The People’s Bank of China on Friday, Feb. 18, warned in a statement that carbon-intensive sectors could be at high risks of default following increased emission costs.

The warning came after the People’s Bank of China wrapped up its first phase of climate stress testing on 23 major banks last year. The vulnerable industries are carbon-intensive, like thermal power, steel, and cement.

According to Reuters, Liu Guiping, vice governor of the China central bank, wrote, “The test results showed that if enterprises in the thermal power, steel and cement sectors do not carry out low-carbon transformation, their repayment capability will decline to various degrees under the (different) stress scenarios.”

Liu said companies could face problems such as stranded assets when they grapple with the environmental costs and policies for “industrial substitution.”

Liu said further tests would evaluate banks’ exposure to other high-emission industries.

Governments worldwide are putting up strategies to transition away from fossil fuels. For example, China, the leading world polluter, said last year that it would tax emissions and implement a national emissions trading scheme.

Reuters reported that more than 2,000 coal-fired power plants are part of the scheme, and compliance costs are expected to climb as more industries, including cement and steel, join it.

According to Reuters, the permit price for each tonne of carbon is less than $9.48, but analysts predict it could soar to around $31.60 within a few years.

Carbon taxes and cap-and-trade programs can play a significant role in global climate initiatives, but they will impact many banks’ regular business, potentially disrupting the financial system.

Through transitioning efforts, China’s financial institutions have continued to fund the coal industry worldwide through loans and underwriting.

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