Written By：Molly Su，Lv Yani，Li Zi’an，Zhang Wanying (Finance & Securities Group)
As the topic of ‘carbon neutrality’ continues to heat up around the world, demands for ‘carbon reduction’ from governments, investment institutions and multinational enterprises are increasingly passing down the chain, which will encourage more enterprises to take substantive actions to accelerate the energy-saving and emission-reduction targets. In line with the global trend, governments in the European Union, the United States and Canada are preparing to adopt a proposal for a Carbon Border Adjustment Mechanism which will put a carbon price on imports of a targeted selection of products so that ambitious climate action in such country does not lead to ‘carbon leakage’. Some multinational enterprises are also announcing the ‘carbon reduction commitment’, which aims at reducing the carbon emissions on their global supply chain. For example, a well-known multinational company requires its suppliers to improve energy efficiency and cut emissions, otherwise, the suppliers will face the risk of being removed from the supplier list. Many internationally renowned investment institutions have also taken actions and are committed to ‘emission reduction’ for their investment portfolios.
However, due to the limitations of existing science and technology, carbon neutrality through technological innovation will not happen overnight. Apart from controlling total carbon emissions through technological innovation and capacity structure optimization, how to use market-oriented measures to fulfill the responsibility of ‘emission reduction’ at the lowest cost will become a key aspect of the carbon neutrality strategy. As introduced in our previous series of articles on carbon finance, with the improvement of China national carbon emissions trading scheme (ETS), China is expected to surpass the European Union and become the world’s largest centralised carbon emissions trading market. A growing number of foreign investors are turning their attention to China ETS markets. This article aims to sort out the feasible path for foreign investors to directly participate in the cross-border green equity transactions via domestic exchanges.
1.Opening up of PRC carbon emissions trading market to foreign investors
The domestic carbon emissions exchanges generally adopt a membership system, market participants may directly conduct relevant transactions at the exchange if they satisfy the prescribed conditions and have been approved by the exchange, or they can choose to participate in carbon emissions trading through the brokerage members (such as some professional carbon investment institutions). Take Shanghai Environment and Energy Exchange as an example, investors can open accounts with brokerage members and authorize a brokerage member that trades at the exchange to conduct trading and clearing activities. Whether foreign investors can apply to become transaction members of the exchanges or indirectly access to ETS through brokerage members is subject to the rules and regulations of the exchanges.
As we introduced in our previous Article Green Equity: Prospects for Chinese Carbon Emission Products and Carbon Financial Markets, the domestic ETS has not yet been opened to foreign investors at the current stage, only some regional pilot markets such as Guangzhou, Shenzhen and Hubei ETS allow foreign investors to access to regional pilot carbon trading market.
Additionally, for the question of whether foreign investors can participate in trading through brokerage members of the relevant exchange, only Shanghai Environment and Energy Exchange expressly stipulates that the brokerage members are only permitted to provide brokerage services to domestic investors rather than foreign investors.
Beyond the internal rules of the domestic exchanges mentioned above, whether foreign investors should also be subject to the practical business processes of the specific exchange. For example, we understand that although Measures for the Administration of Carbon Emissions Trading Membership of the Sichuan United Environment Exchange (for Trial Implementation) explicitly stipulates to accept the member applications from domestic and overseas institutions, in practice, whether Sichuan United Environment Exchange would approve foreign investors’ participation in transactions at the exchange is still subject to the approval of its superior authority.
|exchange||foreign investors can/ cannot access to PRC domestic ETS market||relevant rules|
|National Carbon Emissions Trading Scheme Exchange||×||
Measures for the Administration of Trading of Carbon Emissions (for Trial Implementation)
Article 4: Traders of carbon emissions across the country shall include key emitting entities as well as institutions and individuals that comply with the relevant trading rules of the state.
* In practice, the national ETS does not allow foreign investors to participate in carbon emissions trading at the initial stage.
|China Beijing Environment Exchange||×||
Measures for Membership Administration of Beijing Environment Exchange Co., Ltd. (Revised) does not explicitly wipe out foreign investors from applying for membership.
