PBoC climate lending facility could produce significant emissions cuts

The green lending facility established by the People’s Bank of China (PBoC) in 2021 looks set to support significant emissions cuts, and could provide a model to be replicated by central banks elsewhere, according to the author of a new report.

The Institute for Energy Economics and Financial Analysis (IEEFA) study finds that the carbon emissions reduction facility (Cerf) has already refinanced loans to 2,817 borrowers, which are promising to cut 28.76mn tonnes of carbon emissions annually. However, concerns remain over the credibility of commitments made by the scheme’s beneficiaries.

The Cerf offers low-interest loans to financial institutions which help firms with clean energy and energy conservation measures. Banks drawing on the facility are required to publicly disclose information on the emissions reduction supported by their lending. The PBoC has said the facility is intended to support China’s bid to reach peak emissions by 2030.

The IEEFA report examines the PBoC’s intensifying climate agenda, and projects the impact it might have in the future.

“If the PBoC keeps this pace every month for 2022, the Cerf could add significant cuts to the country’s CO2 by year-end,” says the author, Norman Waite. “This is a strong start, but the Cerf’s real test will come as emission reduction results come through, third-party audits are conducted, and the PBoC assesses both for rollover.”

China’s efforts to decarbonise have been dogged by accusations that firms in the country have been making false claims about their progress, something the authorities are seeking to address. The environment ministry has launched a campaign to ascertain the accuracy of carbon emission verification reports.

Waite told Green Central Banking that if the issues with fraudulent auditing could be overcome, then it should be possible to assess whether the scheme is having an impact.

“There will definitely be a learning curve for issuers, borrowers, and auditors, but once best practices are established and the facility is operating efficiently we should be able to judge whether PBoC funding is being well spent on a fairly regular basis,” he said.

The report notes that while the majority of central bank actions toward climate change have so far focused on the fundamental need for improved disclosure and risk discovery, the PBoC has for some time shown a willingness to actively steer credit towards green borrowers. With the exception of the Bank of Japan (BoJ), which has established a green loans scheme with similar characteristics to the Cerf, other G20 central banks have shied away from such initiatives.

Waite said that there was no practical reason why the PBoC’s actions could not be replicated elsewhere, and that the primary obstacles are political and institutional.

“Aside from the short-lived and unusual macroprudential jawboning I talk about, I don’t see PBoC policies as idiosyncratic and unable to be replicated,” he said. “The PBoC is only unique because it operates within an environment of political clarity around both climate change and the country’s need for decarbonisation.”

Waite suggested that the situation was complicated for central banks where other branches of government have oversight over their mandate and policy tools. He also said that in countries where climate action is more politically contested, central banks may avoid more targeted green finance policies because they risk political oversight that might challenge and derail them.

“On the other hand, if a central bank operates with impunity within a sustained political consensus on climate change and decarbonisation, it should be able to engage in the same level of experimentation that the PBoC does,” he added. “The BoJ’s version of its own decarbonization refinancing facility is testing this idea in real time.”