Series ③: Can carbon asset securitization make up for the investment and financing gap?

At the end of 2023, my country's first carbon asset securitization project was officially signed. The project is supported by the expected future return of carbon assets. It uses an innovative method of issuing market-circulating securities for financing, and issues loans to enterprises based on the pledge of carbon emission rights, forming contract creditor's rights. Asset securitization is carried out as a basic asset. This also represents the successful launch of the country's first carbon emission asset securitization ABS project for small and medium-sized enterprises, achieving a breakthrough in the carbon asset securitization ABS business from "0" to "1".

Carbon asset securitization and indexed carbon trading products can increase the enthusiasm of enterprises and investors to participate in the carbon market, accelerate the flow of capital factors in the carbon market, increase market activity, effectively help enterprises revitalize carbon assets, broaden financing channels, and promote enterprises and Investment institutions carry out low-carbon emission reduction actions and green and low-carbon investments.

Asset securitization improves carbon asset liquidity

Issue securities on the financial market for financing, and then use the proceeds generated by the asset pool as a source of funds to liquidate the issued securities.

"Asset securitization mainly solves the market-oriented pricing and investment and financing issues of assets." Liu Feng, chief economist of the International Institute of Green Finance at the Central University of Finance and Economics, said in an interview with "Environmental Economics" that my country's goal is to achieve carbon neutrality by 2060. Obviously, at the current level of cognition, it is necessary to build a plan that can cover nearly 40 years of planning requires a huge investment funding gap.

"Where does the money come from? From the perspective of financing, at present, my country's financing structure is very unreasonable, with 90% of investment coming from bank credit, that is, green loans. Bank credit is often targeted at projects and enterprises with more stable long-term cash flow, collateral or guarantees, and has low risk attributes. Many high-risk, long-term projects cannot be achieved solely by bank loans." Liu Feng told reporters that as of the end of the third quarter of 2023, my country's green loan balance was 28.58 trillion yuan, a year-on-year increase of 36.8%, ranking first in the world; the domestic green bond market balance was 1.98 trillion yuan, ranking second in the world.

Green and sustainable development requires more diversified financial support, especially investment and financing services in the capital market. Liu Feng said: "The prerequisite for using financial instruments such as stocks, bonds and derivatives to obtain more financing in the securities market is to solve the problem of asset securitization."

Carbon asset securitization uses carbon assets as basic assets and uses future cash flows generated by carbon emission rights or expected income rights of carbon sink projects as repayment support. Through structural design and credit enhancement, asset-backed securities are issued on this basis. Carbon asset securitization is an extension of traditional asset securitization and an innovative financing model for carbon assets.

"Carbon is equivalent to a virtual asset, and we regard it as a unit of valuation. If companies want to emit carbon dioxide, they need to buy carbon quota indicators, which can securitize them." Liu Feng said: "Currently, futures in the financial market are designed in this way. The process is to make a subject object into a subject asset in accordance with relevant standards and regulations. According to the Ministry of Finance's Interim Provisions on Accounting Treatment of Carbon Emissions Trading, carbon quotas have been recognized as current assets and are highly liquid. In practice, they can be directly used for pledge financing."

If the future benefits related to carbon emissions generated by the enterprise, such as project emission reductions, forestry carbon sinks, and carbon quotas for a future project, can be regarded as carbon assets. It is only a matter of time before these carbon assets are expected to be securitized. The securitized assets can be used for pledge financing, and at the same time, there are more operating methods with the help of various financial instruments. Liu Feng told reporters that in the primary market, data compliance transformation is the most direct and effective means to realize the appreciation of carbon assets.

From the issuer's perspective, carbon asset securitization can finance future projects. Through contractual agreements, it can lock in income in advance, increase capital turnover rate, and effectively revitalize carbon assets. Financing can help companies seize project resources and gain higher market shares. At the same time, by achieving bankruptcy isolation and credit enhancement, and improving product ratings, financing costs can be effectively reduced.

From an investor's perspective, carbon asset securitization can earn investment returns. For high-carbon emission corporate investors, while obtaining full carbon emission rights through securitization, they can avoid the risk of price fluctuations in the spot market, help companies plan production plans, and reduce costs. For ordinary individual investors, carbon asset securitization products can be separated and sold, which can lower investment thresholds, expand investment channels, and obtain investment returns.

