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Executive Summary

The event, “Greening China’s Financial System”, was co-organised by the International Institute for Sustainable Development (IISD), the UNEP-Inquiry, and China Carbon Forum (CCF).

The panel discussion involved a range of eminent speakers who provided comprehensive and in-depth discussion of green finance in China, as well as internationally. The panel in particular discussed the outcomes of two streams of work on green finance. The first, with a new report titled Greening China’s Financial System, is a joint project between the Development Research Centre of China’s State Council (DRC) and IISD. The second is from a joint Green Finance Task Force co-convened by the People’s Bank of China (PBOC) and UNEP-Inquiry.

The speakers on the panel discussions presented a good balance of perspectives, approaching the topic from governmental, academic and think-tank viewpoints. This range of views made for a stimulating Q&A session with the audience. Many stayed on afterward to network and discuss the topic of the morning, providing a valuable forum for interaction and networking between counterparts, especially business, NGOs, foundations, policy experts and government representatives.

Record of Discussion

The following is an edited synthesis of discussion that took place at the event among panellists and open Q&A with participants. As per convention, individual’s comments are not attributed.

The panel discussed the progress of important research on green finance in China, and launched the Synthesis Report on Greening China’s Financial System, a joint project between the Development Research Centre (DRC) of the State Council and IISD. The report represents a significant milestone after 18 months of work by the partner organisations, and was launched at the China Development Forum in March 2015. The discussion also covered a separate stream of work involving the People’s Bank of China and UNEP-Inquiry on developing a sustainable financial system for China.

The panel provided some background to the discussion of green finance. Global financial assets, more or less, amount to USD 305 trillion. That is up from USD 115 trillion in 2002. However, this is in the context of other forms of capital, especially natural capital, being rapidly depleted.

China is an important stakeholder when it comes to finding effective ways to encourage green finance, because China faces extensive environmental challenges while it is already one of the largest investors in clean technology. Almost $90bn. was invested last year (a 32% increas) in such technologies, much larger than the next largetst investor, the US, at $51bn.

Existing efforts in China include the Green Credit Guidelines, produced by the China Banking Regulatory Commission, which aim to encourage innovative ways of greening development finance across the country. The two projects being discussed today, involving the State Council DRC and the People’s Bank of China, involve different approaches, but are closely coordinated through partnership with UNEP-Inquiry and IISD. It is important to note other complementary work is also taking place, in particular the China Council for International Cooperation on Environment and Development (CCICED) also has a taksforce looking at green finance.

This research is released in the context of international momentum on green finance. The panel noted that this year will see the Finance for Development Summit in Addis Ababa in July and the UN summit on Sustainable Development Goals for the post-2015 development agenda in New York in September. Finally, the UNFCCC Conference of Parties will take place in Paris in December, hopefully building on progress made during the year.

A few years ago green finance led to a concentration on providing options to those actively interested in “being green”. Now there is a realisation that the way that the finance system works will determine whether or not a sustainabile economy is achieved. The chrystalization of all the aspects that need to come together is happening in China, perhaps faster than anywhere else. This is due to: 1) China’s process of economic reform which make new approaches possible where they weren’t before, and 2) a strong message from the leadership that the transition to an “eco-civilisation” is an absolute priority for China’s development. This combination provides a “perfect moment” to progress green finance in China.

 

State Council Development Research Centre (DRC) and IISD project

The Greening China’s Financial System is the product of two years work, between the State Council DRC and IISD. The key points include:

China has moved early on green finance, although the financial system is not yet sufficiently competitive. The PBOC has had policies relating to green finance since the 1990s, limiting lending to polluting and energy-intensive industries. Later, by 2007, the CBRC put forward guidelines for green lending. Several years later, the CBRC announced that it would release guidelines on green credit ratings. China’s Environmental Pollution Liability Insurance system (EPLI) was also relatively early on the scene, and this is subject to ongoing improvement. While these efforts are not yet mature, they are on the table and markets are preparing to react.

The financial market is still underdeveloped and the institutions do not have the capacity to lead on green finance. Because the financial system is underdeveloped, however, this also offers flexibility in how it develops from here. China’s experience and practice is valuable for learning internationally about green finance, and both its successful experiences and pitfalls can and should be observed by other countries.

However you look at green finance internationally, however, it is clear that we are still far from an ideal green financial regime, and far from the volumes required to meet the demand for green investment. Research by the PBOC suggested that in the period 2015-2022 at least RMB 3 tln would be required for green investment in China, RMB 2 tln of which would need to come from the financial system. Only 7% of current financing in China currently could be described as “green”. Given that provision of finance reached about RMB 10 tln last year, even 10% of this would not be enough to meet demand for green investment in coming years. In addition, Chinese banks have been reluctant to sign up to the Equator Principle, as it would impose significant constraints on their operations, possibly compromising their competitiveness and market share.

The reasons for the current situation include:

• The legal system is still lagging behind. Legislation does not impose strict enough penalties, including newly released regulations. Enforcement is also ineffective.
• The cost and pricing of environment impact is still problematic. The negative cost of pollution and emissions is not factored in to economic statistics.
• There is lack of definition for financing policies, esp. for green bonds.
• There needs to be much better communication between key stakeholders, including financial institutions, oversight bodies and environment agencies.
• There is not sufficient policies to support the development of third parties. Green finance is where industry and the environment meet. This means that there are technical issues which are outside industry’s existing expertise. Policy should support third parties to fill this gap.
• Finally, there is a lack of awareness of green finance amongst society at large, including amongst attendees of the China Development Forum, which represents a concern.

 

The PBOC/UNEP Green Finance Taskforce

The Green Finance Taskforce, co-convened by the PBOC and UNEP-Inquiry has brought together leading Chinese financial policy and regulation experts and international experts to mobilize knowledge, assess options and make specific proposals for establishment of a comprehensive green finance system and the promotion of green investment. The taskforce has also consulted extensively with the private sector in order to produce meaningful outcomes, the results of which will be released in a report in April. Although the report is not yet finalised, the panel discussed the main themes at the workshop.

China’s air, water and soil pollution challenges all require significant green finance. Therefore, we need to change the direction of investment. In the future, investments need to go towards cleaner and greener industries. If the direction of investment changes, the allocation of technology, human resources and production will also switch towards greener industries. The finance sector is important for facilitating this switching of investment towards greener industry. Historically, the public sector has only been able to provide about 20% of the finance needed, with 80% coming from the private sector. It is clear that much will be required of the private sector during this transtion, and incentives need to be provided to attract private finance to green industries.

The panel described several key advantages of green finance. Green finance is an important policy option to help achieve the goal of stable economic growth and development and adjustment of the economic structure. Green finance can help to exploit new areas of potential economic growth. At the same time it can accelerate innovation in the industrial structure, energy structure and transportation structure. Green finance can also help ease constraints on government finance when facing environment problems. Government funds can leverage more than 10 times the amount of investment from the private sector, for example through green banks, green bonds and tax exemptions.

The research work sought to create a framework for effective green finance, which includes:

1. Increased rates of return on green investment. This addresses the existing problem of investors not being satisfied with the expected ROI for green projects. We need to find low-cost means of financing projects and making them more attractive to investors.
2. Raise the cost of pollution/emissions. This “strikes at the heart” of our transport and energy mix. Bringing down the relative cost of greening these sectors can create a huge shift in their impact.
3. Incentives for customers and producers. Build on the leadership of large corporations that use CSR as a market opportunity and help expand consumers’ green consumption consciousness.

Key recommendations of the taskforce:

1. Institution building. Establish new, professional institutions that are engaged in green credit and green investment, including a green banking system and green investment funds. The PBOC has specifically looked at the UK example of a green investment bank, which plays an important role in making projects viable. It is also important to encourage a green securities market, or equity. It is hoped that local government will participate in the development of these institutions.
2. Reduce the cost for green financing. Fiscal policies can be designed to improve the leverage effect, by realising thirty more dollars for every public dollar spent. The new institutions outlined above should support the “ecosystem” of green investment and manage these subsidies and incentives. Transparency and oversight is required. KfW in Germany provides a good example in this regard. In addition, there is a maturity mismatch for loans to many green projects. There is room to allow banks to issue longer maturity loans. Other measures could include waiving the corporate tax liable for profits on green bond sales. Also, from a regulatory angle, offering preferential treatment of green bonds on a bank’s balance sheet. This could reduce risk for banks issuing green bonds.
3. Foster the development of infrastructure for the green financial system, including a green stock index. This should be driven not just by government, but also the private sector, especially securities exchanges. Most mainstream exchanges do not currently have a focus on green assets. In fact many listed companies, and a high proportion of the stock market value, are invested in “dirty assets”. So investors have no choice but to put resources with these older industries. A green index will give investors a green option, complemented a green rating system. A green investment network would also be useful, as exists abroad in some places. These can control large amounts of investment in a kind of syndicate.
4. Establish and strengthen legal frameworks. Environmental liability for banks lending to polluting projects means that victims can sue the banks. Examples exist in other developing countries. Compulsory green insurance is also important, given the wide occurrence of bankruptcy of polluting companies. This puts the potential environmental costs on the books for companies. Finally, compulsory disclosure requirements for environmental impacts allows companies’ performance to be assessed.

