WANG YIMENG/FOR CHINA DAILY
Fostering the green transition could be the most important industrial policy of the coming decades, and funding has a role to play in addressing inclusion challenges
Efforts to combat climate change and strive for a green transition essentially correct the negative externalities of carbon emissions resulting from economic activities. To that end, major economies have set timetables to reach peak carbon emissions and achieve carbon neutrality.
Greenhouse gas emissions are global in nature and reducing carbon emissions requires both technological innovation and the restructuring of traditional industries, potentially requiring a number of important industrial policies in the coming decades. Industrial policies to facilitate the green transition can lead to significant inter-regional, cross-sectoral and inter-temporal shifts in utility, leading to greater income inequalities between different regions and groups of people.
Within an economy, the green transition can lead to inequalities between different regions and economic sectors. Central to the green transition is reducing the eco-premium – the extra cost of choosing clean energy over energy that emits more greenhouse gases. As the green transition accelerates, traditional fossil-fuel related industries will face rising costs and dwindling output, while industries using cleaner energy will gain a comparative advantage encouraged by favorable policies. This is likely to increase income disparities between different regions.
A recent study conducted by the Global Institute of China International Capital Corp. conducted shows that the gap in GDP per capita between underdeveloped high-carbon emitting regions and those with low emissions has widened since China’s “four-eyes principle” policy was implemented. for energy use and energy intensity. Because energy-intensive industries are more likely to be in the middle of industrial chains, they have weaker bargaining power vis-à-vis upstream energy producers as well as downstream energy consumers, and bear most of the transition costs As the economies of less developed regions tend to rely more heavily on emission-intensive industries, limits on CO2 emissions will exacerbate regional imbalances in development.
CO2 reduction will also have an impact on local government tax revenues. For example, about 40 percent of tax revenue in Shanxi Province and Inner Mongolia Autonomous Region comes from the mining and energy industries, which also employ most of the local workers. The two regions are expected to face greater fiscal pressures aside from the need to provide job training to redundant workers during the transition process.
So what role could finance play in facilitating a more inclusive green transition in China?
China can increase the use of policy-based finance and develop transitional finance alongside green finance. Policy-based finance has played a crucial role in China as it mobilizes social finance while supporting the implementation of national strategies and funding key sectors and vulnerable parts of the economy.
In recent years, policy-based finance has made significant contributions in areas that promote equality and inclusive growth, such as Policy-based financing instruments have also promoted green and low-carbon development and built an increasingly inclusive green financial system.
However, a disadvantage of the existing green finance scheme is that it mainly targets new carbon emissions, with limited coverage of the existing carbon footprint of traditional high-emission industries. In comparison, “transitional finance”, financing for high-emission industries, could complement green finance and help close the financing gap during the green transition, ensuring a fair transition for the whole economy.
The Transition Financing Framework adopted at the recent G20 Summit in Bali, Indonesia, emphasizes that a just transition is one of the five pillars of transition financing. The document states that member country governments and financial institutions should encourage borrowers to assess the potential socio-economic impacts during the green transition and disclose the measures taken to mitigate potential negative impacts.
In general, China’s transitional financing lags far behind green financing in both the volume of financing and the variety of products. Currently, insufficient attention is paid to ensuring an inclusive green transition and the potential for growth in transition finance remains significant. Since 2020, China’s financial institutions in the green finance pilot zone in Huzhou, Zhejiang Province, have introduced trial standards for issuance of transitional financial products and published trial guidelines.
Last year, the Bank of China and China Construction Bank released Transition Bond Guidelines, which included definitions for transition bonds and the scope of supported use of proceeds. The two banks have also issued transitional bonds. The National Association of Financial Market Institutional Investors (NAFMII) has also launched Sustainability-Linked Bonds (SLBs). By linking the cost of funding to an issuer’s sustainable performance goals, SLBs help issuers meet and implement their green transition commitments.
This year, the Shanghai Stock Exchange and NAFMII released a document on transition bonds. The Shanghai Stock Exchange stressed that funds raised for the green transition should meet the requirements of national strategic plans and industrial policies, and at least 70 percent of the total revenue must be dedicated to the green transition. NAFMII requires that funds raised through transition bonds be used solely for the green transition.
Meanwhile, China can also create a sound financial environment for an inclusive green transition by strengthening coordination between policy-based finance and fiscal policy.
On the one hand, the country should use transfer payments to cushion the effects on the people affected by the transformation and support socio-economic development in provinces whose fiscal pressure will increase in the green transition process. At the same time, these provinces should be supported to support their green transition, for example by improving research on decarbonization technologies. By gradually phasing out excess production capacity in high-emission industries like steel and coal, China has set up special funds to reward and subsidize industrial restructuring, with a focus on helping laid-off workers find re-employment.
In the future, with advances in transitional finance, the country could improve the social security system to smooth household income streams for the unemployed and create jobs through infrastructure construction projects that require relatively low-skilled labor and can be implemented quickly. In addition, social security funds and industrial development funds should be established to support infrastructure construction, ecological restoration and the promotion of new industries to avoid the impact of population migration and industrial erosion.
On the other hand, as China’s national carbon trading market matures, carbon credits could be auctioned and its proceeds used to support an inclusive green transition. For example, the 2022 revision of the European Union Emissions Trading System proposed increasing the modernization fund to help 10 low-income member states modernize their energy systems and improve energy efficiency, conducive to promoting an inclusive green energy transition among low-income people will be countries.
At present, the draft regulations on CO2 emissions trading still have to be finalized. However, the revised draft of March 2021 proposed to allocate carbon emission allowances to the most important emitters at a price, the proceeds of which could flow into the national carbon trading fund.
In the transition process, China could learn from the practices of the European Union and consider establishing two funds, one to finance the construction of the national carbon market and key programs to reduce greenhouse gas emissions, and another to promote an inclusive green transition and support the Development of clean energy systems in the most vulnerable regions in the process of decarbonization.
The author is Chief Economist of China International Capital Corp and Executive Director of CICC Global Institute. The author contributed this article to China Watch, a think tank run by China Daily. The views do not necessarily reflect those of China Daily.
Contact the editor at [email protected]
Comments are closed.