From the perspective of improving the effectiveness of the carbon trading market, carbon asset securitization can effectively activate the inherent vitality of the market. On the one hand, it provides issuers with effective financing means, and on the other hand, it provides investors with investment income or carbon emission rights. In addition, carbon assets split large financing needs through securitization and improve liquidity, which is of great significance for promoting the trading vitality and trading effectiveness of carbon assets.

"As an innovative financing tool, carbon asset securitization may play a vital role in promoting the development of carbon assets and carbon trading markets." Liu Feng told reporters that securitization is of great significance to green and sustainable development and is the most effective way and method to solve the financing and investment gap, promote market activities and realize the marketization of green value.

During the interview, Li Zhiqing, director of the Center for Environmental Economics Research at Fudan University, reminded that carbon financial derivatives include asset securitization, and we must still adopt a cautious attitude without ensuring its incentive mechanism and stability.

Improve the carbon pricing mechanism

"Based on the pricing of carbon asset securitization, the concept of carbon price can also be derived." Liu Feng told reporters that as long as something has a price, a market is formed, and then financial activities can be launched and forward transactions can be carried out.

In terms of carbon pricing, the current policies adopted by various countries to control greenhouse gas emissions are roughly divided into three categories: administrative control, economic stimulus, and publicity and encouragement. Among them, order propaganda distributed from top to bottom may be difficult to implement, while economic stimulus measures are widely favored because they are flexible and sustainable, and carbon pricing mechanisms fall into this category. Carbon pricing can internalize the negative externalities caused by environmental pollution that cannot be solved by commodity markets into the market scope, thereby maximizing social benefits. To do this, greenhouse gas emitters should pay a fee for emission rights to compensate other sectors of the economy for lost benefits-a process known as carbon pricing.

"The carbon pricing mechanism is generally divided into carbon tax and carbon emissions trading systems." Liu Feng told reporters that the carbon tax does not require too complicated design of market products and trading rules. The government specifies the carbon price and the market determines the final emission level. Therefore, management and operating costs are much lower than carbon trading. Moreover, as one of the government taxes, carbon tax is relatively fixed for enterprises and facilitates emission reduction arrangements. For the government, it can increase revenue and be used to invest in the development of new emission reduction technologies.

However, the shortcomings of a carbon tax are also very clear: not only is it difficult to determine the final emissions at the domestic level and whether resource allocation is efficient and timely, but it is also difficult to establish a transnational market at the international level, which may encourage trade protectionism and industrial outflows.

Another carbon pricing mechanism is the carbon trading market. Liu Feng said that under such a system, the government determines the final emission level and the market determines the carbon price, so the carbon price is uncertain. In addition, as a market-exchangeable product, carbon emission rights have the natural attributes of finance and can attract more participation from banks, funds, and enterprises and improve the efficiency of resource allocation.

"However, carbon trading, as a artificially designed and controlled market, has high regulatory costs and moral hazard." Liu Feng introduced that due to the volatility of carbon prices, once products are financialized, higher requirements are put forward for the ability to supervise financial risks. Therefore, carbon trading is more suitable for countries and regions with relatively mature financial market development.

From the perspective of application scenarios, the carbon tax policy is more suitable for controlling small and micro emissions, while the carbon emissions trading system is suitable for enterprises or industries with large comprehensive control of emissions. Therefore, the coordinated use of these two policies can improve coverage, price mechanism and other aspects play a good complementary role.

Liu Feng concluded that under the carbon emissions trading pricing mechanism, the government determines the final emission level and the market determines the carbon price. Some companies have remaining carbon emission rights, which leads to a carbon emission rights trading market. Through financial means, this right can be turned into a financial product and traded in the market. This has formed a situation in which economic activities trade carbon emission rights in the market on the basis of total control, which is what many countries around the world are currently doing.

In addition, the Party Leadership Group of the National Development and Reform Commission of the Communist Party of China issued a document entitled "Further Comprehensively Deepening Economic System Reform and Promoting Chinese-style Modernization with High-Quality Development" stating that it should actively and steadily promote carbon peak and carbon neutrality, establish and improve the standard measurement system for carbon peak and carbon neutrality, and improve Carbon pricing mechanism.

Product securitization has a long way to go

The basic assets of carbon emission rights asset securitization come from the asset pool formed by carbon emission rights trading. The supply and demand parties of carbon emission rights assets, that is, the buyer and seller, rely on the carbon exchange platform to conduct spot transactions of carbon emission rights. The seller enterprise uses the carbon exchange and other platforms transfer the carbon emission rights to the purchaser enterprise, use the transaction proceeds as the basic assets, design and issue asset securitization products, sell them to investors and generate issuance income.

