Legal Practice Guide on China Carbon Emissions Trading and Carbon-Related Financial Products

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Preface

In a context where low-carbon and environmental protection have become the global goal, China has also put forward the goal of striving to achieve “peak carbon” in 2030 and the “carbon neutrality” in 2060.

To achieve this goal, companies in energy-intensive industries have turned to green energy as an alternative to traditional energy sources like oil and carbon; companies have started tracking the carbon footprint of their products throughout the life cycle of each product to identify certain procedures during commercial operation where steps can be taken to reduce the carbon produced; Companies also paid attention to the preparation of their ESG (Environment, Society and Governance) report at the end of the year, which demonstrates the company’s achievements over the past year in aspects including, but not limited to it, the fact of being more “green”.

As one of the main ways to incentivize carbon reduction, the Chinese government has been working to set up pilot regional carbon trading systems (ETS) in 8 different cities of China, which has attracted considerable interest from many industry players, financial institutions, and trading houses, etc.

In 2021, alongside the launch of the national ETS on July 16, a dual-layer regional/national ETS has been successfully implemented. People believe that there is huge market potential behind China ETS and carbon finance products.

Revolving around the carbon emission right, a variety of financial products present themselves. The Chinese government is also adopting an encouraging attitude towards these carbon financial products. For example, green lending is used to reduce financing costs and help reduce carbon emissions; green bonds create incentives to invite capital to enter the carbon market; carbon funds can absorb the capital of the whole society; carbon insurance is used to cover certain potential risks that any participant in the ETS PRC may face; and the carbon swap is a useful measure to lock in the price of capital, etc.

At present, carbon financial products still present some uncertainties about the benefits they can bring and the potential risks they present. Most of the carbon finance products listed above are still in the testing and exploration phase. The picture could be much clearer as the PRC ETS and relevant financial products develop.

This handbook (1) provides a comprehensive overview of the practical interpretation of carbon emission trading, carbon products (such as mainly carbon emission allowances and certified Chinese emission reduction) and the carbon finance including but not limited to green loans, carbon mortgage/pledge, carbon funds, carbon insurance, carbon futures, carbon futures from a legal perspective and (2) also complements some case examples to help elaborate on the main possible legal issues in carbon-related projects and how to address them.

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