How can finance help Chinese heavy industries to decarbonize? | News | Eco-Enterprise

China’s steel industry has pushed back its timetable for peaking carbon, from 2025 to 2030, underscoring uncertainties about its ability to cut emissions in the longer term.

On February 7, guidelines on the development of the sector were jointly published by the Ministries of Industry and Environment and the National Development and Reform Commission. He said the industry’s peak carbon must occur by 2030. Previously, the target had been five years earlier, as published in a draft of the industry’s peak carbon action plan. China Iron and Steel Association, and post on an official WeChat account.

The new guidelines identified the sector’s main problems as overcapacity, environmental performance and “low levels of consolidation”, which means that there are many small steel mills that are difficult to regulate.

Reducing emissions from carbon-intensive industries, such as steel and cement manufacturing, is crucial to China’s efforts to meet its twin carbon targets of peaking by 2030 and of neutrality before 2060. But low-carbon restructuring, as well as the adoption and commercialization of greener technologies, will be difficult to do on a large scale. Financial market support is absolutely necessary.

A recent report of the Climate Bonds Initiative (CBI), which works to mobilize global capital for climate action, revealed that China needs to spend between 2.2 trillion and 12.5 trillion yuan ($346 billion at 1 .97 trillion dollars) each year to fight climate change. Public funding alone will not suffice: the private sector and social capital must be leveraged.

However, “green finance” is hard to find. The field has grown significantly due to high demand from emerging industries such as renewable energy. But carbon-intensive industries generally don’t qualify as “green,” meaning green finance is out of reach for many companies.

Achieving ambitious goals will often require huge amounts of work from the company, and it might not be convinced of success. At the management level, no one may be willing to take responsibility for any failure to achieve the goal.

Xie Wenhong, China Program Manager, Climate Bonds Initiative

So where should the money to decarbonize heavy industry come from and where should it go? “Transition financing” may be the answer. There is not yet a widely accepted definition of the term, so standards and mechanisms need to be devised that are consistent with high-level policies and sectoral roadmaps.

Industries under huge pressure, need huge funds

China’s carbon-intensive industries have no choice but to change. Crude steel production increased by 31% between 2013 and 2020, from 813 million tonnes to over a billion, according to the CBI report. Although the carbon intensity of production fell by around 8%, overall emissions still increased by 20.71%.

The steel industry is a “pillar industry”, accounting for 5% of China’s GDP and producing 50% of the world’s steel. However, it is responsible for 15% of the country’s carbon emissions, second only to the electricity sector.

Decarbonization technology in industry is immature and not yet commercially viable. Figures from the CBI report show that achieving carbon neutrality will cost the sector 20 trillion yuan ($3.1 trillion). This represents 500 billion yuan per year until 2060, or 500 yuan per ton of annual production.

The sector is working on three paths to decarbonization: reducing crude steel production; passing from basic oxygen furnace process from steelmaking to steel recycling in electric arc furnaces; and the adoption of more advanced, even disruptive technologies, such as direct hydrogen reduction in the production of iron (which is the main ingredient of steel). Developing new decarbonization pathways and equipment, and scaling them up for commercial use, will require investment.

A report released last year by the Rocky Mountain Institute (RMI), a Colorado-based sustainability research organization, said producing carbon-free steel would cost significantly more than traditional fossil fuel-powered approaches. For example, at the current hydrogen price of 40 yuan (US$6) per kilogram, making iron with direct hydrogen reduction technology will increase the cost of raw steel by 80%.

Li Shuyi leads RMI’s Heavy Industry Decarbonization Project. She said: “There are hydrogen metallurgy demonstration projects, but we need more investment to reduce costs. And if the steel industry starts to use hydrogen, or even green hydrogen produced from renewable energies, investments in infrastructure will be necessary. The transition will also see the ovens removed earlier, which could result in a significant asset freeze, and this process will also require funding. »

Sustainability Bonds: Transition Aid or Greenwashing?