Measures of the Beijing Environment Exchange for the Eligibility Management of Investors in Carbon Emission Trading (for Trial Implementation)
Article 7: The exchange may, in the light of the characteristics of carbon emission trading products and investors’ risk tolerance capabilities, reasonably set the qualification conditions for investors who are allowed to participate in the trading, and know the basic information and risk tolerance capabilities of investors. The qualification conditions for investors include but are not limited to financial position, knowledge level related to the project field and investment experience, etc. If it is otherwise provided in laws, regulations, and trading rules of the exchange, such provisions shall prevail.
|Shanghai Environment and Energy Exchange||×||
Measures for the Administration of Carbon Emissions Trading Membership of Shanghai Environment and Energy Exchange (for Trial Implementation)
Article 8: Whoever applies for self-operating membership shall meet the following conditions and provide relevant certification materials: (i) Enterprise legal persons or other economic organizations registered within the territory of the People’s Republic of China; …
Implementing Measures of the Shanghai Environment and Energy Exchange for the Eligibility Management of Investors in Carbon Emission Trading (for Trial Implementation)
Article 5: Institutional investors applying for participation in carbon emission allowance trading shall meet the following conditions: (i) enterprise legal persons or other economic organizations registered within the territory of the People’s Republic of China; …
Measures for the Administration of Carbon Emissions Trading Membership of Shanghai Environment and Energy Exchange (for Trial Implementation)
Article 26: To conduct carbon emissions trading, members shall open an account and register at the managing members’ registry office and submit the following materials: …(ii) the certification document: business license, organization code certificate and tax registration certificate; …
|Tianjin Climate Exchange||×uncertainty in practice||
Measures for the Administration of Carbon Emissions Trading Membership of Tianjin Climate Exchange
Article 2: Exchange members shall meet the following qualifications: Chinese-owned and controlled enterprises established by law.
Rules of Tianjin Climate Exchange on Carbon Emission Trading (for Trial Implementation)
Article 8: Domestic and foreign institutions, enterprises, groups and individuals that satisfy the requirements of the exchange may participate in the carbon emissions trading in Tianjin. Before entering the exchange for trading, trading members and the approved institutions shall apply for appropriate seats and trading rights and become trading participants.
|Chongqing Carbon Emissions Trading Center||×||Detailed Trading Rules of Chongqing United Assets and Equity Exchange on Carbon Emission Trading (for Trial Implementation) does not explicitly restrict foreign investors from applying for membership.|
|China Emissions Exchange (Shenzhen)||√||
Rules of China Emissions Exchange(Shenzhen) on Membership Management (for Trial Implementation)
Article 30: The membership application of the foreign investors shall be handled following the requirements of the Operational Guidelines for foreign investors Applying for Membership Qualification of China Emissions Exchange (Shenzhen).
|China Emissions Exchange Guangzhou (CEEX)||√||
Measures of China Emissions Exchange Guangzhou for Membership Management (Revised in 2017)
Article 5: Institutions that meet the following conditions may apply for membership: (i) legal persons or other organizations who are established in accordance with the applicable laws; (ii) have good business credit; and (iii) comply with the relevant provisions of the competent authority for carbon trading.
|China Hubei Emission Exchange||√||
Rules of China Hubei Emission Exchange on Carbon Emissions Trading
Article 7: Market participants shall be members of the exchange, including domestic and foreign institutions, enterprises, organizations and individuals (except for the independent verification institutions and settlement banks), all of which may participate in transactions of eligible products approved by the exchange.
|Sichuan United Environment Exchange||
subject to the approval of the superior authority
Measures for Membership Administration of the Sichuan United Environment Exchange on Carbon Emissions Trading (for Trial Implementation)
Article 2: the members mentioned in these Measures refer to domestic and foreign institutions, enterprises, groups and individuals that are established and existing in accordance with the law.
|Haixia Equity Exchange||limited to HK, Macau and Taiwan legal persons||
Measures of Haixia Equity Exchange on Membership Management for Carbon Emission Trading (Revised in 2017)
Article 4: An enterprise legal person that meets the following conditions may apply for trading membership: (i) Enterprise legal persons registered within the territory of the People’s Republic of China;
Kindly Note: the table above sets out are for reference purposes only, and the final result is subject to the processing of the relevant pilot ETS.
