China has issued the first 85.5 billion yuan ($13.4 billion) batch of low-cost loans to financial institutions to promote green projects and corporate efforts to cut carbon emissions, according to recent reports.

Under the carbon emission reduction facility (CERF), the first of its kind to be rolled out by the People’s Bank of China (PBOC), financial institutions can apply for low-cost funding to back the loans issued to finance companies to reduce emissions. The CERF is part of China’s broader goal of bringing carbon emissions to a peak before 2030, followed by achieving carbon neutrality by 2060. It also aims to support the economy as a result of the economic consequences of COVID-19. As part of the banks Green Finance initiative, CERF primarily supports projects with significant potential in carbon emission cuts, including clean energy, energy conservation and environmental protection, as well as carbon reduction technology.

Under the CERF, the PBOC will provide financial institutions with funds equal to 60% of a loan’s principal at a one-year lending rate at 1.75%. That would be at a discount to the seven-day reverse repo rate of 2.2%. The bank has also officially rolled out low-cost loans to support companies in their efforts to use clean coal.

The CERF could lead to 1 trillion yuan per year being invested in projects related to clean energy after the monetary tool is fully rolled out in 2022, according to reports from Huatai Securities and Everbright Securities. Banks are however required to certify the loans have been issued to firms that can help the economy adopt cleaner energy or improve energy efficiency. As targeted monetary policy tools, both the CERF and the special clean coal loans aim to contribute to the overall credit supply and stable credit growth.

This type of financing is important for the wider rollout of clean energy technologies including CCUS, particularly in the key region of China and the wider Asia. Organisations such as the International Energy Agency (IEA) and the Global Carbon Capture and Storage Institute (GCCSI), and the International Centre for Sustainable Carbon (ICSC), note that for capital intensive investment projects such as CCUS facilities, the cost of debt and equity can have a significant impact on its financial viability. Banks therefore have a critical role in providing debt finance which must increase significantly in order to achieve the necessary growth in the number of CCUS and blue-hydrogen projects.