The Taiwan Banker

Under the leadership of President William Lai, the National Climate Change Countermeasure Committee has been established, with goals including the “twin transformations” of the green and digital industries and net-zero emissions by 2050. On this front, Environmental Minister Peng Chi-ming has implemented carbon pricing, making Taiwan the sixth country in Asia to do so. A long-time promoter of carbon pricing, Peng argues that it will not just be a cost, but also drive green growth. During a special interview with the Taiwan Banker, Minister Peng was full of vitality and new ideas, saying, “I come from the private sector, so I understand the importance of the market.” Before serving as Environmental Minister, Peng participated in 11 United Nations Climate Change Conferences, but he was particularly impressed with the transformational financial policy proposed by the Glasgow Net Zero Finance Alliance at COP26 (Fig. 1). He has actively promoted net-zero in the Taiwanese private sector for many years; since becoming Minister, he has embraced his original intentions and accelerated his progress. Having now implemented carbon pricing, he hopes to move towards a carbon cap & trade system in just four years.European Investment Bank still invests in steel Peng has traveled to places such as the European Union and Japan with the most stringent carbon reduction requirements, observing how they balance emissions reduction with growth. EU President Ursula von der Leyen has proposed moving from a “European Green Deal” to a “Clean Industrial Deal,” focusing more on new energy industries. “The government spends three trillion euros every year to drive carbon markets,” such as promoting the Industrial Decarbonization Accelerator Act to support companies’ carbon transitions. Banks have played a key role in this initiative. Large financial institutions such as the European Investment Bank, Nordic Investment Bank, BNP Paribas, Société Générale, Temasek, and ING invested 250 million euros (approximately NT$10 billion) into a Swedish steel mill. This goes beyond just banks, as the European Innovation Fund, financed by revenue from the EU Emissions Trading System (ETS), also subsidizes it. Why is the environmentally-friendly EU still investing in the construction of new steel plants?In the past, sustainable finance meant supporting carbon-free industries, such as renewable energy. However, it is becoming increasingly apparent that even industries with high carbon footprints, such as steel and cement, will remain important. New financing systems are developing internationally with a focus not on eliminating or withdrawing funding from high-carbon industries, but on helping these industries safely transition to low-carbon production. Besides investment, the EU has other important transformative finance instruments, such as NextGenerationEU, a green bond. Also, the main funding source for the EU Innovation Fund is revenue from carbon emission credits purchased by high-emissions companies. In this way, emissions quotas are used to induce companies to develop specific carbon reduction technologies. Japan’s green transition bonds“Before carbon pricing, companies reducing their emissions were only doing it for good, with no financial benefit,” notes Peng. The Japanese government has not only set a carbon price, but also plans to issue JP¥150 trillion in green transformation (GX) bonds over 10 years to fund its ambitious green transformation plan. “The first phase of JP¥1.6 trillion (US$11 billion) has already been issued.”Green bonds issued through this kind of public-private partnership “can raise funds from the market to invest in climate-friendly projects. Compared with traditional investment and financing, the capital costs are lower.” Peng said that such product designs are rarer in Taiwan, possibly because most of the financial workforce has a liberal arts background. Carbon reduction often involves science and engineering, so if these skills can be developed, Taiwan’s financial industry will have greater market potential.Peng said that many financial products related to carbon reduction or climate risk are still waiting to be developed. Right now, banks tout carbon reduction, but “excessive packaging is just a kind of greenwashing.” “With carbon pricing, if a company voluntary conserves energy, or develops carbon-negative technologies,” data will exist to determine whether banks can give it preferential financing, supporting its transformation in a very practical way (Fig. 2).A force driving green growthAll countries share the same planet. The EU and advanced economy cannot only actively reduce their own emissions, but must also encourage other countries to reduce their own emissions through a carbon border adjustment mechanism (CBAM). Peng noted that through this mechanism, even if Taiwan does not abide by this standard, future products exported to these countries will still face tariffs on their excessive emissions. Furthermore, carbon pricing is the first step towards a net-zero Taiwan, because business will feel the pressure to transform. Those who transform early or discover new opportunities will grow faster. The financial industry can play an important role in this process by designing “financial flows to incentivize carbon reduction.” This will allow companies to more actively reduce their missions, hopefully enhancing the green competitiveness of Taiwan’s supply chain. Going forward, the Ministry of Environment will even enact its own CBAM, requiring imported products to declare their carbon content and pay Taiwan’s