2.Eligible Carbon Emissions Products for trading by foreign investors
2.1 Carbon Emission Allowance
For regional pilot ETS that accept foreign investors’ participation in carbon emissions trading, the eligible product is limited to carbon emissions allowance which is issued by the local ecological environment authorities of the pilot areas. Foreign investors may access the pilot ETS after the membership approval process of the specific ETS.
According to public information, the State Administration of Foreign Exchange (SAFE) issued an official reply to the Shenzhen Branch of SAFE on August 8th, 2014, approving foreign investors participating in the Shenzhen carbon market, making Shenzhen carbon market the first one open to foreign investors in China carbon market. Moreover, it is the first reply specifically issued by the nation to the local platform without any restrictions on foreign investment. Innovation in Qianhai leads international cooperation and regional development in the national carbon market. In addition, there is no quota or currency restriction for foreign investors to participate in the Shenzhen carbon emissions trade market. In September 2014, Ginga Environment, a Singaporean company, successfully purchased 10000 tons of Shenzhen carbon allowance.
On this basis, China Emissions Exchange (Shenzhen) has also introduced cross-border carbon asset sellout – repurchase product, under which foreign investors use foreign capital to participate in the Shenzhen carbon emissions trade market, and enterprises that have carbon assets can obtain foreign funds for low-carbon development of enterprises. On 19 March 2016, China Emissions Exchange (Shenzhen) launched the first domestic cross-border carbon asset sellout-repurchase financing transaction.
2.2 China Certified Emission Reduction (CCER)
In principle, foreign investors may participate in CCER trading by applying to become a member of the regional pilot ETS. However, subject to the current restrictive provision that the China Certified Emission Reduction Exchange Registration System only accepts an enterprise legal person who is registered in Mainland China as a registered user, foreign investors are still unable to complete registration of ownership transfer for CCER trading through the China Certified Emission Reduction Exchange Registration System. As a result, foreign investors are unlikely to participate in CCER trading through the exchanges.
On August 6, 2021, Beijing Environment Exchange invited bids for the development of the registration system for CCER, which provides that Beijing Environment Exchange will lead the establishment of a national CCER trading centre. It is expected that the national CCER market will gradually establish and open to foreign investors in the long term. Meanwhile, the Ministry for Ecology and Environment (MEE) mentions that‘… rules on CCER management will be issued separately… ’ in the explanation for the preparation of the Administrative Measures for the Registration, Trading, and Settlement of the National. Carbon Emission (Trial)‘, which may provide an opportunity for foreign investors to participate in CCER trading in the future. We will continue to focus on the entry requirements for foreign investors of the national CCER market.
|exchange||foreign investors can/cannot access to PRC domestic ETS market||eligible trading products|
|China Emissions Exchange (Shenzhen)||√||SZEA|
|China Emissions Exchange Guangzhou (CEEX)||√||GDEA|
|China Hubei Emission Exchange||√||HBEA|
|Sichuan United Environment Exchange||√（Subject to the approval of superior authorities）||N/A|
|Haixia Equity Exchange||limited to HK, Macau and Taiwan legal persons||FJEA|
Kindly Note: the table above sets out are for reference purposes only the final result is subject to the processing of the relevant pilot ETS.
3.Account opening and cross-border settlement by foreign investors
3.1 Settlement in RMB
The People’s Bank of China (PBOC) released the Notice on Further Improving Policies for Cross-border RMB Business to Facilitate Trade and Investments (Yin Fa  No.3, hereinafter “Notice”) clarifying the procedures for foreign investors using RMB cross-border settlement for carbon emissions trading in China, which encourages carbon emissions trading in RMB in China. Foreign investors conduct carbon emissions trading in RMB through domestic ETS shall, in accordance with the Measures for Administration of RMB Settlement Accounts of Overseas Institutions ( No. 249  of the PBOC) and the Notice of the People’s Bank of China on Issues Concerning the Opening and Use of RMB Settlement Accounts of Overseas Institutions (No. 183)  of the PBOC) and other applicable regulations, opening RMB special deposit accounts for carbon trading at banks (mostly NRA account in practice) and process fund receipt and payment under the account of carbon emission trading. According to the market information, there have been practices in Guangzhou that use RMB for cross-border settlement in carbon emissions trading.