 

International experience

The panel commented on the need to build consensus in the international community, of the importantance of green finance. Countries such as the UK, France, China and Indonesia have been taking the lead on the issue, but the enthusiasm is not shared with all countries. Some countries‘ needs may vary but especially in developing countries, fiscal resources will not be sufficient. In addition, there can be differences in definitions of green finance, as developed countries tend to emphasise greenhouse gas emissions, whereas developing countries emphasise localised pollution. In addition, there is a difference in paths, where developed countries prefer to frame the issue in terms of investor social responsibility. This leads to green securities growing very quickly but green lending growing more slowly. Developing countries on the other hand are more likely to utilise public investment. While it is difficult for all parties to agree on the same path, we can allow for diversity in terms of methodology while working to coordinate efforts. Green credit ratings and regulatory risk assessment is an area where common standards could be developed between countries.

Existing forums have begun to discuss the importance of green finace, for example the Silk Road Fund, the AIIB and the forthcoming BRIC bank. In addition, the panel suggested that environmental performance has become a much bigger issue for Chinese companies today. China’s larger companies are now operating in many countries and that brings reputational risk. It is also, therefore, an important issue for the Chinese government. The panel suggested that China should aim to meet the environmental standards of the IMF and World Bank in its investments, and in the future to do even better (by going beyond existing standards or making new standards/rules). The better the standards for Chinese companies at home, the more likely they are to lift their standard overseas.

The panel emphasised that the strength of developing green finance, as opposed to emphasising regulatory measures in relation to pollution, is that it directs resources to new areas of growth. It can both suppress investment in polluting industries, while encouraging investment in cleaner industries. This shift in resource allocation is more efficient that regulatory measures, and less costly overall.

The UNEP-Inquiry programme has found that much is going on internationally in green finance, including central banks, financial regulators, policy makers and setters of standards for financial and capital markets that are beginning to think differently on the subject and experimenting. The Sustainable Stock Exchanges Initiative is an important complementary measure to these efforts.

Singapore stock exchange provides a good example, where listed companies are not just required to report on sustainability but there is a system of fines to ensure a high quality of reporting. Credit rating agencies are also starting to actively engage with sustainability, with S&P creating a methodology for assessing climate risk across all of its ratings. South Africa has introduced a requirement that trustees report on environmental issues in relation to its well-developed institutional investment sector.

The panel also commented on the role of central banks, and in partciular that the Bank of England has introduced a prudential review of climate risk on the stability of the insurance sector in the UK. This may exapand to the banking sector. As the banking sector becomes more aware of the issue of climate risk, China may consider undertaking a similar prudential overview of its insurance and banking sectors. Kenya’s central bank has also facilitated the highest level of penetration of mobile banking which has increased the level of financial inclusion over a remarkably short period of time to a high level.

Indonesia has launched it’s Roadmap for Sustainable Finance which brings green issues in to the heart of how capital markets work in the country. The effort will evolve over time, but it marks the first time that capital requirements for banks have been examined as to whether adjustments should be made on account of environmental considerations.

There is also consideration now as to whether the balance sheets of central banks could be utilised more effectively to channel finance in ways which facilitate the green transition. Bangladesh has begun using its balance sheet refinancian operation to support banks that are investing in green and rural economy assets.

Overall, these international efforts represent a blossoming of ambition and experimentation in green finance, and reflects increasing willingness of key stakeholders including policymakers,. central banks, regulators, standard setters, credit ratings agencies and accounting bodies, to try and bring the environment in to alignment with the underlying design of the financial system.

The downside is that the efforts are still fragmented and we are still unclear about the benefits and costs of various approaches. The challenges are not yet dealt with in a comprehensive way that allows for policy to chart a clear course. The panel described the challenge as: “we see all the stars in the heaven, but we don’t understand how the heaven works”. China, of all countries, is taking positive steps to addressing these challenges, including the work of the PBOC, DRC and CCICED (under MEP). This work is helping to provide a framework for understanding how the stars fit together and relate to one another.

The panel commented that multilateral organisations have proved to be slow to react to innovations in green finance, and rather the “stewards of convention”. This has been the case even when it can be shown that new approaches are beneficial. This will gradually change and resistance will be overcome, leading to the organisations actively contributing to the process. This is laregely up to the member nations of those organisations to push forward on green finance.

The final report of the UNEP-Inquiry will draw together the lessons learned from countries around the world. It will be launched at the IMF/World Bank meetings in October 2015 in Peru. It intends to engage widely with partners in order that the lessons are carried forward as much as possible.

 

Observations on China

The panel commented on the likelihood of green finance being a topic covered within the 13th Five Year Plan, as well as the 19th Party Congress language. If this happens, China would become the first country to place green finance in its highest level of strategic policy directives. This would also represent incredible progress for China which has arrived at this point much quicker than developed countries with far more mature financial sectors.

While those working on green finance focus heavily on the issue, it is important to keep in mind where the issue fits in relation to China’s other priorities. China is not lacking for important issues on its policy agenda. The finance sector faces significant challenges in relation to the welfare system, established industries, as well as new areas such as e-finance. For those concerned about sustainability, it is important to make sure that green finance is raised in the most important policy initiatives, at the very least alongside these other key areas.

China’s “one belt, one road” strategy also provides an opportunity to push green finance internationally. China can work with its trading partners to find ways to promote green finance, alongside the trading initiatives. The panel also suggested that China should work to have green finance included in the decisions and communiques of multilateral meetings such as the G20.

The panel emphasised the need to continue to prove to stakeholders the importance of prioritising green finace. The changes needed won’t happen by themselves. At the same time, change in China will work best if the international community aims to “encourage” China, rather than “teach” China. While this seems to be happening so far in the area of green finance, the nature of engagement in relation to expectations for reform from the international community is a key issue for China.

Executive Summary

The event, “Financing the green transition in China: opportunities for local government access to climate finance”, is part of the China Low Carbon Leadership Network 2012-2014 event series jointly organized by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) and China Carbon Forum (CCF).

It saw the launch of an important new report on opportunities for accessing climate finance by Chinese provincial governments, with a focus on Guangdong. The report, a collaborative project between GIZ and The Climate Group, can be downloaded here:

Download – Analysis of Climate Finance Policies and Innovative Finance Mechanisms in Guangdong Policy Mapping and Case Studies

The speakers on the panel discussion presented a good balance of perspectives, approaching the topic from governmental, academic and think-tank viewpoints. This range of views made for a stimulating Q&A session with the audience. Many stayed on afterward to network and discuss the topic of the evening, providing a valuable forum for interaction and networking between counterparts, especially business, foundations, policy experts and government representatives.

 

Record of Discussion

The following is an edited synthesis of discussion that took place at the event among panellists (around 60 minutes) and open Q&A with participants (30 minutes). As per convention, individual’s comments are not attributed.

The panel pointed out that there is an accepted wisdom that influences climate change negotiations, that development must take priority, and that we need to adapt to climate change. Climate change, however, is closely linked with other development goals such as air pollution and energy security. So this idea must change, because although the low carbon economy might sound cliché and boring, dealing with climate change is the only acceptable future. China has been working hard to win respect from the international community on climate change. This means that developed countries are increasingly aware of China’s actions on the issue. Although China is the highest emitter in the world, it has also recently brought hope to the world.

China’s hard work can provide a positive impetus for dealing with climate change mitigation and adaptation. China has been making significant efforts to improve energy productivity, energy efficiency as well as expanding renewable energy, recently surpassing the US as the largest investor in renewables. Experts agree, including the recent New Climate Economy report, that a path towards a sound and sustainable future for China is possible, but this requires the transition of the energy system and other parts of the economy to accelarate.

