SHAPING CHINA'S CLIMATE FINANCE POLICY - The Climate Group

China
This is part of
THE CLEAN REVOLUTION
SHAPING CHINA’S
CLIMATE FINANCE POLICY
Executive summary | November 2012
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China
Shaping China’s Climate Finance Policy
Executive summary | November 2012
Over the coming decade and beyond, China, like all countries, faces the challenge of
financing the essential transition from a high to a low carbon based society. This clean
revolution will cost billions in upfront investment, but deliver long-term savings and an
economy that is far more efficient and climate resilient.
In partnership with the Research Centre for Climate and Energy Finance [at the
Chinese University of Finance], The Climate Group Beijing is undertaking a six-month
project to understand how China can best finance this transition. The first output from
this project is a detailed report (in Mandarin) setting out recommendations for improving
China’s existing climate finance framework and the new institutions and mechanisms
that should be established. This short paper is a summary of the key points and
recommendations from the full-length report.
China’s challenges
In recent years China has achieved some important preliminary successes in its
climate actions, such as improvements in energy efficiency and slowing the rate of
emissions growth. But its high-energy consumption, intensive manufacturing activities
and high population, mean that the country still faces considerable challenges to
meeting its climate pledges. Key financing challenges include:
– The lack of a central management mechanism and institution overseeing the
disbursement and use of public climate finance.
– Disbursement of public funding to various sectors without a centralized strategy for
meeting national climate objectives.
– Underdeveloped monitoring mechanism and service industry for the carbon market,
limiting the potential of private sector capital to play its full part in driving climate action.
– The lack of a clear management mechanism for adaptation funding and actions.
– Uncertainty over China’s international climate strategy. This could hinder China’s
access to climate finance markets and its ability to influence developments in this area,
including in the area of South-South Cooperation.
– Addressing these challenges will require a multi-faceted response from the Chinese
Government centered around two broad areas of action, covering both public and
private finance:
– Institutional reforms combined with new strategies.
– Improved fiscal management, climate finance mechanisms and new funds.
Institutional reforms and new strategies
As with other countries, China’s climate strategy and action is developed and managed
by a wide variety of government bodies. The main institutions and bodies are set out in
the table below:
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Institution
State Council
National Leading Working Group on
Addressing Climate Change (‘the Working
Group’)
National Development & Reform
Commission (NDRC)
Department of Climate Change
Ministry of Finance
Role
China’s highest executive and
administrative body
Responsible for developing China’s
overarching climate strategy, objectives
and plans
China’s top economic planning and
administrative agency and responsible for
coordinating China’s climate actions
Part of the NDRC and responsible for
climate change planning and
administration
Responsible for management of state
budget, including for climate activities
A number of short, medium and longer-term reforms are recommended to be
undertaken by these institutions to improve the management of climate finance in
China.
Short-term reforms (i.e. under the current 12th Five Year Plan):
– The Working Group should develop clear, overall objectives and plans for climate
finance in China, including appointment of responsible managing agencies.
– NDRC should entrust the Department of Climate Change with greater power and
functions and also improve the existing coordination mechanism among the funding
management agencies under its authority.
– The Ministry of Finance should provide clear arrangements on the funding of climate
change programs, including the establishment of designated budget items and subitems
for climate related programs to be managed by the NDRC.
– The Ministry of Finance should also implement a funding approval system that specifies
qualified institutions for financing activities, with priority given to organizations raising
their own funding;
– The NDRC and the Ministry of Finance should establish an analysis and reporting
mechanism for direct climate finance to cover the disbursement use and effectiveness
of funding.
– Related to the preceding point, the Ministry of Finance should also formulate guidance
on climate finance assessment to ensure funding is meeting economic needs, project
objectives are achieved and funding is justified.
– Carbon reduction and adaptation to climate change should be incorporated in the
national development strategy and management system for international cooperation
and serve as a key criterion for project selection in national and international
investments.
– Elevate climate change collaboration to the level of international relations strategy to
facilitate climate funding into China.
– Enhance strategic planning with regard to South-South Cooperation, including on
outward financing and investment in other developing countries.
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Medium to longer-term reforms:
– Enact legislation detailing the responsibilities and status of government entities
involved in organizing and managing climate finance.
– Set up a ministry or national administration on climate change and energy under the
direct supervision of the State Council, to consolidate management of national climate
strategy and actions, including financing.
– Establish an international development administration with responsibility for climate
related international cooperation (including finance) also under the direct supervision of
the State Council.
– The Ministry of Finance should establish assessment and monitoring systems for climate
finance and develop guidelines for assessing the performance of new climate funds.
– The Working Group should establish a Carbon Trading Regulatory Commission
(CTRC) under the State Council.
– The CTRC should have full responsibility for the monitoring and management of a
national carbon market, including, but not limited to: allocation of emissions;
development of appropriate standards, regulations and laws; establishment of
appropriate bodies and mechanisms for the effective functioning of the market; oversee
development of derivative markets; and provide guidance to cities, provinces and
financial institutions.
Improved fiscal management, climate finance mechanisms and new funds
Improving fiscal management and climate finance mechanisms and the creation of new
funds, would ensure that China’s funding for climate action is delivered more effectively
and efficiently.
Improved fiscal management
As noted above, a key recommendation is the creation of designated budget items for
climate change action to be managed by NDRC. Existing national funding for
mitigation, energy conservation and other climate activities relating to transport,
agriculture, water and forestry, should be channeled into this centralized climate
budget. Local governments could apply to the NDRC for funding, which would verify
needs and help leverage private capital. The recommended specific budget items to be
created are listed in the table below.