3.2 Settlement in Foreign Exchange
Under the provisions of Circular of the General Affairs Department of the SAFE on the Operation of Foreign Exchange Business Concerning Cross-border Trade in Environmental Interests Including CO2 Emissions Reductions (No. 151  of the General Affairs Department of the SAFE), for the business demand for settlement and sale of foreign exchange and cross-border payment arising from the cross-border trading of sale or purchase of carbon dioxide emission reductions and other similar environmental rights and interests, the domestic institutions and the overseas institutions may, by bringing the effective documents, directly go to the designated foreign exchange bank to do such business.
In the meantime, according to the requirements of Notice by the General Affairs Department of the SAFE of Reviewing and Integrating Certain Foreign Exchange Accounts (No. 73  of the General Affairs Department of the SAFE), the “capital account—foreign exchange account for transactions in environmental rights and interests (2107)” shall be included in “capital account—asset monetization account (2103) ” and Article 6.7 “opening, account entry and use of the asset monetization account” of the Guidelines for Foreign Exchange Business under Capital Account (2020 Version), and the relevant provisions and operating guidelines on the account for realization of assets under the trading of environmental rights and interests, which further specify the foreign exchange revenue and expenditure accounts applicable to foreign investors when they participate in trading of environmental rights and interests such as carbon dioxide emission reductions through domestic institutions such as environment exchanges, emission exchanges and forest rights exchanges and the specific requirements thereof. However, foreign investors’ participation in local carbon emission trading is still an innovative business in practice. It is advisable to fully communicate with the local branch of the SAFE before carrying out the specific business.
Besides, Shenzhen and Hubei province have obtained official replies from the SAFE on foreign exchange business for foreign investors participating in local carbon emission trading. The Hubei branch of the SAFE has also formulated a supporting system for the management of trading funds of foreign investors, the Interim Measures for the Foreign Exchange Administration of Foreign investors Participating in the Trading of Carbon Emission in Hubei (No. 26  of the Hubei branch of the SAFE), which stipulates that domestic and foreign investors can participate in the trading of carbon emission through special accounts opened by the China Hubei Emission Exchange with depository banks in foreign exchange or cross-border RMB.
According to No. 26  of the Hubei branch of the SAFE, foreign investors may apply to the depository bank for opening an NRA account specially used for the trading of carbon emission by presenting the agreement signed with China Hubei Emission Exchange. The account may be a multi-currency account. The foreign investors shall deposit, remit or import the funds required for participating in the trading of carbon emission through the NRA account opened with the depository bank, and participate in the trading of carbon emission through the “capital account – special foreign exchange account for other capital accounts” opened by the China Hubei Emission Exchange with the domestic cooperative bank. An overseas investor may only open one NRA account for a single currency.
Meanwhile, the China Hubei Emission Exchange may apply to the depository bank for opening a special capital account (the code of the account is 2499), while the domestic investor may open a “capital account – foreign exchange account for trading of environmental rights and interests (the code of the account is 2199)” for retaining the foreign exchange income under the cross-border carbon emission trading to meet the requirements for the transfer and separation of funds for the trading among the participants. The specific flow of funds is shown as follows:
The development of China carbon market is regarded as the wind vane of global in using of market mechanism to help enterprises to mitigate the carbon emissions reduction pressure and achieve reduction goals. Taking the opportunity of ‘carbon neutrality’ to attract more potential domestic and foreign investors and possessing rich experience in carbon trading and carbon assets management, would enhance the liquidity of the domestic carbon market, which is better to discover the effective carbon price and then guide the investment decision of covered entities to curb the emissions. Besides the exchange-trading opportunities of green equity and interests designed for foreign investors introduced in this article, we are devoted to sorting out the detailed guidance and practical procedures to advise the foreign investors on how to participate in other cross-border trading of green equity and interests in the next article of this series for your attention.
Many thanks to interns Yijing Duan and Jiawen Qian for their input to this article.