Recently, low carbon pilot and demonstration projects have been a particular theme of Chinese government policy. In March 2011, the 12th Five Year Plan announced comprehensive low carbon economy goals, marking a pinnacle of central government policy on green development so far, including many ambitious goals and compliance requirements. Transitioning to a low-carbon, climate friendly economy is a high priority for the Chinese government, but this requires access to large amounts of new finance, especially for provincial-level governments. In the investment sector, not enough attention has been given to the financial support reguired for the green goals set out in the 12th Five Year Plan. This presents an important challenge in order to realize those goals, and the government realises that more attention must be given to climate finance issues.

If the world is to meet the scientifically-determined target of limiting global warming to 2 degrees, the required capital will be very large. Investment needs to scale up significantly in order to be able to solve the climate change challenge. There are different models for estimating the total budget for both the mitigation and adaptation problems. It is also important to follow the level of investment already made in the climate change sector, although it is difficult to provide accurate numbers. Recently, at the Lima COP, USD 10 billion was pledged by the developed world. Last week, 30 countries gathered in Berlin, pledging another USD 9.3 billion. In Copenhagen, the target was set at USD 100 billion per year by 2020, so we have five years in which to reach a five-fold increase in donations. Where will this money come from? How should climate finance be seen in terms of international law, as well as common but differentiated responsibilities and developed countries’ obligations to developing countries.

In addition to multilateral climate change finance, developing countries should identify capital domestically to invest in climate change solutions, given its close link with economic development. Climate change action has a public good quality, so it is very much dependent on public policy. If there is no adequate policy in place, most people would not be willing to invest, be it governments, enterprises or individuals. This cannot be solved just through charitable donations. The climate change negotiations must ask each country to make global undertakings, and also to create policy incentives. Without this, it is very difficult to make the goals become practical and durable targets.

The Climate Group, in cooperation with partners, has been working on the climate finance issue since 2011. TCG judges that this work has had some influence, judging by the draft Climate Change Law. However, although there has been some progress in central level policy, there is still a long way to go in terms of translating the lessons learned in to practical steps to be taken. As a result, research on how to implement climate change finance at the local/provincial scale was required. Tonight, this event launches a joint report from The Climate Group and GIZ, Analysis of Climate Finance Policies and Innovative Finance Mechanisms in Guangdong – Policy Mapping and Case Studies. This is the first such report on China to focus purely on the provicincial level, and Guangdong was chosen as the focal point for the research. The report represents three months of work.

The report has two sections: the first maps provincial-level climate change policy; the second involves three case studies which aim to reduce the gap between real world actions and conceived targets. A key goal is to leverage resources in order to maximise the scale of climate change finance.

Climate change finance is still at an early stage in China. In Guangdong in particular, both the ADB and the World Bank have been involved in exploring avenues for its development. Guangdong Province has played a leadership role, exploring capacity improvements as well as supply chain structure. Guangdong province is a special case, having advanced quickly in relation to other provinces on climate change, as well as during China’s development and reform process generally. Guangdong has the most ambitious emissions reduction target nationally, as well as the largest ETS in China. Guangdong’s 18% emissions intensity reduction target for 2015 means that the local government has a significant responsibility in relation to emissions reduction. As a result, Guangdong is becoming a leader of low-carbon growth in the country, and provides a good case study for the implementation of climate change finance at the local level.

China has the second largest carbon market behind the European ETS, providing a new channel for climate finance. The carbon market is now a key component of climate change finance in Guangdong. However, government agencies face many challenges overall. Sources of capital include public investment, international funding through channels like the ADB, while the largest is commercial bank loans and green credit. Both market capital and government spending play important roles. The provision of government funds and the stability of public policy are both important in order to boost confidence for private market investment.

All three case studies are relevant to energy efficiency, and they all share some similarities. The first case study focuses on an efficiency power plant (EPP) project developed by ADB. It provides 100 million USD to the Guangdong government to support loans for energy efficiency and renewable energy projects. There are many special aspects to the Guangdong EPP project, including that loans are at interest rates substantially lower than commercial rates, which helps to break many of the bottlenecks for financing of SMEs. It also helps to manage potential risk, as projects may face problems if they were forced to  take loans directly from the market. The terms of the loans are for 3-5 years, and the capital is recycled for up to 15  years, meaning that funds could be used up to 5 times. One important question is scalability, and the ability to duplicate to other areas. Among the projects funded, a rooftop solar project at a factory was selected for the case study.

The second case study relates to lorry transportation in Dongguan. The partners are the World Bank and the GEF. This project deals with the low fuel efficiency of truck freight transport in what is a pillar industry for Guangdong, and is a first for China. It utilises a number of advanced technologies to improve efficiency and reduce emissions. The project also utulised an ESCO model for technology provision.

The third project is a commercial LED ESCO project. LED deployment in Guangdong has been increasing rapidly in recent years, encouraged by both national and provinical government policies. This project looks at LED deployment at a factory complex in Zhongshan and the details are shared in the report.

The three projects receive government support, however an entire “ecosystem“ of policy and private sector linkages still requires many elements to be improved upon. To sum up the lessons from these three cases, China has made achievements in developing public policy and boosting public investment, however the outcomes and the industrial capacity are still far from the planned targets.

Guangdong has made progress in low carbon development over the last three years, including data collection and compliation as well as a trial of carbon trading. Of course, local public finance has been a very important element in this process. Guangdong, since 2010, has invested CNY 30 million in low carbon projects, including funding for both basic scientific research as well as practical project implementation. Carbon trading is an avenue which needs further exploration. Guangdong was the first Chinese province to feature auctions for the issuing of emissions credits. CNY 670 million has come from auctioning in Guangdong. In the future, it may also be possible to set up a fund to leverage more capital from the carbon market.

Rather than emissions reduction representing a cost, it should also be a way to make money. The solutions lie in technology, which can help reduce energy consumption and make industrial processes more efficient, or improve agricultural yields by using less fertilizer and pesticides, and reducing costs. There are many existing technologies, but it is often quite hard to commercialise them. There are two key ways to achieve commercialisation: economies of scale and integrating resources. Platforms such as TekoNet aim to provide technology incubation, technology transfer, resource integration, as well as identifying market demand and tailoring solutions to clients.

In Europe, it has been shown that a long-term stable policy framework can help to engage finance contributing to, for example, energy efficience measures in SMEs. Guangdong may be able to learn from this and other examples in order to target sectors until now not engaged in such activities. The ongoing financial reform process in China is stimulating change, for example subsidies for undertaking energy efficiency and other measures. This allows an environmental co-benefit for actions in the private sector which aim to reduce costs and risk in terms of exposure to energy prices. Policies that are being implemented through the banking system are extremely positive. The extent to which they are taken up still needs attention, but there are positive signs.

The Guangdong government’s climate finance contributions include two aspects: First, low interest or no interest loans to help companies under the Guangdong ETS to establish energy efficiency and carbon reduction projects, as well as research and development. Second, encouragement of market mechanisms and involvement with financial institutions. For example, government loans can also attract some private sector contribution, and be structured in a way to encourage companies to pursue clean energy projects. There are many technologies out there that could be scaled up, however, due to lack of funds and financial support, these technologies are not utilised. The government hopes to use of market mechanisms to expand the reach of technologies, including products already the subject of collabration with financial institutions through the carbon market. The Guangdong government is hoping to expand public private partnerships for low carbon development in the province.

Public-private cooperation in the climate change field is becoming popular in China, at the encouragement of the Ministry of Finance. Typically there are two types of such policies: green banks and green funds. Green banks have become successful internationally; the UK Green Investment Bank and banks at the state level in the US are now well-established. However the restrictions for establishing funds are much lower than for establishing banks. Whether from a bank or a fund, public funding can attract additional investment from the private sector. Minimising government investment, while maximising market investment, helps achieve a win-win outcome. A lack of appropriate technologies is no longer an obstacle faced today, but rather how to choose adequate technologies or combination of technologies is crucial. There is significant potential for bringing together capital and technology.

Although the overall picture of financing low-carbon deveopment in China is not clear, and involves a considerable lack of coordination, the silver lining is that we are moving towards the market taking priority. If everything is done through government, the burden falls on the tax payer and there are limits to how much burden can be imposed on individuals, either through taxes or subsidies, or by service charges. China is doing a good job across a range of areas not directly related to low-carbon development, to provide incentives for the private sector to adopt advanced technology. We saw that in solar panels, and now in relation to the LED industry in Guangdong.

