E3G’s latest report identifies potential opportunities for integrating green finance within China’s broader economic and financial reform.
The policy report identifies the investment trilemma currently facing China as it aims to:
- Increase scale and pace of investments to sustain economic growth;
- Deliver greater economic efficiency in allocation of public resources and a greater role for the private sector;
- Promote investments in cleaner and low carbon technologies, to urgently tackle local pollution as well as for a lower carbon path of development.
The report indicates how reconciling and balancing these objectives presents a complex policy agenda and the need for integrated thinking and policy-making across the currently unrelated policy agendas of: green credit policy; low carbon development and climate finance and; ongoing financial reform. Research commissioned by E3G suggests that financing required for decarbonising China’s energy sector, including for energy efficiency within the industrial, buildings and transportation sectors, will be as much as $453 billion per annum in 2030.
Some potential synergies and opportunities of undertaking financial reform alongside financing the transition to a cleaner and lower carbon development path are identified in the report, notably:
- Efforts to enhance transparency and coherency of financial regulation can be reinforced by the progress on monitoring, evaluation and compliance of Green Credit;
- The CDM Fund co-financing role provides valuable lessons of how limited public finance can be used in a targeted way for mobilising scaled up investment from the private sector;
- Financial innovation required for greater economic efficiency can be led by financial institutions championing green finance, e.g. the China Industrial Bank and the Shanghai Pudong Development Bank, which can deploy pilot use of non-lending instruments such as equity, guarantees and insurance for green and low carbon investments.
- Opening up the financial sector to allow private ownership of small and medium banks will increase financing for SMEs that provide green and low carbon business solutions, including energy efficiency services.
The discussion note identifies a range of questions that will be important in tackling the investment trilemma and avoiding a potential financing gap. This suggests the value of creating a China Platform for Low Carbon Finance and Investment to increase dialogue between relevant Government, financial and regulatory institutions on how to finance China’s low carbon pathway. It would help capture and share valuable learning now being generated through China’s green credit policy and guidelines, the practical investment experiences of the CDM Fund and Banks that are leading on green finance, e.g. the China Industrial Bank and Shanghai Pudong Development Bank. The Platform can provide coherency between green finance, climate finance and carbon markets, and provides opportunity for structured dialogue with leading international experts.
Amal-Lee Amin, E3G’s Associate Director commented:
"China has made very positive progress on the green finance agenda. This provides a strong foundation for the further policy and financial innovation that will be required to finance the scale of green and low carbon investment required. At the same time, the opening up of China’s financial sector also provides valuable opportunity for integrating green and low carbon finance objectives within a governance framework that would support China’s sustainable development. However, maximising potential synergies will require more integrated thinking and policy dialogue. This is why we suggest the value of a China Platform that captures lessons and feeds these into discussions on future financial reform.”
Shin Wei, E3G Senior Policy Advisor, added:
“As China moves to achieve its urbanisation and economic transformation goals, there is a need for more and timely low carbon/clean investment to ensure that its growth is ‘decoupled’ from GHG emission as early as possible. Unlike before, public finance alone cannot satisfy all investment needs, including infrastructure investment. As China innovates and tries out new financing models such as public-private partnerships (PPPs), it is imperative China’s decarbonisation ambition is incorporated into its overall reform agenda, especially the financial reform that will have widespread implications across its economy.”
The policy report is launched on the same day as the Green Growth Best Practise (GGBP) initiative report Green Growth in Practice: Lessons from Country Experiences.
E3G’s Associate Director Amal-Lee Amin and Senior Associate Chantal Naidoo are lead authors of the Mobilising Investment chapter, which Marcela Jaramillo, Policy Advisor at E3G, is a contributing author. The chapter draws on several country case studies of how to mobilise investment for green growth. Some of the key findings are:
- Importance of Governments in mobilizing green growth investment through an enabling environment; effective use of public budgets and investments and; tailored application of financial risk-mitigation instruments.
- Enabling frameworks need to provide green price signals and investment grade policies that removes market barriers, align economic drivers and support early market projects.
- Public budgets and investment, including the use of dedicated funds and other intermediaries, will increase green investment flows when integrated with fiscal frameworks, strategic plans and effective governance systems.
- A range of financial instruments can help mitigate financial risks and increase returns for private investors, these should be aligned with policy measures, and used in a targeted and transparent way.
- Long-term finance for green growth can be accelerated through innovative financial approaches and regulatory measures that mobilise dedicated capital for green investments.
Chantal Naidoo, E3G Senior Associate, notes that:
“The policy report is an important contribution to the emerging body of knowledge on country experiences in promoting green growth. It was an inspiring journey as we aimed to understand the innovations that are mobilising investment particularly the different levels and roles of national government. There is a momentum building in developing countries as they engage more strategically with policy and financial instruments – and build bridges between the different sources of finance in a very pragmatic manner. The emerging evidence also hints upon on wider changes within the financial system both domestically and internationally to support more integration of green investment within regulatory and risk frameworks.”
- E3G is an independent organisation acting to accelerate the global transition to sustainable development. We leverage outcomes on climate, economics, resources and security. More information available at: http://www.e3g.org/
- The E3G policy report on Financing China’s Low Carbon Pathway and accompanying discussion note are available here: [Links].
- The report and commissioned research was undertaken with the financial support of the Blue Moon Fund http://www.bluemoonfund.org/
- The GGBP report is the result of a collaborative partnership between the Climate & Development Knowledge Network (CDKN), the European Climate Foundation (ECF) and the Global Green Growth Institute (GGGI). It is the culmination of over a year of work by over 75 green growth practitioners from around the world. The report is available at www.ggbp.org, and supporting in-depth case studies will also be available from mid-July 2014.
Amal-Lee Amin, Associate Director, +44(0)7883 530 792 / Amal-Lee.Amin@e3g.org