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China faces $243 billion climate finance “gap” per year by 2020, exploring reforms to expand clean tech investment

Date
22 March 2013
China faces $243 billion climate finance “gap” per year by 2020, exploring reforms to expand clean tech investment

LONDON: China will need to raise up to US$243 billion of additional funds per year by 2020 in order to adequately finance action to curb the impacts of climate change and invest in low carbon development, according to a new report commissioned by the Chinese government’s powerful National Development and Reform Commission (NDRC).

The report, authored by The Climate Group and the Research Centre for Climate and Energy Finance at the Central University of Finance and Economics, China, is to be presented to the NRDC, the Ministry of Finance and other top Chinese government entities later this month. It calls for a two stage plan to reform China’s climate finance mechanisms by 2020.

The Shaping China’s Climate Finance Policy report is the final of a series of reports, papers and other research The Climate Group has produced as part of its role in advising Chinese government institutions in restructuring the Chinese economy, according to what senior officials call “green industrialization” principles.

China has already made huge investments in renewable energy and clean technology: in 2012 it accounted for one quarter of global investment in renewables, spending US$67.7 billion – a 20% increase on 2011. China’s goal is to have 15% of its total energy demand sourced from non-fossil energy by 2020.

In one of the first efforts to quantify China’s climate finance needs, the report’s authors estimate that achieving China’s 2015 and 2020 emission intensity targets (a 17% cut vs 2010 levels and a 40-45% cut vs 2005 levels respectively), will require a total investment of up to US$333 billion by 2015, escalating to US$413 billion by 2020.

Current public and private funds are not sufficient to cover the required investment, resulting in a financing “gap” of around 2% of China’s projected GDP in 2015 – or up to US$214 billion - increasing to US$208-243 billion by 2020.

Plugging this gap will depend on both increased public sector finance, but also on a larger role for private sector financing especially after 2015. To ensure this happens, China will need to create the framework and incentives that can leverage large amounts of private finance using the still significant – and increasing – levels of public funding.

 

China’s climate financing gap

 

2015

2020

Area

Current estimate

Required

Gap

Current estimate

Required

Gap

Mitigation

109

273-305

164-196

156

353-385

197-229

Adaptation

9.4

24-27

14.6-17.6

13.5

24-27

10.5-13.5

R&D etc

0.76

0.95

0.19

1.09

1.37

0.28

 

 

 

 

 

 

 

TOTAL

119

298-333

179-214

171

378-413

208-243

All figures in billion US$/year

 

Changhua Wu, The Climate Group Greater China Director, said: “China has already made huge investments in clean technology. Sustainability and renewable energy, what we call in China 'eco-civilization', is at the very top of the incoming Chinese leadership’s agenda. The next decade could see China driving a global Clean Revolution. We at The Climate Group are working closely with the Chinese government to advise on how to accelerate necessary low carbon initiatives to address the country’s environmental challenges.” 

 The Climate Group’s report identifies the key climate finance challenges China currently faces and outlines a two stage plan to reform China’s climate finance mechanisms by 2020. Those reforms include:

  • Implementation of national climate change laws.
  • Establishing a 'horizontal' coordination agency to connect government bodies with as well as policy and commercial banks to promote international communication and foreign investment.
  • Establishing development finance institutes, including a National Climate Fund (NCF) and a Green Investment Bank.
  • Establishing a Carbon Trading Regulatory Commission.

In addition to the institutional and legislative changes described above, The Climate Group’s report a range of policy reforms could also be made to support the growth of finance and help to shift the risk-reward equation for investors in favor of more climate-friendly investments:

  • ‘Green’ the current tax system: possible initiatives include increasing the sales tax for energy and emission intensive products and offering preferential value-added tax rates for car fuels that meet the next phase of vehicle emission standards.
  • Reform environmental pricing policy including incorporating the environmental cost of extractive industries (e.g. coal, oil and natural gas) in the pricing of commodities.
  • Improve environmental finance services and through reforms make it easier for low carbon enterprises to publicly list and issue bonds.
  • Use market mechanisms to promote energy efficiency.

Also, even though China enjoys a relatively wide range of climate finance sources, the narrowness of some financing channels remains a problem according to The Climate Group report. In the future, new capital sources need to be developed and existing ones widened to achieve the volume of financing that China will require in the coming decades.

To ensure adequate access to all these sources, China’s government will need to pursue a variety of strategies and policies:

  • International climate funds: For the foreseeable future, access to international climate finance, particularly from the international financial institutions will remain important. China should therefore actively engage in climate finance discussions within these forums and others such as the UNFCCC’s Green Climate Fund.  On the private sector side, the Chinese government also needs to ensure the country is increasingly attractive to institutional investors.
  • Off-budget public capital: China’s Sovereign Wealth Funds (SWFs) have total assets of some US$1.1 trillion. Together with capital managed by the National Council for Social Security Fund, these off-budget sources of public capital could easily be directed to climate related investments if suitable investment products were created to meet their investment criteria.
  • Accelerate implementation of national carbon market: The sooner a national carbon market is in place the better for increasing climate finance in China. In the longer term, the sale of emission allowances could provide the government with a new source of revenue that could be recycled for climate related activities.
  • Reduce fossil fuel subsidies: In line with recommendations from the International Energy Agency, China should phase out fossil fuel subsidies and abolish preferential policies that support high energy consumption energies and products.
  • Strengthen Green Credit Policy: The current ‘instructive guidance’ laid down by the government for green credit policy should be upgraded and made mandatory, with related laws and regulations improved to facilitate implementation of policies.
  • Leverage non-traditional sources of capital: Non-traditional sources and channels of funding, such as micro-financing and crowd-sourced finance, offer new and potentially important sources of climate finance. 

To explore further, read the report now.