[2023-November-8]WG3 Webinar :Green Financial Product Innovation in Compulsory Carbon Markets

On November 8, 2023, the GIP Working Group on Green Financial Product Innovation (WG3), co-chaired by Standard Chartered Bank and Industrial Bank with support from Deloitte, successfully held a seminar titled “Green Financial Product Innovation in Compulsory Carbon Markets.” The event invited experts from the London Stock Exchange Group (LSEG), Industrial Bank, Standard Chartered, Hubei Carbon Emission Exchange, and Deloitte to discuss trends in carbon markets and innovative practices in financial products.

JIN Boyang, Lead of the China Carbon Research Team at the London Stock Exchange, shared insights into the formation mechanism and investment practices of EU carbon allowance prices. He went through the history, coverage, trading mechanisms, and influencing factors of the EU Emissions Trading System (EU ETS). JIN highlighted that the EU ETS, through its cap-and-trade mechanism, has successfully reduced carbon emissions annually, particularly in the power sector. He noted that the increasing participation of financial institutions and investors in the EU carbon market has significantly impacted carbon pricing. Despite some speculative behavior, the robust development of the carbon market has positively contributed to emissions reductions and promoted green investment.

ZHAO Jianxun, Director of the Green Research Division at Industrial Bank’s Green Finance Department, introduced innovations and trends in China’s carbon financial products from a banking perspective. He highlighted several innovative approaches undertaken by Chinese financial institutions over the past few years, including risk management mechanisms, diversified funding sources, creative use of collateral, sustainability-linked instruments, ecological compensation, and the application of financial technology. Specific products include carbon asset pledge financing, carbon revenue bonds, carbon index-linked financial products, and carbon asset repurchases. ZHAO highlighted the significant potential of China’s carbon market, driven by institutional development, improved payment and settlement capabilities, the inclusion of additional sectors, and continued innovation by financial institutions in the carbon finance sector.

Kenneth WANG, an expert from Standard Chartered Bank, outlined the bank’s participation and practices in the EU ETS, the UK Emissions Trading System (UK ETS), and the voluntary carbon market (VCM). Standard Chartered helps clients manage carbon price risks through products such as spot, forward, options, and swaps. Regarding the voluntary carbon market, Kenneth noted its critical role in achieving carbon targets but highlighted challenges such as weak demand, uneven project quality, and low trust. The International Carbon Market Integrity Committee (ICVCM), where Standard Chartered is involved, aims to establish global carbon standards to enhance market transparency and credibility.

LIU Yang, an expert from the Carbon Trading Department of the Hubei Emissions Exchange, provided an in-depth overview of the development and trends in China’s mandatory carbon market, with a particular focus on practices in Hubei Province and nationwide progress. LIU highlighted the distinctive features of China’s carbon market, including local pilot programs, the gradual inclusion of industries beyond power generation (e.g., steel and aluminum), and the collaborative responsibilities of central and local governments in market development, allowance allocation, compliance, and verification. Looking ahead, LIU outlined key measures that the government is expected to take to support the evolution of China’s carbon market, including strengthening regulatory frameworks, implementing long-term planning, expanding sectoral coverage, increasing market participation, introducing paid emission allowances and emission caps, diversifying trading products, enhancing carbon offset mechanisms, fostering international cooperation, and reinforcing supervision.

CHANG Jinyu, Associate Director of Sustainability at Deloitte, shared Deloitte’s insights and practices in international carbon market project development and trading. At the market level, Chang observed that while China’s carbon prices have risen, they still lag behind international levels but are expected to converge over time. He projected significant growth in the scale and transaction volume of the voluntary carbon market by 2030. To address challenges such as project transparency and carbon lock-in risks, CHANG emphasized the need to strengthen third-party validation mechanisms, refine methodologies, and develop integrated carbon standard systems. These measures, he noted, would enhance information transparency and encourage greater participation from consumers and investors.

This seminar provided GIP members with valuable insights into the dynamics of carbon markets and an opportunity to exchange innovative experiences. It offered practical ideas and case studies to advance green financial product development and address the challenges of climate change.