The growth of LEDs in Guangdong has been exponential. The impact of this is twofold. Guangdong is supporting this development as it providess local benefits including local industry and jobs. However this has spillover benefits for the rest of the world because it triggers the learning effect where LEDs becoming cheaper for everyone else, a virtuous cycle. This type of development not only benefits the local economy but it also means that the cost of low-carbon development is not being borne by the Chinese taxpayer, but rather by global consumers. So although this development is chaotic and not necessarily integrated, that is the nature of markets, involving experimentation through trial and error. Some things work beautifully, having impacts, while others don’t.

The Guangdong government is looking at avenues for climate finance, and exploring ways to make use of funds efficient. Tradable permits are just one mechanism. Some companies face difficulties in financing, and it is impossible to ask many SMEs to undertake energy efficiency or low-carbon projects on their own. The government is cooperating with banks in order to help SMEs access green finance.

SME finance is a world-wide challenge. It difficult for banks whose interest margin is low on such loans and must still pay for lawyers and staff time within that margin. The income on loans is minimal and often involves high risk. Some projects have long timeframes during which much can change, including policy, technology and the market. It can be hard to guarantee a loan for SMEs. SMEs also have low trading volumes so transaction costs for banks are high. This high risk, high cost, low income situation makes banks reluctant to loan to SMEs. This is especially the case in relation to climate finance, where money is lent for projects in which much of the gains are borne by society rather than the companies.

In order to overcome these obstacles: 1. It is important to understand the value of the energy efficiency that SMEs can achieve. They must also find the best technology in order to optimise the outcome. This is not only a finance problem, but also related to management and policy. 2. Innovative financing models are needed. Commercial banks are more interested in real estate projects or manufacturing than energy efficiency or renewables projects. Although low-carbon investments may be part of a company’s CSR strategy, it may require assessment of its liability and solvency of the project. So we need to design a mechanism which avoids burdening SMEs, allowing them to maximise productivity, while also reducing risk, achieving better corperate governance, and reducing transaction costs. Similar technologies could be bundled into a larger project to be utilised many times. ADB has used a similar approach in China already. Companies not only need loans from banks but also equity finance, so low-carbon equity funds have become important. In this way, returns can be achieved not only directly from the project but also from the capital market. LED lighting is an example of this.

Using finance efficiently is important. This includes leveraging public finance. If government invests money into a green fund, through good project design, incentives can be provided for banks and the private sector to invest money into projects. Financial recycling can then be implemented, maximising efficiency and helping government reach investment goals meeting future targets. This approach has already been used effectively in Guangdong, but could be applied more widely.

Which technologies require support in Guangdong? First, agriculture is both emissions and water intensive, representing a risk to human health. Examples of soil contamination in Hunan have created concerns in the region. Second, environmental protection technology, especially relating to air pollution, water resources and land rehabilitation. Environmental protection also relates to energy and the reduction of fossil fuels. It has been said that if air pollution continues as it is in Beijing, in addtion to APEC, we may need a BPEC and CPEC in order to keep the air clean! Basic human needs of clean air, clean water, safe food and a liveable environment are important. Thirdly, the health sector. The population is ageing, with life expectancy increasing and consequent costs. Climate change will compound these costs.

The characteristics of technologies which government should be incentivising are ones that already have a proven business case, that are ready to be scaled up, that the private sector is poised to take over in order to make the most leverage of the public money. We saw this with wind, and solar still has a way to go. Feed in tariffs can be an effective way to incentivise improvments. Electric vehicles are also worth mentioning. In general, governments need to be careful in the allocation of finance to the private sector in order to avoid undue risk taking, but if it is focussed on technologies that are proven, public money can be used to maximise private profits and public good at the same time.

For other provinces, it is important to remember that Guangdong has a large manufacturing capacity for LEDs and other technologies. On the market side, the government instituted a range of incentives to allow the industry to scale up, representing an important part of the success. However that may not be scaled up in other provinces which do not feature Guangdong’s manufacturing base, meaning the formula doesn’t work in the same way. There has been a mentality in local government that attempts to identify the next technology to “bet” on. Care should be taken in this regard. The recent Climate Group “Cleantech Summit” picked twenty technologies which gave presentations. They include technologies in agriculture, environmental protection (e.g. water treatment), renewable energy and energy efficiency. Funds need some kind of guidance on selection of technologies to fund, but this will up to the fund management itself on a case-by-case basis.

Electricity prices in China are lower than other parts of the world. Experts agree that electricity needs to be priced correctly. China has started on that journey,  and although there is still a long way to go, reforming electricity prices is already part of the debate. China currently pays a big price whenever the government decides to create clean air for international meetings, through lost production and transport restrictions. There is a question about the willingness to pay for environmental benefits in this regard. Electricity pricing is important, however if it is the only measure undertaken it may end up benefiting the wrong parts of the economy. There are a broader set of reforms needed, in order to rationalise the operation of markets. This is important so that reforms do not merely increase profits for polluting industries but in fact do provide important incentives and reallocations within industry. Successfully addressing climate change requires a broad set of reforms, including the operation of markets, transparency, the elimination of waste, corruption, etc.

In other parts of the energy sector, prices are higher than other parts of the world, yet pollution is also higher, suggesting that there is significant wastage that requires use of improved technology. Currently, higher energy prices eat up part of the advantage of low labor costs, meaning that the Chinese people are paying an unnecessary cost. Fertilizer is a good example. 70% of fertilizer in rural areas is wasted because for each crop season farmers use fertilizer twice. When it rains, fertilizer is washed in to the water system, wasting energy, farmers money and pollutes the water resources. Not enough attention has been paid to this problem. China needs to learn from other parts of the world and find an efficient, mature technology which could help farmers save money and save significant carbon emissions.

To date, the Guangdong government has not implemented polices for ESCO companies as widely as it could have. There are plans to raise the profile of this avenue in the future, encouraging ‘middle-man’ companies in the energy efficiency sector. This allows the government to mainly provide project support, and identify opportunities for consolidation. The government may cooperate more with banks and other organisations to share the burden in this process.

There is a trend that government support for ESCOs is always too little and too late. Banks do not have much knowledge on energy efficiency, so they are reluctant to give out loans for projects. There have been suggestions, therefore, for government to provide financial leasing to ESCOs. If an ESCO company can prove that energy saved from the equipment will cover the rent of the equipment and interest, the equipment will be provided. ESCO projects usually have a double risk for both parties involved: financial risk and technology risk. A technology guarantee mechanism can also be implemented, by inviting the best technology provider in China to certify the technologies used. Credit rating agencies could also give out credit ratings on ESCO companies. Upfront payment for assets may also help. Estimating how much financial gain a project will provide, there could be a 50% discounted return for upfront payment on such projects. Alliance purchasing of equipment, like a groupon scheme, could also be encouraged. A low price would be provided for a group purchase, with say a 20% reduction in cost. Marginal costs will therefore be reduced for all involved.

Executive Summary

This event was part of the series held by the Low Carbon Leadership Network, jointly organised by China Carbon Forum and GIZ. The event discussed a wide range of important issues currently facing China in managing climate change. It focused on the role of local governments and identified some key areas where the panelists thought that improvements could be made. Importantly the panel identified further bilateral collaboration as crucial to helping China meet these challenges successfully.

The event builds on a dialogue which was started in December 2013 when a high level delegation of the National Development and Reform Commission (NDRC), led by Deputy Director General Sun Zhen, traveled to North Rhine-Westphalia (NRW) for a series of meetings on the topic of Climate Governance and attended the NRW climate congress in Wuppertal. Since then the dialogue on the topic has continued with various stakeholders, including China’s National Center for Climate Strategy and International Cooperation (NCSC) and the Wuppertal Institute.

The event provided a valuable forum for interaction and networking between Chinese and German counterparts, especially businesses, foundations, policy experts and government representatives.

Record of Discussion

The following is an edited synthesis of discussion that took place at the event among panelists (around 75 minutes) and open Q&A with participants (30 minutes). As per convention, individual’s comments are not attributed.

The panel heard from Chinese and German representatives on the two countries’ approaches to climate change. While China has prioritised its “top-level design”, this is an evolving process, and the government is also using a bottom-up strategy to help China move toward a more market-oriented approach. At the national level, the central government has clear goals under the five-year planning process, which assigns goals from national to local government level. Besides this, NDRC needs to provide more creative policies through legal reform. For example to establish the carbon trading system, carbon inventories need to be regulated and quantified, establishing differentiated caps moves in to the area of political administration, and within the areas covered by the carbon market allocation methods need to be set appropriately. In the future, China would also like to see further inter-governmental cooperation for the purpose of carbon management and climate goals.

