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Cover: Climate Report 2017: China

Climate Report 2017: China

Private Sector and Climate Finance in the G20 Countries

By LI XinleiJuly 6, 2017

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After the conclusion of the Paris Agreement, China started to direct its focus of climate politics principally also to green investments from the private sector. Although still very state-centered, China has rapidly become the largest issuing country for green bonds. During its G20 presidency in 2016, the Chinese government underlined the topic »Green Finance«. Beyond the G20, China can use its leadership role within the New Development Bank or the Asian Infrastructure Investment Bank to incorporate low-carbon support in these institutions.

Solar panels in front of the Shanghai skyline.© Aania, Adobe Stock
Solar panels in front of the Shanghai skyline.

China increasingly puts on the private sector

Beside the traditional »North-South« flow of financial support there were two other interesting developments in the area of the climate financing since the ending of the UN Climate Conference in Paris 2015. In order to obtain the necessary financial resources amounting to a billion for the control of the climate change, the so-called »South-South climate financing« is gaining here in importance. Because by now half of the global gross domestic product fall to developing countries.

As the largest energy consumer of emitter of greenhouse gases, China declared already in the evening before the UN Climate Conference in 2015 that it intends to provide 3.1 billion US dollars for financial assistance, and started to prove in this respect global leadership abilities. The rest of the world is now watching with increased interest the Middle Kingdom and how these two trends — the South-South climate financing and the involvement of the private sector — are going to be realized. The Chinese leadership used already the G20 presidency in 2016, to underline the meaning of the topic »Green Finance« during the summit in Hangzhou, and to signalize its willingness to advocate environmentally friendly changes in the future. Nevertheless global climate protection targets can be achieved only, if laws are also introduced on the national level to stimulate investments from the private sector.

Environmental problems have priority

China, as one of the countries that are most threatened by the climate change plays a central role in the improvement of the environment protection. Especially the air contamination is being regularly picked out as a central theme, not least because whole cities in the northeast of China regularly disappear in the unhealthy smog. A survey of the inhabitants of ten Chinese cities, which was carried out by the Chinese Renewable Energy Industries Association (CREIA) showed that over 90% of the urban consumers are willing to pay more for the »green current« from renewable energy sources in order to minimize the air pollution. This result shows a clear improvement of the environmental consciousness of the Chinese population and underlines at the same time the necessity of a change to environment-friendly energy resources.

According to a statistic of the Centre for Development Research of the central government, China would need each year green investments amounting to at least 2 billion RMB (315 milliard USD) over the period of the 13th five-year plan (2016–2020), to be able to effectively combat with its environmental problems. In the last two years, the central and provincial governments were able to provide only 200 billion RMB for investments in environmental protection, energy savings, the development of renewable energy projects and other green sectors. Due to the financial limitations of the public sector, it is expected that 85-90% of all green investment have to be financed by the private sector. In order to guarantee a stable sustainable climate change and to mobilize resources from the private sector, the development of an effective green financial system is therefor of crucial importance.

Concrete objectives for the activation of private capital

An involvement of the private sector in the climate financing can be guaranteed and stimulated only by positive signals on the national level. So far, China tried its utmost to achieve the objectives of the Paris Agreement. It committed itself to reach the peak of its carbon emissions before the year 2030, and to reduce its emissions - in relation to the economic performance at this point in time - to 60-65% of the 2005 level. Beside this, non-fossil fuels shall cover 20% of the primary power consumptions. In the 13th five-year plan that has come into force in 2016 the Chinese government defined also the “ecological red line”, which shall not be exceeded, and has to be observed in future laws. In respect of the environmental protection the 13th five-year plan had several key points that have to be pointed out: on one hand the government defined the upper limit for the general energy consumption in general and in the use of coal in particular, whereas on the other hand Premier LI Keqiang demanded more vigorous actions against air and water pollution. For the first time in Chinese history a concrete target for the measuring value of PM2.5 (pollution particles with the size of 2.5 µm) of the air quality has been set additionally.

The People’s Bank of China (the country’s central bank) published in August 2016 together with six other governmental departments the directives for the layout of a green financial system. These directives shall serve as a guideline for the development of green financial mechanisms, in order to enable a transformation to a sustainable economy. The publishing of such directives is a sign that the central government follows a clear strategy of supportive proposed legislations in order to receive sufficient social capital, and to speed up the economy’s green change. In this form the central government sent out positive signals to the financial industry and green companies, in order to eliminate the doubts of private investors. In relation to this the national initiative »One Belt, One Road« is of interest. After the program for opening of new trade channels has been planned, the governments, companies and social organisations use these investment chances to support public and private partnerships, and to start giving larger emphasis on sustainable ecology.

