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China's 2060 carbon-neutrality goal could boost green-bond issuance

China's new target to go carbon neutral by 2060 could be seen as an additional push for more green bond issuance to finance the energy transition for the world's second-largest economy, analysts said.

On Sept. 22, China President Xi Jinping told the United Nations General Assembly that the country aims to achieve net-zero emissions in 40 years, and that it is on track to reach its current target of peak carbon emissions by 2030 under the Paris Agreement on climate change.

China was the world's third-largest green bond issuer in the first half of 2020, after the U.S. and France, according to the Climate Bonds Initiative. However, it fell to seventh after excluding green debts that were only compliant with domestic standards, which included clean coal projects and uses of proceeds that are generally not acceptable to international investors.

"With Xi's aim to curb carbon emissions to a certain level in the medium term, I believe China will continue to aim to boost investment in environmentally friendly and infrastructure projects," said Arthur Lau, head of Asia excluding Japan fixed income at PineBridge Investments. "Hence, I would expect some of these investments will be funded through the new issuance of green bonds."

As of 2016-end, China was the world's largest emitter of greenhouse gases, according to the World Bank. In the nation's energy plan for 2016-2020, coal consumption in the energy mix is expected to fall to 58% by end-2020 from 64% as of end-2015, while renewable energy sources including solar, wind and hydropower is set to rise to 39% from 35%. The country also targeted to reduce carbon emissions per unit of GDP by 18% in the same period. Beijing is expected to unveil the details of its energy plan for 2021-2025 in late 2021.

A Japanese government official in Beijing, who is involved in energy analysis, told S&P Global Market Intelligence that for China to achieve carbon neutrality, it will likely need to invest more than it earmarked for renewable energy sources between 2016 and 2020. China had pledged to invest around US$380 billion in renewable energy sources in those five years.

To help finance these green projects at scale, China would have to rely on green bonds, said the official, who asked not to be named.

Tapping foreign investors

Among efforts to grow its green bond market by appealing to more investors outside the country, China recently proposed to bring its domestic standards closer to the international rules by no longer allowing green bonds to fund clean coal projects.

"They [China] want foreign [environmental, social and governance] investors to buy more green bonds to finance its growing green projects" as China would need to accelerate a pace of shifting to alternative power sources such as renewables from coal plants, said Yoshihiro Fujii, executive director of the Research Institute of Environmental Finance in Japan.

In the first half, China's issuance of green bonds that only met domestic definitions totaled US$7.97 billion, well above $4.37 billion for the globally aligned bonds, according to the Climate Bonds Initiative, or CBI. Overall, green bond issuance has slowed so far in 2020 amid the pandemic.

For the second quarter through June alone, green bonds issued on the Chinese standards more than doubled to $5.92 billion from the previous quarter, while the globally aligned green bonds also nearly doubled to $2.82 billion, CBI added.

In 2019, locally aligned green debt in China totaled US$24.5 billion, less than US$31.3 billion for the bonds aligned with the global standards, according to the CBI.

"China's pivot to renewable energy has already created opportunities in fixed income and with the potential increase in supply of China's issuance of green bonds in the near future, we see this opportunity set growing," Lau added.

With the Chinese leader's new commitment, it is almost certain that the central bank's proposal to exclude coal completely will be passed through without a hitch, said Edris Boey, ESG practice lead at Maitri Asset Management.

Coal-fired power plants in China currently supply more than 50% of the country's energy, provide 3.5 million jobs and represent the world's single largest greenhouse gas emitter annually. "Transitioning these plants to become carbon neutral will require huge investment," Boey added.