China’s banks face rising default risks as a result of higher climate-related costs in carbon-intensive sectors like thermal power, steel and cement, Liu Guiping, vice governor of the central bank, said in comments published on Friday. The People’s Bank of China completed the first phase of its climate risk stress tests at 23 major banks last year, focusing on the possibility that the three sectors would be forced to pay for their carbon emissions, Liu wrote in the bank’s China Finance publication. “The test results showed that if enterprises in the thermal power, steel and cement sectors do not carry out low-carbon transformation, their repayment capability will decline to various degrees under the (different) stress scenarios,” he wrote. Rising emission costs as well as policies designed to facilitate “industrial substitution” would lead to the problem of stranded assets and other “transition risks”, he said. Liu said more tests would be conducted to ascertain banks’ exposure to other high-emission industrial sectors. China, the world’s biggest source of climate-warming greenhouse gases, has sought to put a price on carbon, introducing a national emissions trading scheme last year. More than 2,000 coal-fired power stations are taking part in the scheme and the costs of compliance are likely to rise as more sectors – including cement and steel – are included in it. The permit price for each tonne of carbon is less than 60 yuan (US$9.46), but analysts predict it could be as high as 200 yuan within a few years. Though China has been transitioning to cleaner energy, its financial institutions have continued to provide support to fossil fuels, providing loans and underwriting services for the construction of new coal-fired power plants. It has pledged to end financial support for overseas coal-fired power plants, though it remains unclear if projects in the pipeline will go ahead.