With a special focus on the region of North Rhine-Westphalia, the panel discussed climate policy in Germany at both the national and local levels. In 2013, North Rhine-Westphalia became the first German state to pass a Climate Protection Law with legally binding mitigation targets. On the one hand, the Climate Protection Law is supposed to serve as a legal framework for reducing CO2 emissions, on the other hand it is also an important guiding principle, which will determine North Rhine- Westphalia’s climate protection policy over the coming legislative periods and therefore lays out the political goals for the next 30 to 40 years. A distinctive aspect of North Rhine-Westphalia’s climate protection policy is the cooperation of more than 400 stakeholders from different areas of expertise, who are working together on a climate protection plan which will serve as a road map for climate governance at the state level. In this regard, the national level could take North Rhine-Westphalia as an example for broad public participation in conceptualizing its national climate protection plan for 2016.

The panel discussed the limitations of economic advice on climate policy, given the unpredictability of economic development. This contrasts in some ways with the high-degree of certainty in regard to climate impacts. This makes policy advice a unique challenge.

This event builds on existing cooperation between NRW and NDRC. A Chinese delegation visited Germany in December 2013, in recognition of the progress that the German local governments such as NRW have made in relation to the low-carbon transition. This progress includes legal approaches that could inform progress in China. The visit helped Chinese representatives see how local German governments had connected their local goals with the wider climate change issue in the public mind, helping to provide important public support. Government’s also need to send a signal to companies in order to encourage technology innovation.

Further progress depends on a process of exchange of views and experience, and it is not a zero-sum game. The Chinese government’s goal is for climate change professionals to be involved in training political leaders, mayors, and party leaders. Many problems remain to be solved, and  many lessons to be learnt.

The panel discussed existing partnerships between NRW and China, especially business partnerships, which are already very diverse. Furthermore, climate protection offers substantial business opportunities, especially in the field of energy efficiency and energy saving. Many market leaders in this area of expertise are located in North Rhine-Westphalia. One example of this expertise is the manufacturing of heating pump systems which require over 80 percent less energy. Therefore it is important to access these new growth markets and further strengthen technical development and cooperation between Germany and China.

Exploring the theme of the event, the panel discussed how local policy informs national policy in China, and the central/local decision-making balance. China has a long history of promoting pilot projects which is not well understood outside of China. While the government is not currently confident enough to predict when China’s overall emissions may peak, several local-level administrations have broached this topic, including Beijing and Zhenjiang in Jiangsu. In short, there is significant potential for local governments to influence national policies. China is such a vast and diverse country, and each province has unique characteristics, the experience in Jiangsu might not be useful for Inner Mongolia. the central government has to be responsible for the entire country, while local government has the flexibility to adapt to its own conditions.

President Xi has appealed to officials to learn from international experience. Germany and China have existing collaboration for over a hundred years. Germany should not be worried that China would surpass it economically. However China is in a unique situation and must work hard to reduce its environmental footprint, faster than has happened in developed countries. China is ranked as the world number one in many areas, but still has much to learn. American creativity, Japan’s approach to crisis, and Germany’s precision should all provide an example to China.

The panel was asked to consider the issue of climate change adaptation, and how to plan for it at the local level. The panel pointed out that bottom-up processes are very important for climate change adaptation. While climate protection policies are made at the central level in Beijing and Berlin, it is the local and regional level where those policies have to be implemented. Therefore, innovations and ideas from the local level like the stakeholder process in North Rhine-Westphalia are needed to better realise climate protection measures.

China needs to have a sense of crisis awareness in relation to climate change and domestic development. However there are conflicts arrising from statements for domestic and foreign audiences. For example the government tells foreign partners that it is still developing and should not be asked to take on strong commitments. At the same time, the government asks local administrations to meet increasing tough standards. This leads to confusion among local governments who are concerned that the central government might have concealed motivations, and in many cases choose to proceed as normal. This dynamic does not exist in the way that other countries deal with the media. The panel expressed hope that Chinese local governments will expand their communication and exchange of experience with foreign and other local governments.

The panel challenged the conventional wisdom that China is shifting its pollution problem west, as the east develops. In fact it was suggested that some western regions have been advancing faster than counterparts in the east. Fairness is an important issue for transforming the economy of China’s western region, why should they bear the environmental costs of the wealthier eastern coastal area without compensation?

Executive Summary

On 20th May 2014, China Carbon Forum together with EuropeAid’s project team for the “Design and Implementation of Emissions Trading Systems in China” (the EU – China ETS Project) held an event to launch the implementation of the project. The event involved a discussion on “China’s National ETS: The Way Forward”, which took a forward look at the development of a national emissions trading scheme in China.

The national ETS could become a key component of China’s bold ambitions to control its growing carbon emissions and is being watched closely by many other countries and regions that are developing and implementing their own emissions trading systems and carbon market mechanisms.

Record of Discussion

The following is an edited synthesis of discussion that took place at the event among panelists (around 1 hour) and open Q&A with participants (45mins). As per convention, individual’s comments are not attributed.

The launch of the EU-ETS project represents important progress in EU-China cooperation on carbon markets. The work plan for the project has involved months of work between the EU team and Chinese counterparts and is now ready to move in to implementation. The project seeks to address China’s ETS capacity needs, bringing together the necessary stakeholders. Existing knowledge in the pilot regions is important, but not sufficient. The project hopes to take these lessons to other regions.

The panel emphasized three key points for a well-functioning carbon market. Firstly, cap setting determines scarcity and creates a difference between supply and demand. Putting the cap in to practice is not easy. Those looking for free permits want as many as possible and that must be dealt with carefully by decision makers as the market can be over supplied such as in the EU which has had to attempt to remove some permits from the market.

Second is building the infrastructure for an ETS. This needs to be reliable and transparent. The registry is not often spoken about, but it is the “backbone” of the market, just as with a stock exchange. This includes cyber-security. The EU had a problem with this because of its initial decentralized system, which some took advantage of. This is being rectified in the new period.

The third element, trust, has to do with market participants. Monitoring Reporting and Verification (MRV) is important for this. Transparent guidelines, reliable verifiers are important for creating trust between market operators, otherwise they won’t participate. EU guidelines involved a lot of work, and have been made available to those involved in ETS development in China.

China is currently in the process of preparing its national ETS. The exact timetable is not entirely clear, however pilots are road-testing the key elements of design for a national ETS. Each pilot is different, in terms of economic and industry structure, meaning that different schemes are testing different rules and approaches. Most are located in eastern and central areas which are more economically developed than the west. However the Clean Development Mechanism (CDM) program has involved many projects in western China, meaning that there is experience of reliable MRV in the west as well. China has strong experience of verification through CDM. Many of the same companies involved in CDM are now involved in verification for the pilot regions.

Strong central government leadership is an asset. Accurate data availability is the main weakness. The National Development and Reform Commissions’ (NDRC) national requirements for large companies will help to address this. Looking internationally, one key difference is the legal basis for ETS which most Chinese pilot regions lack. The central government is aware of this and will likely address this for a national ETS. Capacity is a significant issue moving to a national ETS, especially for verification. Another issue is how to deal with national SOEs, a peculiarly Chinese issue. The local DRCs dealing with SOEs may be told that they do not have authority. All of these issues are being considered by the government moving towards a national ETS.

Implementation of the EU-China ETS project will involve three parts: 1) regional training in non-pilot regions, involving various stakeholders and experts, covering the building blocks of ETS; 2) specific trainings, focused on specific aspects of ETS to advance existing knowledge; 3) meetings with senior experts, to ensure that necessary strategic work is being done for a successful national ETS.

The difference between this project and the work that the World Bank’s Partnerships for Market Readiness (PMR) is doing in China is that the EU-ETS project will focus on training and capacity building, which will help ensure a successful national ETS. The PMR programme is working more at the high-level design decision-making process. There is, however, complementarity. The PMR programme aims to help NDRC establish the cap, the coverage, rules, legal framework as well as elements looking at MRV and how to engage particular sectors and provinces. The EU-ETS project is also complementary with work done to establish national sectoral guidelines for MRV, and work on the legal framework, which is currently underway by Chinese experts.