carbon tariff.Taiwan has taken an important step towards carbon pricing. A resolution of the Carbon Pricing Review Committee of the Ministry of Environment recommends that carbon pricing be gradually increased in stages. The rate will be adjusted annually based on independent reductions, industrial competitiveness, and international carbon pricing. The system will be launched in 2025, with an estimated annual revenue of approximately NT$6 billion.To accelerate the transformation of industrial structure, Peng said that he is planning to promote three types of green finance to boost development, namely the Green Growth Fund, Green Financial Innovation, and the Taiwan Net Zero Fund. He is currently working with the Ministry of Economic Affairs, National Development Council (NDC), and FSC, as well as the financial industry, to speed up the transformation. The Ministry of Environment (MoE) is seeking NT$10 billion for from the NDC for the Green Growth Fund. Peng said that The MoE is already drafting plans for this national development fund, and expects to launch the project next year. The investment partners and amounts will be chosen based on carbon reduction. The investments may range from NT$20 million to 100 million, which he hopes will drive the development of the domestic net-zero industry, and venture capital and industry accelerators will also be invited to cooperate. As for Green Financial Innovation, Peng promised to cooperate with the FSC and negotiate with major insurers to expand investment in Energy Service Companies (ESCO). Priority will be given to several large public hospitals for carbon reduction, as hospitals are unavoidably large consumers of electricity. The power saved by these hospitals could be equivalent to the power produced by a whole plant. Peng explained that this initiative can also promote the development of the recycling industry. Through investment by the financial industry, recycling plants can earn profits, while hospitals also conserve power.Finally, Peng explains that the Taiwan Net-Zero Fund will be led by private venture capital companies, which will observe new international carbon reduction technologies and companies with substantial carbon reductions. In the future, these investment targets will be integrated and set up on a public platform, but detailed plans are still forthcoming.Carbon diplomacyFollowing carbon pricing, the MoE will transform the environmental protections of the past into business models, and even diplomacy. Peng has discussed with Foreign Minister Lin Chia-lung that if international cooperation can occur with allies, not only will Taiwanese manufacturers be able to purchase adequate carbon credits, but allies will also benefit from developing their own carbon credits systems, which Taiwan can use to consolidate its international position. The Ministry of Foreign Affairs has included cooperation in new energy and carbon pricing within the seven pillars of the Rongbang Initiative of comprehensive diplomacy based on Taiwan’s strategic advantages. Peng states, “Some industries are coming under pressure due to the 2050 net-zero carbon emissions goal, but international carbon credit transactions are booming. For example, our diplomatic allies Paraguay and Guatemala have great potential for a carbon credit system.” Through inter-ministerial integration, public-private partnerships, and transnational cooperation, crises can turn into opportunities. “Taiwan can not only achieve sustainable development, but also contribute to the world.”In the past, businesses were concerned that carbon pricing could lead to cost inflation. However, the green economic strategy could drive up to NT$100 billion in investment and create trillions in output, allowing Taiwan to transition to net-zero while still elevating its economy.20 years of financial entrepreneurshipComing from the private sector, Peng said that when he started his business more than twenty years ago, he wanted to develop weather derivatives with banks and financial institutions, protecting against low risk, high incidence events. For instance, last year’s warm North American winter, five degrees warmer than average, caused heating consumption to decrease, leading to surplus coal and gas reserves. Moreover, heavy summer rains in Kansai, Japan hurt amusement parks, hotels, and airline businesses. Traditional insurers do not compensate such losses, so a market exists for climate futures and options.Travel agencies offering cherry blossom viewing tours suffer heavy losses due to sudden changes in temperature. Products like weather derivatives can offset the financial risks some companies face in extreme climates when it gets too hot or cold, and Peng hopes to develop them in Taiwan. However, Taiwan’s financial industry might still be too conservative, preventing such ideas from being applied.Now, as Environmental Minister, Peng still has these ideas. He often meets with Chairman Peng Jin-lung of the FSC, Chainman Liu Jing-qing of the NDC, and Economic Minister Kuo Chih-hui, discussing breaking barriers between different ministries, and asking what green financial products they would like to see. “Maybe we are not pioneers,” he says, “but we could be good followers, reducing the chance of mistakes.” As for why it is better to implement carbon pricing and reduce emissions as early as possible, Peng compares carbon emissions to a person’s weight. If you don’t take your BMI seriously until you turn 60, the costs of losing weight will be higher. Losing weight requires less investment and can achieve faster results at a younger age.