National Budget Category
Climate Change
Specific Budget Items
Phasing out outdated capacity
Energy and resource conservation
Pollution and emissions reduction
Renewable energy
Sandstorms and desertification control
Conversion of cultivated land into forests
Conversion of pasture to grasslands
Return cultivated grasslands to natural grasslands
Low carbon city pilots
Adaptation to climate change
Climate data analysis
International cooperation on climate change
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Given the extent of climate investment required in China, it is recommended that
central and local governments allocate 3-5% of their annual budgets to climate funds.
Climate finance mechanisms New and improved climate finance mechanisms are
needed to leverage private sector capital in support of public climate financing. Action
in three key areas is required:
– Facilitate the development of green credit businesses.
– Establish a national carbon market.
– Develop new mechanisms for increasing adaptation financing.
Facilitate the development of green credit business
Currently, the ‘green credit’ business of China’s commercial banks is driven by policy
requirements and social responsibility objectives, rather than by commercial business
opportunities. The existing guidelines on low carbon growth for banks from China’s
Banking Regulatory Commission (CBRC) are also of a guidance, rather than
operational nature. New means for incentivizing the participation of commercial
financial institutions are therefore required. The following recommendations are made:
The Ministry of Finance should develop assessment standards for environmental and
climate risk, monitoring measures and implementation regulations in order to provide
financial institutions with the tools to assess the risk of low carbon projects.
The CBRC and the Chinese Insurance Regulatory Commission (CIRC) should develop
credit policies relating to national strategies on industry restructuring, energy
conservation and environmental protection. This would allow institutions to assess the
credit risk of companies with exposure to high-energy consumption, heavy pollution or
excess capacity.
A green credit guarantee fund should be established to provide first loss guarantee for
banks using public money from central and local government.
The Ministry of Finance and NDRC should provide interest subsidies (at 1-3%) for
green financing as another means of incentivizing the expansion in green credit.
Establish a national carbon market
A national carbon market should be established over the medium term, building on the
regional pilot schemes currently being established. For this market mechanism to
function effectively and help drive low carbon financing, a number of key
recommendations are made:
As recommended above, a Carbon Trading Regulatory Commission (CTRC) should be
established to monitor and manage China’s carbon market with regulatory agencies set
up at the local level.
National carbon market legislation should be developed based on existing pilot
programs to provide a firm legal basis for market activities.
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Necessary bodies should be established for monitoring and regulation of secondary
markets and independent third parties (e.g. carbon market service providers).
An agency responsible for real-time greenhouse gas (GHG) monitoring and data
management should be established.
A demand/supply monitoring mechanism should also be established with power to
regulate demand and supply by raising reduction targets or through buying or selling
allowances. This would prevent extreme fluctuations in price and so provide greater
investment certainty.
The design of the market should ensure compliance with international standards,
including for monitoring, reporting and verification (MRV), to lay the foundation for
future linkage to other national, regional or international carbon markets.
The government should enhance China’s MRV capabilities with respect to both
hardware (e.g. its Carbon Registry and trading system) and software (e.g. guidance on
emission monitoring and verification).
Develop new mechanism for increasing adaptation funding
The majority of climate finance in China has to date been directed towards mitigation
initiatives. The NDRC, however, is in the process of establishing 13 adaptation pilot
programs. Public funds, from both central and local government sources, are expected
to provide the key source of financing. Other mechanisms, however, could also be
used. Key recommendations are:
Private funding should also be channeled to adaptation work, for example, through
ecological compensation mechanisms. These mechanisms would allow businesses to
undertake certain activities if they provided funds for adaptation work elsewhere.
Insurance should also be used to lower the risks associated with climate change and
the government should introduce policies to facilitate access to insurance.
The government should also raise awareness among businesses and local authorities
about the risks and vulnerabilities created by climate change, to minimize impacts and
help keep the cost of insurance premiums down.
New funds
The creation of new dedicated climate funds would allow China to engage in financial
transactions with bilateral partners and international financial institutions in a more
efficient manner. The following key recommendations are made:
National climate fund
A national climate fund should be set up to promote China’s participation in
international climate processes, both as a contributor and a receiver of finance.
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The fund would be unrestricted (i.e. not limited to certain sectors or issues) and would
be under the authority of the Ministry of Finance, with funding used for both mitigation
and adaptation.
The fund would coordinate the management of international funds, divert capital to
climate change areas and leverage domestic capital.
The fund would be operated by a policy bank, such as the China Development Bank,
which has extensive experience managing international funding and policy programs
and the ability to integrate public, private and international finance.
A steering committee would be established to provide strategic direction to the fund.
Capital from the fund could be provided in the form of grants or loans. Grants would be
managed by the NDRC, while the bank would manage the commercial loans.
South-South Cooperation Fund
Strengthening South-South Cooperation on climate change issues is important for
China’s overall international engagement strategy. By working with other developing
countries, China can expand its international trade and build consensus on around
climate negotiation issues. To deepen this engagement an expanded Cooperation
Fund should be established and gradually grow in funding sources and disbursement
channels. Key recommendations are:
Build on China’s existing Cooperation Special fund, which was established in 2011, and
allocate a fixed amount of new annual funding (e.g. RMB 500 million).
Additional funding should be sought through international sources, private capital and
fee collection from project development.
The principle aim of the fund should be to increase the development capability of
developing countries. It should do this through the transfer of climate friendly
technology and with a special focus on technical capacity building.
The fund should aim to improve the coordination and collaboration among Chinese
parties, including research institutes and business enterprises, as well as country
partners.
The fund should work with China’s policy banks and incorporate emission reduction
and other climate factors in project selection criteria.
The fund should also encourage NGOs to play a bigger role in South-South
Cooperation, working with government and business to support climate policy planning
and capacity building projects.
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