Chinese President Xi Jinping recently pledged that his country, currently the world’s biggest producer of carbon dioxide, will seek to top out such emissions by 2030 and achieve carbon neutrality by 2060.

Among the ways China is looking to reach these goals:

European/Chinese Standards: To broaden the appeal of Chinese green bonds to international investors, the People’s Bank of China (PBoC) is working with European counterparts to establish a common taxonomy to harmonize the definition and classification of green projects.

Unified Domestic Standards: Currently, China’s domestic green bond market is regulated by PBoC, CSRC and NDRC (securities regulators) with differing standards. A shift is under way toward a single green taxonomy to govern the market, which would bring China into closer alignment with international best practices.

Monetary Policy: The PBoC is incorporating climate change into its policy framework. It has already developed guidance around bank lending to the green sector, mandated preferential interest rates, and required more disclosure.

Carbon Trading: A national emissions trading system (ETS) went live on February 1, through which 2,225 power-generation facilities (40% of emissions) were assigned CO2 emission caps, and will be allowed to trade their emission quotas, likely starting in 2H 2021. The ETS will gradually extend to other sectors such as cement, steel, chemicals and petrochemicals. With EU carbon prices expected to reach over $50/ton by 2030, we expect Chinese prices to reach at least $25/ton,, although the country may not wish to indicate its preferred range.

Industry Impact

The cost of the energy transition will likely reach around RMB 100 trillion, or 1.5 – 2.0% of annual GDP, according to Tsinghua University. We thus anticipate expanded investment opportunities in areas including solar, wind, nuclear, smart grid and electricity storage. However, ferrous metals may face stricter production controls and higher power tariffs, reducing China’s global role in exporting steel. The resulting reduction in supply could cause an increase in steel prices.

Investment Implications

Given that China is the world’s largest carbon emitter, the potential impact of its new commitment to green energy is substantial. China’s green bond market is already the second largest in the world (USD 135 billion in 2020, up from USD 8 billion in 2015). While Chinese carbon-neutral bonds that are monitored and meet ICMA or CBI standards remain relatively scarce, their number is likely to grow, providing an appealing area of opportunity for global investors.