Recent meetings between President Xi and European leaders produced a statement that both parties want to work toward national commitments that will have legal force, whatever that means, and that commitments will be presented well before the Paris COP. This is important because it reflects a “full, mutual” commitment to a binding agreement, and shows that these key parties are not dragging their feet. It also emphasizes “verifiable”, which aims to avoid problems with a multitude of transparency standards. The statement reflects European concerns that parties may move toward less-binding commitments at Paris, and that the negotiations will be difficult and it’s important that an agreement be more than just a piece of paper. Successful carbon markets, similarly, rely on enforceable legislation. Europe’s shift from a decentralized to centralized model could inform China’s ETS development, with the same advantages of standardizing of design and regulation.

The panel referred to, and endorsed, the findings of China Carbon Forum’s 2013 carbon pricing survey, which found that the majority of experts expected the national ETS to be in operation by the later years of the 13th Five Year Plan. The process of establishing emissions trading is more difficult than expected.
There has been discussion in Beijing about how much local air pollution is due to fossil fuels. The current priority for most people is local pollution which has an immediate impact on people’s lives. There are clear links between China’s war on pollution, and reducing carbon emissions. To that extent, if China cannot address local pollution, it will not solve the climate change issue. Maximising the synergies between these policy areas will be beneficial. Policy measures that address both challenges will have co-benefits. The good news is that the cost of such measures is coming down significantly.

A carbon tax still remains uncertain. The panel emphasized that the key is for decarbonisation to be incentivised. In Europe, the obstacle to carbon taxation has been political. However in the EU, the ETS has proven that it can play the role of providing the incentive. The temporary low prices will be addressed through new legal approaches. The ETS has reduced pollution at least cost.

Hubei’s pilot scheme has seen high trading volumes, however it is not clear that this reflects any particular advantage. All pilots are in a process of learning by doing. Once the first compliance cycle has been completed, some meaningful information will be available to analyse what is working and not. In Hubei, there was a low initial price for permits. This likely led to investors buying in anticipation of profit potential. It also reflects access to the market by non-covered entities.

The UK discovered that the wider market, the cheaper the abatement options, which explains its eagerness for participation in the European market. The same dynamic will exist in China, and as markets connect and scale up they will provide more abatement options.

The EU opted for absolute cap-setting, which proved problematic with lower than expected economic growth, while China is largely opting for intensity-based cap setting. The panel was asked about a potential for a unified approach based on intensity-based caps with ambitious benchmarking. Any move towards unification would help address carbon leakage and efforts by industries to protect themselves. Significant linking would be unlikely to happen prior to 2020 however given the Chinese timetable. Also, there are strengths to developing ETSs based on local conditions which ensure their success domestically. This does not preclude mechanisms for linking. The benefit of absolute caps provides simplicity. All players know what needs to be delivered to the ton. Simplicity matters in the market. A hybrid approach may be assisted by a market reserve.

Does the government’s existing approach of providing emissions reduction targets to each province provide a barrier to cross-provincial trading and achieving truly least-cost abatement? The panel suggested that this issue is currently under discussion internally, and that there is a feeling that a ‘top-down’ approach may be better than ‘bottom-up’ provincial targets. This challenge is also reflected in Europe with 28 separate countries. In Europe, only sectors outside of the ETS are subject to specific national targets.

China’s pilots have pursued a different approach to Europe in relation to indirect emissions. That is partly because China’s pilot regions have a significant volume of imported electricity. It is also because of China’s unique energy sector. In addition, other policies need to be considered for their complementarity and/or conflict with the ETS.

Executive Summary

On 24th April 2014, China Carbon Forum and the Beijing climate community welcomed the EU Climate Commissioner, Ms. Connie Hedegaard, to participate in a discussion on ‘How can China get the most out of Paris 2015?’ along with other distinguished panelists.

The panel discussed the importance of international cooperation leading up to the Paris COP21 in 2015. The panel emphasized the existing partnership between the EU and China in the areas of energy, urbanization and emissions trading. Building on the impressive progress made domestically in China, the panel suggested that this must be allowed to help progress discussions in the UNFCCC. While differentiation of responsibility should be considered a core principle of any deal in Paris, it must nevertheless be equally binding to all parties. The current slow progress, including climate finance assistance from developed countries, must be overcome in order to build confidence amongst parties and lift ambition. It is also important that public support contribute momentum in the lead up to COP21, as it did prior to the Copenhagen conference in 2009. The panel agreed that much has changed since Copenhagen, including increasing evidence of the seriousness of the challenge, awareness amongst leaders in both politics and industry, as well as significant domestic action worldwide. With strong cooperation between now and COP21 between the EU and China, and working to achieve agreements on key issues prior to the meeting, the chances of a successful outcome will be greatly increased.

Record of Discussion

The following is an edited synthesis of discussion that took place at the event among panelists (around 40 minutes) and open Q&A with participants (30 minutes). As per convention, individual’s comments are not attributed.

China and the EU, both individually and collectively, have an impressive record on action to address climate change. Domestically, for China this includes ambitious carbon intensity reduction targets as well as the introduction of carbon pricing through pilot emissions trading schemes. The EU has pioneered carbon markets, and as a whole boasts the biggest renewable energy investment in the world, helping to drive down production costs for renewables. At a bilateral level, existing EU-China cooperation on energy, urbanization, will be extended. Cooperation on pilot ETSs has allowed China to learn from both good and bad experiences from the EU.

The Paris COP must achieve a credible deal that will allow the world to stay below 2 degrees of warming. This is a daunting task for all parties, and must be pursued actively not just at the international level but domestically, in order to allow for success in Paris.

Europe’s leaders received the EU Commission’s proposals on emissions and renewable energy targets for 2030 well, and committed to making a final decision by October 2014. China is now the world’s largest emitter, and that brings with it sufficient responsibility. Of course developed countries have special responsibility; however, without a “fair share” contribution from the current largest emitter, there is no possibility of tackling the climate change challenge. It is important that all parties announce their targets by early 2015 as agreed in Warsaw last year, so that these pledges can be assessed prior to Paris.

There are a number of positive developments in China, including the pilot emissions trading schemes and the high-level recognition of the challenge, however there is a paradox that this progress is not reflected at the international negotiating table. The sooner China’s efforts and “fair share” commitments are reflected at the negotiating table, the more likely that a successful outcome at Paris can be reached.

The French government has stressed the importance of a successful outcome in Paris 2015, given the threat of business as usual taking us towards 4 degrees of warming, and will do everything it can to ensure this. The French government volunteered to host COP21 at a time when the UNFCCC process was struggling and facing many challenges, demonstrating a commitment to endorse and promote its role. France and China established bilateral discussions on climate change from last December, at the meeting between the two countries presidents, and this continues.

Progress is now not limited to the public sector, with companies and investors aware of the risk and factoring it in to their decision-making. So there is a new narrative, and we need to see climate change as an opportunity to rethink our economies. Action is not just necessary but desirable, because it leads to sustainable jobs and healthier lives. The French government will use this narrative to help realize a successful deal in Paris.

A deal must be universal, ambitious, binding and flexible, identifying a spectrum of different possible actions and responsibilities according to capacity. Providing climate finance to developing countries will also be essential.

The panel addressed the question of what has changed since the relatively unsuccessful Copenhagen conference. They pointed to even more evidence which has been published about the seriousness of the climate change challenge, as well as the fact that more governments and business people around the world realize that business as usual comes with a high price tag. Indeed, since Copenhagen 90 countries around the world have developed their own climate change legislation. Today it is hard to find a mayor of a city, both in Europe and in China, who doesn’t know about climate change. In China climate change is no longer a peripheral issue, but one centred in the minds of the political leadership.

In the run-up to Copenhagen, one success was the mobilization, creating awareness worldwide. While less expectations may make the meeting less dangerous for the leaders involved, the agreement that the world needs will not be reached without expectations. There has to be a push from the bottom-up, that citizens expect leaders to do what is needed. The deal must reflect what is feasible, but politicians must be expected to deliver the necessary outcome. You can avoid making such an agreement once, but not delivering in Paris will make hard to see a way for any credible approach to limiting climate change.

One of the key failures at Copenhagen was to have sufficient exchange between parties in the lead-up to the meeting. For Paris to be successful there must be regular discussion and agreement on important elements of a deal prior to the COP, including targets and support. We don’t have much time, so EU and developed countries need to “listen carefully” to what China’s concerns are, in order to achieve cooperation. In the new agreement there must still be differentiation, because China is not the US or Europe. Even so, the agreement must be equally legally binding.

