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Finance strategy, boosting low carbon China.

Date
07 November 2011
Finance strategy, boosting low carbon China.

By Changhua Wu, Greater China Director, The Climate Group.

The Climate Group released its fourth China's Clean Revolution annual report, Financing China’s Low Carbon Growth on November 7, 2011, in Beijing. 

The international non-profit organization The Climate Group today published a briefing note for its fourth China's Clean Revolution annual report, Financing China’s Low Carbon Growth. The report focuses on China’s fiscal and monetary policies to support low-carbon growth, and for the first time provides a comprehensive review on China’s low-carbon growth financing strategies from a third party’s perspective. The report aims to inspire professionals working in the field of climate change and finance in China, while serving as a reference for the Chinese government to optimize its financing strategies.

The Climate Group’s series of “China’s Clean Revolution” annual reports aim to identify the key elements of low carbon growth in a forward-looking manner.

Since its first release in 2008, our research has covered the status quo of China's low-carbon practices, trends, and low-carbon city characteristics and the future. In the “Twelve Five” period, to achieve low-carbon growth, we need the support of ideas, policies, technology and funding, with financing strategy being an indispensible link.

Through nearly a year’s research, The Climate Group has gathered views from experts from the Development and Reform Commission, Ministry of Finance, Tsinghua University, and the Chinese Academy of Sciences as well as collected perspectives from banks and investment institutions. The Climate Group aims to show and analyze China’s financial and fiscal policy system and practice in support of low carbon growth, along with the challenges faced.

The Chinese government has increasingly integrated tax, finance and market mechanism and other key elements into the process of low carbon growth, and has made great achievements.

The report shows that in respect of fiscal policy, China has initially formed a policy system to promote energy conservation and support low carbon industries through the integrated use of the integrated use of financial subsidies, financial discounts, government procurement, tax relief, financial resources tax reform and other financial instruments, which effectively support the policy goals.

During the “Eleven Five “period, the central government has invested over 220 billion Yuan of funds to effectively promote investment in social capital.

On the financial front, the government emphasized on the green credit policy to promote energy conservation, support technology-based SMEs and the development of key industries.

In 2010, the banking institutions have achieved a loan balance in energy saving projects five times of that in 2006. At the same time, the government is committed to broadening the financing channels and utilizing the multi-level capital market financing function. Corporate bonds, venture capital (including pioneering investment and private equity), and IPO as well as other financing channels have been developed.

Let us take China’s venture capital market as an example. According to data from Tsingke Research Center, there were 84 investments into the clean technology industry in 2010, involving an investment amount of $ 508 million, which rose by 58.5% and 42.7% respectively compared with 2009 data.

In addition, the carbon market and public-private partnerships as well as other market-based mechanisms will be playing an increasingly important role in the low carbon growth process in China.

At the regional level, many cities have proposed to develop low-carbon industries as a starting point, while providing the industrial park with incentives for investment and financing, constructing some specific-function financing platforms (such as financing platforms that support small and medium enterprises and science and technology enterprises), and taking advantage of international cooperation funds, and so on, so as to meet the financial needs of low carbon growth.

Meanwhile, China's low carbon growth will require substantial capital investment. Compared with the development of low carbon industries, the financial needs gap is relatively larger for development in areas of industries, construction, transportation and energy-saving in people’s daily lives. As for the average annual investment demand in China’s energy saving and renewable energy industries, some experts estimate it to be between 5000 billion to 1.5 trillion in the “Twelve Five” period; most of the interviewed experts also believe that the annual investment demand will be higher in the “Thirteen Five "period.

More than half of the interviewed experts believe that, based on the existing investment and growth trends, growth in China’s funding needs for low carbon growth in 2015 can be met; some experts, however, believe that investment demand cannot be met, especially given the financing problems faced by some specific areas. For example, some investments in areas of industries, construction, transportation and daily living will not generate any economic return or may have very long payback periods; these funding needs will thus require more government support.

In respect of China’s low carbon growth, the key to meeting funding needs lies in how the government will effectively direct social capital investments to low carbon industries, and also improve the efficiency of use of funding (e.g. to prevent redundant construction in some industries, and at the same time to direct social capital flows to areas facing the largest funding needs gap).

With respect to low carbon solutions that are at different development stages, the bottlenecks constraining their development and applications vary, so the focus should be different in order to solve funding difficulties.

The report analyzed how financing strategy could be compatible with the development stages of low carbon solutions, taking five solutions that are at varying stages as examples, which include energy efficiency projects, semiconductor lighting, renewable energy, electric cars, and carbon capture, use and storage. For instance, in order to support the energy saving in enterprises, government should promote energy efficiency loans provided by commercial banks, try to refine the policy and standard for green loans as soon as possible and at the same time draw on IFC’s China Energy project financing experience and explore a larger-scope, lower-cost risk-sharing mechanism. For another example, with carbon capture, use and storage (CCUS) technology, the current R & D and demonstration of the funds come primarily from national research funding, corporate self-financing and international cooperation projects.

In the future, China should actively fight for international community financial support, and continue to give subsidies for research and demonstration projects; in addition, in order to promote the large-scale application of CCUS after its commercialization, the departments in charge of developing CCUS department also need to take precautions, and make a positive effort to enhance communications with private investors.

The "Report" shows that finance strategy involves more than one policy, such as fiscal policy, monetary policy, tax incentives, resources and energy taxes (prices), investment policy and so on.

These policies do not differ significantly in importance; the key point is to enhance coordination and synergy among them. In the near term, we should further improve the low-carbon-growth-related fiscal and financial policy system; in the long term, we need to promote energy conservation and low carbon industries of a sustainable business model.

As I stated in the press release for the Report: “Funding is one key point to achieve low-carbon development goals. As presented in the report, China’s low-carbon growth requires substantial capital investment. To meet the demand for funds, the key lies in how the government will make full use of fiscal and financial instruments, frame finance strategy, and direct social investment effectively. We also believe that the huge demand for funds is not only a challenge but also implies development opportunities for China’s low-carbon businesses and financial industries in the future.

The full text for the “Report" shall be officially released in late November. In 2012, the Climate Group will launch a series of reports on finance strategy, providing further in-depth discussions on key issues.

Browse the summary of China's Clean Revolution annual report: Financing China’s Low-Carbon Growth in English and Chinese: www.theclimategroup.org and www.theclimategroup.org/cn

Translated by Fang Zuo. 

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