Low-carbon Economy: Developments and Prospects

By LIANG MENG & QI FAN

Government Commitments

The level of governmental commitment to the low-carbon economy determines its level of success. The facts that China is rich in coal but poor in oil and gas and that its energy utilization rate is low are the main causes of its heavy carbon emissions. The Chinese government has long been aware of these problems and has worked hard to reduce energy consumption and develop new energy sources.

In its 10th Five-Year Economic and Social Development Plan (2001-2005), the Chinese government put forward a development strategy that focused on the exploration and conservation of resources – conservation being paramount, the improvement of the resources utilization rate, and the ultimate realization of the sustainable utilization of resources. It called for active development of wind, solar, geothermal and other new and renewable energy sources and promotion of energy-saving and comprehensive energy utilization technologies. The 11th Five-Year Plan (2006-2010) elevated the conservation of resources as a basic national policy and specified binding targets for the reduction of energy consumption per unit GDP and the utilization of new energy sources.

In support of the national development strategies, the State Council passed in 2004 the Outline of the Medium and Long-Term Energy Development Plan (draft). The same year the State Development and Reform Commission issued the country’s first Special Medium and Long-Term Energy Conservation Plan, and in 2007 published the Medium and Long-Term Renewable Energy Development Plan, setting objectives up to 2020. It also published the National Climate Change Program, which defines comprehensively, systematically and clearly the guidelines, principles, targets and policy measures of China in dealing with climate change. China is the first country in the world to produce such a program.

In legislation, the Standing Committee of the National People’s Congress adopted the Renewable Energy Law in 2005 and the revised Energy Conservation Law in 2007, laying the legal basis for energy conservation and the development of new energy sources. Table I shows the effectiveness of China’s efforts in reducing per unit GDP energy consumption during the 11th Five-Year Plan period. Chart I shows the growing share of clean energy sources in China’s energy consumption structure – from 5.1 percent in 1990 to 8.9 percent in 2008 – and a gradual decrease of coal’s share.

China insists on the “common but differentiated responsibilities” principle and has committed itself to obligations that a developing country should shoulder. It has been active in promoting the institutionalization of clean development and emissions trading mechanisms in China. After committing itself to a 20 percent reduction in per unit GDP energy consumption during the 11th Five-Year Plan period (2006-2010), China further volunteered, at the 2009 Copenhagen Summit, a per unit GDP carbon emissions reduction of 40-45 percent by 2020, showing China’s sincerity in meeting its environmental obligations as a trustworthy developing country and the importance it attaches to the issue of climate change and international cooperation in the field.

Promoting Low-carbon Finance

Low-carbon finance is a key link in the development of a low-carbon economy. Its roles include supplying related construction funds, establishing an effective carbon emission rights (CER) trading market and an accurate price signaling system, and developing pertinent and concomitant financial instruments. China has made certain achievements in low-carbon finance and in establishing a carbon emission rights trading mechanism. Table II lists financial support and measures of some commercial banks for energy conservation and emission reduction projects.

The CER trading mechanism is the core of low-carbon finance. By setting a limit on the amount of pollutants each enterprise can emit, hence giving their emission rights or permits, a value, a sizable emissions trading market can be established and the price of emission rights can be decided. In this way, enterprises’ investment in the development of energy conservation and emission reduction technologies will see financial returns, and private capital and broad social resources will be attracted into environmental endeavors, hence reducing the investment pressure on the government.

China’s emissions trading market has been probing the way ahead since 2008. In August 2008, China Beijing Environment Exchange and Shanghai Environment and Energy Exchange were founded; in September China’s first emission rights trading market was opened in Tianjin – the Tianjin Climate Exchange is a joint venture with the Chicago Climate Exchange, a source both of foreign investment and mature experience in such operations. Similar establishments and platforms later appeared in Hebei Province and Guangzhou City.

Currently such environmental rights trading facilities are mainly involved in the following businesses: enterprises’ voluntary emissions reduction projects, CDM (Clean Development Mechanism) information services (See Charts II and III), energy management contracts, and energy conservation technologies transfer and financing. They also provide verification and certification services on the volume of greenhouse gas discharges and consultancy relating to emissions trading.

Multiple Ways of Promotion

Macro policies and low-carbon finance are administrative and market leverages used to encourage enterprises to reduce emissions, but a broader scale of involvement by individuals as well as enterprises requires assiduous promotion of low carbon through both government and public endeavor. China has carried out various forms of promotion.

For example, the Tianjin Summer Davos made “sustainable development” its theme; the People’s Bank of China and the Tianjin municipal government jointly sponsored the first Global Low-Carbon Finance Summit; and Shanghai established the “Green World Expo” voluntary emissions reduction and CER trading mechanism and platform, promoting the green idea on a global stage. Further examples are available at governmental and business levels. Following its promulgation of the “Panda Standard” – China’s first voluntary carbon standard, the Beijing Environment Exchange went on to publish the country’s low-carbon indices on the Beijing-based Ditan Forum. The Tianjin Climate Exchange initiated a voluntary emission reduction scheme for enterprises and established a building- energy-efficiency trading mechanism. Tianjin’s Binhai New District was cited as a paradigm in the development of low-carbon economy by the UN Conference on Trade and Development in its 2010 World Investment Report.

In addition, the Internet has also become an effective promoter of low-carbon economy, and many government websites and Internet service providers are actively involved.

Promising Future

Low-carbon economy has great prospects, but its further development still needs the government’s rational planning and policy support. In the long term, carbon finance will provide an important resort and opportunity for China to gain an advantage in low-carbon industries and sharpen the competitive edge of its financial institutions. Therefore China should work out as soon as possible an efficient carbon emissions trading mechanism and guide more enterprises to get involved in trading by setting emissions limits on them. Meanwhile, the government should standardize the operations of emissions trading markets across the country, form a stable price-signaling system and strengthen the power of the market in resources sourcing. Efforts should also be made to study ways of transnational trading and elevate the international influence and pricing power of the domestic carbon market. In addition, the government should encourage commercial banks to develop low-carbon products; besides “green loans,” the banks should adapt themselves quickly, in terms of both technologies and human resources, to businesses related to CDM financing and development of low-carbon derivatives. Such efforts will stand them in good stead for raising their international competitiveness.

Low-carbon economy is a flourishing human endeavor, and its fate is linked with that of humankind. China should go along with the world development trend and use all means possible to promote the transformation of its economy toward low carbon. Achievement here will lead China to its goal of sustainable development and provide a reference case for other countries.