The panel discussed whether there continues to be universal support for the Durban Agreement which endorsed legally binding commitments for all parties. As far as China and India are concerned, support for the agreement continues, however the nature of the binding commitments is open to question. It is important that this issue does not continue to waste time at Paris, and with only one year left before the meeting, this needs to be addressed.

The lack of adequate climate finance assistance to date has led to reduced confidence amongst developing countries about the commitments made by developed countries. However, while China has not received such finance, Europe has made contributions to LDCs. Going forward, climate finance must come from both public and private sources, and public money can be leveraged to attract private resources.

Private sector finance provisions may be a part of a Paris deal, and the UN Secretary General’s leaders summit later this year may progress this issue, which would provide a strong signal that leaders are serious. This is an area where behind-the-scenes much work has been done since Durban. Addressing barriers to institutional investors to support low-carbon investments has huge potential. Successful international examples can be replicated. Regional development banks and multilateral banks are shifting away from coal toward alternatives, which can engender significant change.

The EU’s emissions peaked in about 1990, the US in recent years. Now is a good time to have the discussion about when China’s emissions can peak. This needs rigorous analytic work because if the peak is five years earlier or later, this has a big impact on the climate system.

Executive Summary

China’s carbon market is developing quickly, and China is on its way to establishing the world’s largest carbon market. For China’s carbon market to be effective, stable carbon prices with a rising forward curve are necessary. An international reserve, which supports a strong and rising carbon price, could be of significant benefit to China, both as a demander of credits in the future, and also as a supplier given the stranded assets currently under the CDM. On March 5th 2014, China Carbon Forum, in cooperation with the Climate Markets & Investment Association, and Association for Sustainable and Responsible Investment in Asia launched the Brookings Institution and Climate Advisers’ innovative Carbon Market Reserves Report in Beijing. The event successfully shared the report’s main messages, lessons learned and heard feedback from China’s climate stakeholders on the future development of domestic and global carbon markets.

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The following is an edited synthesis of discussion that took place at the event among panelists (around 1.5 hours) and open Q&A with participants (45mins). As per convention, individual’s comments are not attributed.

Record of Discussion

While carbon markets are spreading around the world (in 2015 3 billion (bn) people and the majority of the global economy will be covered), the global carbon market is dysfunctional, with CDM prices just 7% of market value in 2011, creating uncertainty about future viability. Absent new policies, global carbon markets will suffer from lack of confidence and volatility.

There are two key arguments for ensuring a stable carbon price. 1) Extreme uncertainty undermines a potential stream of FDI in clean energy and technology. CDM has generated billions of dollars for business and investment in developing countries; and 2) Experience in the global carbon market, especially CDM, has led to domestic climate action. Model projects and regulatory capacity allow host countries to make more robust pledges.

An international carbon market reserve is one possible solution, short of harmonizing all the disparate carbon markets. The global carbon market is one of the few markets that doesn’t have some kind of reserve or price stabilization policy.

To test whether a limited global carbon market reserve could be useful in the post-2020 period, the Brookings study modeled the impact of a reserve on carbon market prices from 2020-2030. The model assumed a need to hold around 600 million (mn) credits (about 1% of the global carbon market’s projected size in 2020), and assumed 2012 CER volatility. The report found that the total value of a reserve was US$14bn.

Because CER prices are low there is an opportunity to act now. There are about 500mn CERs in the market today worth less than US$1, or 1bn CERs by 2015, implying that a reserve could be populated for at most $600mn. Waiting could mean paying 2020 CER prices, which are likely to be much higher (e.g. EU estimates 2020 prices to be about €16). This would make it ten times more expensive to establish a reserve in 2020 than it would today. If $600mn couldn’t be raised, a $100mn down payment would go some way towards a reserve, saving about $1bn compared to the cost in 2020. Capitalizing the reserve now makes financial sense, representing a greater ROI.

A larger reserve would be more expensive to populate, but would buy the international community more time. In more than 50% of the simulations where the model didn’t work, it was because it didn’t have enough money to maintain the price floor and ceiling function.

There are three reasons why an international reserve is of interest to Chinese policy makers and business. 1) China may participate in new areas of the international carbon market. As a future demander of credits, China should allow international post-2020 credits for compliance, potentially generated in the G77 or LDCs. If China looks to contain costs through an international market, a stable carbon price would be essential. A stabilization reserve, such as in many Chinese pilot ETSs can help. A reserve that helped maintain a price floor and ceiling could also help provide a minimum price for Chinese offsets; 2) G77 countries would benefit from FDI that would flow due to a stable global market; and 3) Stranded Chinese CDM projects could benefit from this proposal. 10% offset allowance cap in many of the pilot schemes will absorb some of these assets, but probably not all. An international reserve could help.

There was agreement among panelists that the earlier an international reserve is established, the earlier China could benefit from it. Likewise, that establishing an ETS earlier means claiming a share in the global carbon market.

The current mode of trading in China’s pilots varies. In Shenzhen, non-compliance entities are eligible to participate in trading, in Beijing they have to obtain approval to participate, and in Shanghai and Guangdong they are not eligible to trade. These differences reflect pilot regions perceptions of risk. Local government leadership is very important in China, and the success of the pilots is very much dependent on the leadership of that region. Administration is sometimes ahead of other mechanisms in China, perhaps due to the limited development of free market thus far.

From China’s perspective, current ETS priorities include: 1. Legal framework to determine the coverage of companies; 2. Durable and cost effective methodology; 3. Capacity for entities to include carbon revenue in their financial reporting; and 4. Regulation of exchanges. China’s plan to build capacity in all these areas was clearly noted.

The panel noted that the UNFCCC’s attempt to establish an international reserve had been unsuccessful. As a result, the proposal moved to the World Bank, which is working on how to establish a reserve given that UNFCCC endorsement is not currently politically possible. In addition to The World Bank, Sweden, Norway and others are trying to capture some of the principles that a reserve would deliver. There’s already $100-$300mn of investment between those countries. The World Bank with IFC and other stakeholders are trying to bring it together in a way that makes sense and it’s a matter of when and how, rather then if this happens. So despite the current difficulty in securing public funds, a reserve can build on existing donor interest in trying to support these stranded assets. Much of this money will come from developed countries, but there are also reasons why emerging economies have interest in a stable international carbon market to contain costs for their own companies if they allow international credits in to their domestic mechanisms.

Developing a domestic reserve puts less demand on public funds because it only requires a percentage of allocations used for establishment, with no need to mobilize additional money. It is also possible to, at auction, use allowances that weren’t bought to populate a reserve. In the international market, public money will be required in order to pursue the proposed reserve.

The panel noted the complementarity between an international reserve and emerging ETSs that include a reserve for price stability, including Chinese pilots. Guangdong has a system with 10% (30mn tones) dedicated to a reserve. However it’s not yet clear how that will work, i.e. the mechanism, trigger and legal compliance. In Shanghai, the reserve proportion has not been announced, but local experts are investigating how it would work. Specifically, the Shanghai emissions inventory involves a dual bottom-up and top-down approach. For top-down, the DRC looks at economy-wide emissions and sectoral emissions under the cap. For bottom-up, the DRC looks at company emission inventories. The discrepancy margin between the top-down and bottom-up approach may serve as a reserve quantity, especially after the first compliance period. For Tianjin, local experts indicate that between 0-10% would act as a reserve for managing price volatility. For Shenzhen, the reserve proportion is about 2%. The Shenzhen ETS has emulated the Californian tiered approach to contain price inflation.

The panel was cautious but optimistic for these adjustment reserves to play an important role in stabilizing carbon prices in China. Prior experience of commodity reserves in China is mixed, e.g. the cotton reserve policy, which was stopped by NDRC, so it is important to get the legal framework and transparency right for a carbon reserve. Market players and policymakers have to be on the same page. A local carbon reserve could help address price volatility in the short term and in achieving the early goals, keeping in mind China’s unique and developing financial market.

The panel was encouraged with developments in China. Although only on a pilot scale the potential market is huge (already second largest in the world). Experimentation and learning by doing over the next three years is expected until policies become more consistent. Because both the regulator and companies have to observe, build, and learn, the first step is a transparent assessment of GHG inventories and action up the carbon chain, which requires investment, time and capacity building. The market requires not only participants and actors, but also an ecosystem of compliance mechanisms, which will be realized over the next few years. An estimated 500,000 people with carbon market knowledge will be required. It will take time to establish the human resources at the capped entities, the consulting firms around them, the verification agencies, the exchanges, and the regulator at the top, having a view by 2016 of what China’s national system should look like.

