(Yicai Global) April 26 -- China’s low-carbon transition will have a potentially major impact on the nation’s macro policies, according to Xu Zhong, deputy secretary general of the National Association of Financial Market Institutional Investors.

Policies for low-carbon transition may lead to higher prices for specific commodities, affect inflation and have an impact on the potential growth rate, so they must be included into any future monetary policy framework, Xu wrote in an article published yesterday.

Big high-carbon assets depreciate faster during low-carbon shift and will not generate economic benefits before their service life ends, with financial institutions exposed to that risk, Xu said in the piece posted on the WeChat account of China Finance 40 Forum.

Completing the switch in a short period of time will require coordination between the financial system’s ability to absorb losses and the speed of transformation, he noted. In addition, stress tests and response plans are needed because the shift may cause regional and industry risks.

Managing Expectations

Managing expectations is also necessary. The change will have a great impact, so society must form stable risk expectations so that credit and product pricing is not affected, Xu said. The role of the carbon trading market must be brought into full play to steady expectations and respond to risks, he pointed out.

Xu said the priority should be to clarify the top-level design for the target in reducing carbon emissions and then focus on using price signals from the carbon trading market to guide and stabilize expectations and prevent market fluctuations arising from views of institutions and experts.

Experts estimate that the default rate for China’s coal and electric power companies will rise to 22 percent in 2030 from about 3 percent last year, Xu said. That is just the experts’ opinion, but in the absence of a carbon trading market price signal, they may cause the market to misread the country’s so-called ‘30·60’ target.

30·60 refers to China’s commitment to hit peak emissions by 2030 and carbon neutrality by 2060. It is a mid- to long-term strategic shift, and industry and regional risks as well as financial institutions’ bad loans will not disappear during the process, so advance guidance and response plans are necessary.

Auction Proceeds

The initial allocation of carbon quotas will gradually form a paid auction mechanism in the long term, but all auction proceeds should be used in low-carbon development and not in other areas, Xu wrote. One way would be to use the auction proceeds to subsidize risky areas to prevent potential regional and systemic risks.

But in the short term, carbon quota auctions may struggle to generate enough income at this stage, Xu said. So the central government needs to consider appropriate policy support or subsidies for riskier fields and prepare response plans accordingly.

China will promote the development of a national carbon trading market, either by rolling out spot goods and derivatives at the same time, or futures before the spot launch, he added.

That will not only provide risk control tools for businesses that slash carbon emissions and financial institutions that take part in carbon trading but also reduce the impact of the formation of the carbon trading market in its initial stage.

More importantly, the price discovery function of futures offers a vital basis for the first pricing of carbon spot goods and cuts unnecessary price risks, Xu said.

Editor: Peter Thomas