As mentioned, the problem is that carbon-intensive industries are not labeled as “green”, and are therefore excluded from green finance markets. These markets are relatively well developed and usetaxonomiesto define and decide on the investments eligible for financing. This has created a new imperative for financial markets to develop new tools to obtain financing for the sectors and activities that need it.

This is how the idea of ​​financing the transition was born. Globally, the main transition finance product is the SLB, or Sustainability Linked Bond. Money raised through an SLB is usually for general operating expenses rather than a specific project, asset, or activity. However, the company issuing a bond is required to make sustainability commitments and set key performance indicators (KPIs) – such as emissions reductions – for those goals. The interest rate of the bond is linked to the KPIs. If the commitments are met or exceeded, the rate is reduced. If not, it is increased or the bond expires earlier.

While a green bond must relate to an activity defined as “green”, SLBs only require a commitment to be greenermaking them more suitable for carbon-intensive businesses.

Ricco Zhang, senior director for Asia-Pacific at the International Capital Market Association, said, “SLBs are different. As long as there are environmental, social and governance aspects in a bond, investors can get on board. Meanwhile, issuers that do not qualify as green or sustainable can still issue bonds to fund their transition. It can give us a win-win situation.

According to reports, the Liuzhou Steel Group released the first SLB in China’s steel industry last year. Its related target was to reduce nitrogen oxide emissions to 0.935 kg per ton of product by 2022, 0.188 kg less than in 2020. So far, however, the Chinese steel industry has not has issued no SLBs with carbon reduction targets.

And while the SLBs have been well received, questions also arise.

Xie Wenhong, China program manager at the Climate Bonds Initiative, told China Dialogue that currently companies issuing SLBs can set and meet their own targets. This is one of the reasons why these obligations have grown so rapidly, but how can we ensure companies are setting ambitious and credible targets, rather than just greenwashing? And if ambitious targets are proposed by the lender, will companies commit?

“Achieving ambitious goals will often require huge amounts of work from the company, and they might not be convinced of success,” Xie added. “At the management level, no one may be prepared to be responsible for any failure to meet the target. This means that companies are not keen on issuing SLBs with ambitious targets and clear sanctions in case of failure.

Urgent need for a single standard and more products

Many of these issues stem from the lack of a single definition and standard for transition funding. It is therefore difficult to judge whether or not the activities of carbon-intensive industries align with the goal of net zero emissions, and investors fear being accused of greenwashing or “transition-washing”.

Xie believes that financial regulators should establish a clear, ambitious and credible standard for the sector for the financing of the transition, to ensure coordination between the financial world and the real economy, with investment proposals, actions and measures for each sector.

CBI research on the steel industry revealed persistent overcapacity, unbalanced product structures, high financial leverage, poor inventory management and environmental pressures. This has led financial institutions to take a cautious approach to funding. Concerns about greenwashing would be greatly reduced if a clear roadmap for a transition in the sector was produced, with a single standard, specific performance indices and tools to help investors monitor progress. If steelmakers can accelerate environmental progress and raise corporate credit ratings, while improving business performance, investors will take notice.

At the same time, other transition financing products could emerge, such as investment funds and insurance. Ma Jun, chairman of the green finance committee of the China Society for Finance and Banking, said in a interview with 21st Century Business Herald that high-leverage companies, small-to-medium sized businesses, and companies requiring risky low-carbon technology are more likely to need equity financing than loans or loans. ‘obligations.

Equity investments and M&A funds supporting the transition are needed, so that capital markets can play a role in the process. Meanwhile, the uncertainties associated with the transition mean that insurance products to offset these risks are also needed. According to Ma Jun, Chinese steel companies are highly indebted and need financial institutions to come up with innovative products, tools and mechanisms, which will give them time to absorb transition costs and provide them with more opportunities. of financing.

Ma Jun also suggested that transition finance products could take into account the idea of ​​a “just transition” and require companies to consider employment impacts and take measures to preserve jobs. When designing new instruments, financial institutions could use job retention performance as a key performance indicator.

This article was originally published on China Dialog under Creative Commons license.

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