China dominates the global steel production industry, accounting for over 50% of the world's total capacity. Globally, steel production contributes 7-9% of global emissions; but in China it’s responsible for 15% of the country's total carbon emissions.
Hebei province, next to Beijing, is the centre of the centre for steel: it produces 11% of the world’s steel!
We have an incredible opportunity for change: nearly 80% of China's steel assets will reach retirement age or need refinancing by 2030. That’s an astounding low-carbon investment opportunity, a critical window to mobilise capital for transition. Trillions of financings are needed to support the Chinese steel sector to shift to low-carbon production practices.
Hebei, China’s largest steel-producing province, now has credible guidelines for financing steel decarbonisation.
In December 2023, China’s Hebei Province issued its Guidelines for Transition Finance in the Iron and Steel Industry, the first transition finance guideline at the subnational level specific to the iron and steel industry in China. The guidelines set out guiding principles, eligible technologies, and needed supply chain cooperation. They are good!
Financing will be key to the steel sector transition. The steel sector in China requires fixed asset investment of at least CNY1.6tn (USD220bn) for decarbonisation, (as per the Financing China’s Low-Carbon Transition in Heavy Industry report from the Climate Bonds Initiative and Rocky Mountain Institute).
Science-based guidelines that align with international standards are important for building investor confidence and increasing the attractiveness of China's transition finance market to international investors – with the potential to unlock the trillions that are needed.
Sectoral-specific transition guidelines and policies from national and local governments that promote the rapid decarbonisation of the steel sector will attract financing.
Hebei’s Guidelines include key elements of global transition principles, including Climate Bonds: a lesson for others
The Hebei transition finance guidelines incorporate numerous elements from leading global standards and research products, including Climate Bonds’ steel Criteria, to ensure credibility and international harmonization, this includes:
· Companies should include science-based and clear short-term (2025), medium (2030), and long-term (2060) carbon emission reduction targets and transition action;
· Avoid lock-in;
· No significant harm to other environmental objectives;
· Unemployment should be analysed and minimised (we need just transition plans);
· Carbon reduction plans for the next 3-5 years, including emission reduction targets, technologies, projects, and timelines.
A highlight of the Hebei guidelines is their applicability to downstream companies that purchase low-carbon steel. For example, an automotive company using low-carbon steel can also access financing under the Hebei transition guidance. This provision aims to stimulate demand for low-carbon steel through public and private procurement, which is a crucial component of the steel sector transition. Yes!
Similar to China’s green bond catalogue which uses a white-list approach to list eligible activities, Hebei’s Guidelines list a catalogue of transition finance support technologies. 176 technologies are included. Examples include capacity replacement, adoption of electric arc furnaces, hydrogen-based steel production, strengthening supply chain cooperation, energy efficiency improvement, recycling and others.
Broader regulation development underway to transform China’s steel industry
Since 2022, at least eight local provinces and cities in China have launched regional transition finance guidelines, covering regionally relevant industries such as textiles, oil refining, chemicals, steel and other high-carbon emission sectors. Brilliant!
The People's Bank of China is also currently leading the development of transition finance guidelines for four sectors, coal power, iron and steel, construction and building materials, and agriculture.
Lessons learnt from drafting and implementing regional guidelines, including measures to ensure market credibility and international alignment will provide important feedback into the national transition finance development.
Hebei’s steel transition plan is a crucial development, setting credible sectoral transition guidance, strongly aligned with international best practices, including Climate Bonds’ own steel Criteria.
This is just a beginning - stay tuned!
‘Til next time,
Climate Bonds