To date, the Chinese pilot schemes have experienced low liquidity and trading levels. However, the panel suggested this would improve with time. In the UK ETS, where the EU system had its beginning, had no liquidity. However, much liquidity is off exchange between market participants. That type of liquidity requires capacity building. Given time, the liability, risk and obligations on the part of energy intensive companies in China, the liquidity will come and its transparency will increase. Linking markets would also increase liquidity e.g. California and Quebec.

The panel would like to see hedging in China’s carbon markets, and companies managing carbon risk. China’s financial infrastructure needs to enable derivatives trading. A derivatives market is important not for speculation, but to help utilities manage assets, and China needs it as soon as possible. Considering that the Chinese pilots are still in their first compliance period, it will take time to build liquidity. In the future, Chinese companies will need assistance to manage their carbon assets so that secondary trading works like the EU (i.e. hedging risk). Given California’s ETS experience, and given capacity, the Guangdong could see 100mn contracts in 2 years.

The panel would like to see the carbon cash market, futures market, and financial instruments converge. Other financial markets are opening up internationally. The Chinese share market currently has opened to US$80bn worth of foreign capital, and international pension funds can now participate by buying shares in the market. That legal framework can be easily applied to a carbon market so that foreign firms can build on their own capital and risk analysis to provide liquidity to help counterparts in China.

Experience shows that success requires a sustained price signal to drive clean tech investment and behavior of companies under the cap. This in turn requires an open and transparent system, with data available in real time to all market participants so they can observe the forward price. While it may seem that achievement of an environmental goal alone is a sign of success, this is only one indicator. The purpose of the market is to help companies achieve their goal at lowest cost. This requires institutional liquidity, sophisticated capacity both at the emitters and the financial institutions, as well as international collaboration. If, as a regulator, a strong forward price curve is achieved, then companies will behave accordingly and the scheme will deliver its intended result. If a strong forward price curve is not achieved, participants will be confused, negating the key technology impact and emission reductions. The consequence will be economic rent that switches “from pocket to pocket”.

BROOKINGS REPORT: http://www.brookings.edu/research/papers/2013/12/international-carbon-market-volatility-purvis

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Executive Summary

Carsharing aims to complement the existing public transport system by providing on demand and short-term access to public automobiles. Carsharing separates car use from vehicle ownership. It intends to reduce the car population in a city to prevent traffic congestion and reduce pollution. Carsharing solutions have spread in western countries where local governments see them as convenient ways to reduce parking needs in the city centers and improve overall transportation efficiency of the city. However, the concept is still very new in China.

In 2009, China became the world’s biggest auto market. By 2012, 14.7 million new cars were hitting China’s roads. This has led to a dramatic increase in the congestion and pollution problems in major cities. Municipalities, including Beijing, have adopted specific policies that limit the annual growth of private vehicle ownership and control when they can be used. There is therefore an opportunity for Chinese policy makers and researchers to further explore the potential of carsharing systems as part of the traffic congestion and pollution solution in each of China’s cities.

Record of Discussion

The following is an edited synthesis of discussion that took place at the event among panelists (around 1 hour) and open Q&A with participants (45mins). As per convention, individual’s comments are not attributed.

The automobiles on Beijing’s roads increased rapidly from 2.6 million vehicles in 2005 to 4.6 million in 2010. In response, Beijing’s municipality designed an enforceable system that limited the growth of new vehicles on Beijing’s roads to 240,000 per year. From 2014, this number will be reduced to 150,000, and a minimum of 20,000 of those will be electric vehicles. The share of electric vehicles will increase to 50,000 by 2016. A separate policy only allows cars to be driven on alternate days of the week and even less during heavy pollution events.

Among the different means of transportation in Beijing, private car usage rose from 23% in 2005 to 32.6% in 2011. This has since flattened out. Public transport usage has risen from 30% in 2005 to 44% in 2012, and the objective of the municipality is to reach 55% by 2020, mostly through the development of more subway lines. The bicycle share, however, dropped from 30% in 2005 to 14% in 2012. The municipality wants to reverse this trend and aims for 15% by 2020. This creates an imbalance between the demand for driving cars, and the supply of cars allowed to be driven in Beijing. Carsharing companies could benefit from this demand; however, they still face the same limits on new car entrants as private owners.

There are two carsharing models – the station-based model, which requires returning the car to a designated carsharing station; and, the free-floating model which allows users to pick the car up and leave it where they wish within the carsharing zone. This model requires a minimum density of available vehicles, but more easily meets the needs of users who usually don’t schedule their trips in advance.

An example of successful carsharing implementation came from the city of Bremen in Germany. 200 vehicles are available for carsharing with 50 parking stations throughout the city. The service already has 8,700 users. The city estimates that 2,000 private cars have been replaced by this solution and hopes to reach 20,000 users by 2020, which will remove 6,000 cars from the roads. In addition to the reduction in congestion and emissions, Bremen’s carsharing system also creates more parking places and the possibility to develop specific bus lanes, bike parking areas and other public spaces.

Carsharing could further drive the use of electric vehicles. While carsharing doesn’t require electric vehicles, station-based model of carsharing can help implementing a large number of charging stations in the cities. Most trips using carsharing solutions are short trips that suit the battery life of electric vehicles.

Does carsharing compete with taxis and car rental? Taxis are already one of the great transportation solutions in China. However, the demand for the younger generation to drive by themselves continues to rise. While car rental can be effective in many cases, it is often limited to half-a-day minimum hire and the vehicles need to be booking can be inconvenient. A viable solution for the transportation system requires a combination of different carsharing modes and public transport to fill types of new demand.

Is car-pooling an alternative to carsharing? More and more owners of cars use car- pooling and drive together to work because it’s more convenient and cheaper for them, even if the passengers already own a car. Chinese government aims to promote car- pooling in order to reduce traffic jams and improve air quality. However, officials also want to draw a clear line between car-pooling and black taxis.

Will more carsharing companies emerge in China? Companies can start with a reasonably small investment (around 20 vehicles) and the fleet can increase with demand over time. However, the main question is finding an effective parking solution in the city center. This is a sensitive question which can only be resolved with each local government.

How can the local government facilitate the implementation of carsharing solutions in China’s cities? According to the panelists, carsharing businesses do not require financial support from the government, but require policy incentives. Carsharing companies require access to park on any available public parking place, and for the company to directly pay for the parking fee directly to the municipality. Carsharing companies want carsharing to be treated as part of the public transportation system like the taxis and receive a specific license plate, and to be allowed to be used every day.

What is the incentive for the local government to promote carsharing? Carsharing can reduce the need for parking spaces in the city center which, therefore, provides space to build cycling lanes and improve the flow for public transport and emergency services.

Which Chinese city is ready to start a carsharing business? It will be difficult for Beijing to commence a carsharing program in the near future, but China has more than 160 cities each with a population of over 1 million inhabitants, each with all very unique features which could lend themselves to carsharing programs. The key is getting agreement with the local government.

While carsharing uses new fuel efficient vehicles, one of the biggest benefits on emissions reductions from carsharing comes from reducing the demand for production of more vehicles. The embodied energy through manufacturing a car can be more than half of the emissions over the car’s lifecycle. 

On 10th October, 2013 China Carbon Forum together with the Centre for Climate Economics and Policy at the Australian National University’s Crawford School of Public Policy (ANU) held a report briefing on the China Carbon Pricing Survey 2013 at the UNDP compound, Beijing.

The survey for the first time provides a quantified analysis of the expectations that China-based experts hold about carbon pricing in China. The survey provides information about expected price levels, and the expected start dates of pilot schemes and a possible national carbon pricing scheme. This information is of key importance for investors in carbon-intensive sectors, the financial sector, and policymakers to better anticipate the future cost of carbon emissions.

Carbon market developments in China are of interest around the globe, and this survey sets out the possibilities as perceived by a large number of local experts.

The survey is a joint initiative of the Centre for Climate Economics and Policy at the Australian National University’s Crawford School of Public Policy and China Carbon Forum. It is part of a new cooperative research program between China and Australia on market instruments for climate change action in China.

To access a full copy of the survey report in English click here: 
China Carbon Pricing Survey 2013_Report_English

To access a full copy of the survey report in Chinese click here:  
中国碳价格调研（2013）报告_中文

To access a copy of the executive summary in English click here: 
China Carbon Pricing Survey 2013_Executive Summary_English

To access a copy of the executive summary in Chinese click here: 
中国碳价格调研（2013）摘要_中文