Volume 57

Carbon Trading and Financial Innovation: Financing Mechanisms for CCUS Retrofitting in the Steel Industry Xia Hia, Jian Guo

Abstract

On March 20, 2025, China’s Ministry of Ecology and Environment issued “the Work Plan for Including the Steel, Cement, and Aluminum Smelting Industries in the National Carbon Emission Trading Market”, explicitly incorporating these three sectors into the national carbon market management framework, covering an additional 3 billion tons of CO2 emissions. This move holds significant implications for the development of the carbon market and the application of CCUS technologies in these industries. Current research on CCUS investment incentives primarily focuses on sectors like power and oil & gas, with limited studies addressing policy mechanisms to promote CCUS adoption in steel enterprises. Moreover, due to the high costs of CCUS investments, existing research exhibits a pronounced “technology-oriented” bias, overemphasizing techno-economic analyses while neglecting financing-related policies and financial innovations, particularly the financing decisions of banks and other financial institutions.
To facilitate financing for steel plants’ CCUS retrofits and ensure the implementation of emission reduction technologies, this study proposes a “government subsidy + bank green credit” financing incentive policy. A tripartite evolutionary game model is constructed involving steel enterprises, governments, and financial institutions. Banks decide whether to issue green credit based on risk-return assessments, governments determine their regulatory stance, and enterprises weigh retrofit costs against benefits to decide on CCUS adoption. Carbon allowance trading is introduced to examine the system‘s evolutionary dynamics and stable strategies. Key findings include:
(1) Initial strategy proportions have minimal impact on simulation outcomes, with the stable equilibrium being (retrofit, grant green credit, proactive governance).
(2) Government subsidies and penalties are pivotal in incentivizing banks to extend green credit and enterprises to adopt retrofits, though excessive fiscal pressure may discourage proactive governance.
(3) Higher carbon social costs simultaneously strengthen government proactivity and bank lending willingness.
(4) Green credit returns drive bank lending, while rising lending costs, though dampening bank willingness, can pressure governments to act proactively and enhance enterprise retrofit motivation.
(5) Under carbon trading, enterprise willingness to retrofit increases with carbon prices.
Integrating game theory with carbon market mechanisms, this study proposes a dynamic CCUS financing decision framework for the steel industry, offering theoretical insights for quantifying policy synergies and designing green finance policies for high-emission sectors under the “dual carbon” goals.

Keywords CCUS, financing decision, carbon policies, steel enterprise