US$32.9 billion) – based on the average closing price of 53.28 yuan per tonne on Tuesday – worth of such quotas have become available and can be used by banks to collateralise their loans.

“As the [market] pricing of carbon quotas gradually emerges, these quotas will become effective collateral going forward, providing the basis of collateral pledges for banks to expand their financing [to borrowers],” Ye said.

Beijing has committed to achieving peak emissions before 2030 and net zero emissions by 2060. These goals will be boosted by the use of carbon quotas as collateral by banks, as small businesses will be able to monetise their idle carbon quotas and obtain loans.

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China launches world’s largest carbon-trading scheme as part of 2060 carbon neutrality goal

“As carbon quotas trading moves to an exchange trading environment from being traded over-the-counter, this should be a positive for the prospects of using such quotas for the purpose of collateralising loans,” said Frank Fang, head of commercial banking, Hong Kong at HSBC.

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