A green response to the crisis

China can respond to the economic downturn by tailoring its recovery measures towards low-carbon solutions. Jing Xuecheng explains how.

The global economic crisis means that low-carbon development is no longer just about combatting climate change: it is also about finding new sources of growth. China’s stimulus package aims to keep growth around 6.5% this year. Developing the low-carbon economy now could kill two birds with one stone, both providing new sources of economic growth and improving the quality of economic growth overall.

A low-carbon economy is of benefit to China and other nations – in particular, the United States and European Union countries. Not only will it contribute to the global fight against climate change, but it will also strengthen mutual understanding and trust, and decrease international pressure on China – a new focus for China’s international economic strategy.

Meanwhile, the low-carbon economy is of strategic significance in another arena: the reform of international markets. Carbon may one day succeed or parallel the dollar as an international currency, perhaps relieving the Triffin Dilemma caused by the use of a national currency as a global reserve currency. Were there strong low-carbon growth and an international consensus, carbon couldeven become the currency of choice in countries such as China and Russia – a “superpower currency”.

China should now provide broad policy support to the low-carbon economy. Investment in energy-saving and emissions-reduction should be seen not as an exogenous, additional expense, but as an endogenous part of the model that helps economic growth. Financial policy support is crucial. A comprehensive and strategic approach is required.

First, strong tax incentives are necessary. Only 210 billion yuan (US$31 billion) – just over 5% – of the Chinese government’s four-trillion-yuan (US$585 billion) stimulus package will be invested in the low-carbon economy and the environment. There is scope for funding to be increased in the future. At a minimum, there is room for structural changes within the stimulus package itself. The government could provide tax breaks, such as reduced rates, waivers or increased allowances, for low-carbon firms and environmentally-friendly projects. Low-carbon investment funds could be established.

The 100 billion yuan (US$15 billion) in loans allocated annually by state-owned commercial banks for energy-saving and emissions-reduction projects is small compared with total loans of three trillion yuan (US$439 billion). Discounted interest rates and subsidies, and the introduction of investment funds, will also act to guide bank lending.

At the same time, financial regulators need to provide policy support. Bank regulators could be more flexible with regard to loans for low-carbon projects, and when necessary allow reserve requirements to be temporarily breached.

Second, there needs to be coordinated support across the banking, securities and insurance sectors. Lending and operational rules at commercial banks should differ in accordance with the client’s industry. Environmentally-friendly sectors, such as new energy and new materials, should receive loans at preferential rates. Punitive rates should be imposed on polluters. Key firms and projects could receive further support from local banks via loans from larger banking groups, consortiums and overseas groups.

The Industrial Bank and the Industrial and Commercial Bank of China (ICBC) have made particular contributions in this direction. The Industrial Bank was the first Chinese commercial bank to apply to join the Equator Principles benchmark, and it has already made more than 2.15 billion yuan in loans to energy-saving and emissions-reducing projects. The ICBC made loans of 49.15 billion yuan to similar projects in 2008, a growth of 69.17% on the previous year. At the same time, 3.52 billion yuan in loans to energy-intensive and polluting firms were recalled. The ICBC was also the first Chinese bank to establish an “environmental veto”, with all loan applications for projects in restricted areas or river basins frozen until environmental approval is obtained. The ICBC also gives corporate clients an environmental rating: the first step towards an environmental risk database.

Despite this progress, further support is required. It is also necessary to ensure that environmental impact assessments remain strict and loan procedures are accelerated. Securities regulators should provide fast-track channels for market listings, share issues, project and asset bond issues for suitable firms, in order to encourage expansion and improvement. As venture capital investment is aimed at a market listing, regulators should reduce the barriers for suitable firms to do so, and encourage venture capital and private equity investment. Other policy measures include compulsory insurance for energy-intensive, polluting and resource-intensive firms, which can pay out in case of environmental damage.

Third, there needs to be support for asset and equity markets. The growth of small and medium-sized enterprises – which do not yet qualify for a market listing – in the new energy field, can be boosted by the development of asset and equity markets, which provide an open and fair environment for price finding and realistic valuations. The existing securities exchanges in Shenzhen and Shanghai have a similar function, but only for listed companies. Low-carbon firms are new and largely unlisted. Asset and equity exchange markets for these firms will increase their liquidity and thus attract venture capitalists and promote growth.

Fourth, China should foster carbon-trading markets. Climate change has brought huge business opportunities; there are excellent prospects for carbon trading, low-carbon products and carbon services. Turnover in the global carbon trading market in 2006 was US$28 billion. By 2007 it had passed US$70 billion and in 2008 it was valued at US$125 billion. By 2012 the market in emissions rights could reach US$2 trillion, along with a US$1.9 trillion market in renewable energy. 

China has already become the largest supplier of emissions rights, accounting for a 40% market share in terms of trading volume. Meanwhile, trials of pollution emissions rights trading in China are underway. A recent proposal for pollution trading in Zhejiang province was approved, with initial estimates of investment needed at 1.02 billion yuan (US$149 million). This is the third proposal of its type, following those in Jiangsu province and the city of Tianjin. This market will also attract venture capitalists to invest in energy-saving and emissions-reduction.

China’s carbon trading market still has many urgent issues to resolve, including a lack of legal backing and regulation. But overseas investment banks and carbon venture capitalists are already investing in Chinese projects with carbon-trading potential. This growth of this market may drive firms to beat targets for energy-efficiency and emissions-reduction, greatly reducing pollution.

Jing Xuecheng is the former deputy director at the research department of China People’s Bank and former executive manager of the China International Relations Association. He is currently a consultant and professor at the China Financial Institute, Peking University.

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