Measurements for mobilizing the private sector

Private capital will not automatically flow into the green sector without a combination of government finances and supportive laws. Investments into the green sector are covered with problems, especially in developing countries, which do not have an established financial market, because the government defines the major part of the capital use by state financial institutions, development banks and legally supported lending. China’s central government finally introduced various measurements that shall mobilize green investments, inter alia its own carbon market, green certificates, green bonds or evaluations of creditworthiness, which include environmental protection factors.

In 2005, the Chinese Government passed a law for renewable energies, which guarantees to the energy companies supplying tariffs, to ensure that a lucrative market for renewable energy can be developed. Since 2009, China belongs to the leading countries for renewable energies; although a large part of the produced solar and wind energy cannot be used inefficiently due to regular problems with power supplies. The cut-off rate of wind and solar parks reached in 2016 15-19.6%, which may in the long run lead to minimized investments in renewable energies. However, the Chinese Government tries to make improvements in this area too. In 2017, the National Development and Reform Commission (NDRC) published a document with the aim to promote sustainable consumption, greater coordination of mains power supply and subsidy mechanisms for a trading system with green certificates.

In recent years, China emerged as one of the world’s leading countries for green bonds. In April 2015, the People’s Bank of China and the Environment Program of the United Nations (UNEP) published a series of law proposals and official guidelines for the introduction of a green bonds market, and soon after that, in October 2015, the first green bonds of a Chinese provider came on the market. In 2016 alone, the Shanghai Pudong Development Bank, the Industrial Bank Co. and the Qingdao Bank sold green bonds worth 7.5 billion USD, by which China became the largest issuing country for such bonds.

Since 2011, several pilot regions for emission trading have been developed in China. They extend from the prosperous coastal regions in the east of the country to the poorer inland regions. By this, China gained larger practical experience in emissions trading over the last six years, and plans to open in 2017 a national carbon market of unprecedented size. The initial plan of the Chinese Government is to issue emission allowances for 3-5 billion tons of carbon annually. According to the NDRC, the Commission identified more than 7,000 companies which are responsible for about half of all Chinese emissions and shall become part of the market. Recent tests showed however significant performance differences in the carbon trading between the different regions of China. Carbon prices, with 50 RMB per ton, are stable only in Beijing, whereas the prices in e. g. Guangzhou and Wuhan achieve only 10-20 RMB per ton. There are also large differences in the participation of companies in the carbon market. These two factors contribute to a very different development of regional carbon markets.

China strives for International Leadership

As the major industrial and newly industrialized countries, as well as the strongest producers of green-house gases are part of the G20, they would have the format and the necessary capacities to incorporate the climate financing in their work program. By that, the political stimulus for the efforts to lower the use of carbon and to invest in eco-friendly developments would be given. China has proposed a G20 working group for the climate financing already in 2014. The central banks of China and Great Britain should manage this group and at the end submit a summary report on the opportunities for green financing. China also used its G20 presidency to promote the inclusion of the climate financing in the future summit agendas and by this to demonstrate the importance of climate financing.

Beyond the G20, China can use its leadership role within the new financial institutions, such as in the New Development Bank (NDB) or the Asian Infrastructure Investment Bank (AIIB), to incorporate low-carbon support in the fundamental part of these financial institutions. The NDB, which has been established in 2014, provided its first loans for four projects in Brazil, China, India and South Africa, with the aim to improve the capacity for the production of renewable energies. Although the loans are considered as »green«, the representatives of civil society organizations criticized that the NDB so far has not specified, how it wants to involve the public into this and receive feedback on the projects. In the meantime the AIIB plans to invest into the infrastructure projects in the framework of the »One belt, One road« initiative. First, the authorized capital of the Bank is 100 billion USD, while the subscribed capital comprises 50 billion USD. Unlike at the NDB, at the AIIB guidelines have been incorporated for the lending in 2016, with the aim to ensure that a public consultation will take place. Since it is the job of the AIIB to finance large infrastructure projects in developing countries, in the long term much will depend on the fact, whether or not the planned projects are environmentally friendly. So far, the AIIB did not formulate any energy strategy that would support a change from unsafe and polluting energy sources, like coal and nuclear power, to environmental friendly energy sources. Furthermore, there is a need to clear the question of transparency and cooperation with the civil society. If the AIIB should achieve to make improvements in these areas, they might be able to justify on the long term their self-imposed image of being a green and clean development bank.

About the author: LI Xinlei is an assistant professor at the School of Political Science and Public Administration at the Shandong University Jinan of the People’s Republic of China.

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