Relying on the relevant needs of carbon asset management in various industries and fields, asset securitization can reduce carbon transaction costs, improve carbon asset trading efficiency, and optimize carbon resource allocation. As my country's carbon trading market has not yet been improved, there are still many constraints in the implementation process of the carbon asset securitization path.

Adequate basic underlying assets are a prerequisite for realizing carbon asset securitization. Liu Feng told reporters that the conditions for product securitization are as strict as the company's listing standards. This requires consideration of whether there are green assets and whether there are behaviors such as "brushing green" and "greening". In fact, doing this requires many measurement methods, such as information disclosure, information collection, measurement indicators, etc. Carbon emission measurement indicators, measurement tools, measurement methods, data statistics and management all require unified standards and operating rules and mechanisms. It is difficult to effectively manage and implement without a simple, transparent and credible standard and rule system.

Liu Feng said: "At present, we still have many technical problems that have not been solved. For example, the current accounting subjects involve the pricing and measurement of carbon assets and require the participation of accountants, but they have not yet been included and are still incomplete."

"Without improved infrastructure, it is difficult for brokers to put their products on the market." Liu Feng said that the role of brokers is to price products, convert them into bonds or stocks, and market them to the market.

"Carbon sink projects have a long development cycle, high project implementation and management costs, and high investment in related development costs such as project design, approval and registration, implementation monitoring, and emission reduction verification and registration. Currently, the transaction price of my country's carbon sink market and carbon sink project development costs and benefits do not match, resulting in low enthusiasm among project owners to participate in the development of carbon sink projects." Liu Feng told reporters that insufficient financing demand will have a certain negative impact on the pricing, issuance, trading and other aspects of carbon asset securitization, thus limiting the development of asset securitization.

Securities companies practice carbon finance and enter the fast lane

Under the "double carbon" goal, companies face huge needs for emission reduction funds. As entities with strong flexibility and high market participation among financial institutions, the participation of securities companies will help increase the activity of the carbon market, guide capital to invest in new energy industries, and promote carbon emission reduction and clean and low-carbon transformation. In recent years, securities companies have entered the fast lane of practicing carbon finance.

How can securities companies participate in carbon emissions trading? According to Sun Yongping, deputy director of the Institute of National Governance at Huazhong University of Science and Technology, in an interview with the media, in the carbon trading process, securities companies can not only play the role of investors, directly participate in the carbon market, and obtain benefits by buying and selling carbon quotas; they can also play the role of brokers, assisting buyers and sellers in completing transactions, and providing professional financial services and suggestions for transactions between both parties; Play the role of an information intermediary, collecting and analyzing market information, providing timely and comprehensive market information to companies and other investors participating in the carbon market to help them make better investment decisions; you can also play the role of an underwriter, underwriting related financial products developed based on carbon quotas, increasing your own revenue, enriching the types of trading products, and promoting the development of the carbon market.

For securities companies, developing carbon emissions trading business can also provide new tracks and opportunities for their long-term development. At present, eight securities companies, including CITIC Securities, Guotai Junan Securities, China International International Capital Corporation, Huatai Securities, Shenwan Hongyuan Securities, Orient Securities, CITIC Construction Investment, and Huabao Securities, have successively announced that their self-operated participation in carbon emission trading has won the China Securities Regulatory Commission No objection letter.

"Currently, my country's carbon financial market is still in its infancy. Brokers have specifically applied for the qualification to join the carbon market, but they have not fully entered." Li Zhiqing told reporters that according to relevant regulations and policies issued by the Ministry of Ecology and Environment, the national unified carbon trading market launched on July 16, 2021 temporarily does not allow institutions and individuals to participate in carbon trading, and only allows transactions between companies that control emissions.

Li Zhiqing said that although the above-mentioned eight securities companies are allowed to conduct proprietary carbon trading, actual participation in the trading still requires the approval of the Ministry of Ecology and Environment, the authority in charge of the carbon trading market. Subject to approval by the Ministry of Ecology and Environment, securities companies can freely participate in the trading of carbon emission rights under their legal status, and can also provide services such as carbon trading agents, carbon trading consulting, and carbon financial instrument development as market intermediaries.