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Marking Earth Day 2019

The Paulson Institute’s national parks initiative is working to protect China’s endangered species, like these snow leopards. (Photo: Tambako the Jaguar/Getty Images)

 

I declare this world is so beautiful that I can hardly believe it exists.”

—Ralph Waldo Emerson, American philosopher, 1836. 

Anyone who has experienced wilderness, whether a rainforest in Borneo, the Masai Mara in Kenya, Sanjiangyuan in China or Yellowstone in the U.S., will understand Emerson’s sentiment.

As well as providing essential life support systems for human beings, the sheer beauty of nature can have a profound effect on our senses. Nature is where we go to celebrate the good times and where we retreat to contemplate and seek solace in the bad times. This is no coincidence; scientists have shown that spending time in wild places can relieve stress, increase social interaction, encourage physical exercise and even help soothe mental illness. The economic benefits of a happier, more relaxed and less stressed population are hard to measure but are surely significant. In fact, research to value nature has been growing rapidly over the past few decades and, according to one study, so-called “ecosystem services” – all of the things that landscapes and the organisms that live in them do for us, from providing us with food and water, to sequestering carbon and filtering the air – could be worth well over USD 100 trillion per year to the global economy.

However, just as we are beginning to understand the real value of nature, it is under threat. According to the Living Planet Index, more than 60% of wildlife on Earth is estimated to have been lost since 1970. The IUCN Red List, the world’s most comprehensive information source on the global conservation status of animal, fungi and plant species, reports that more than 27,000 species are threatened with extinction, including 40% of amphibians, 25% of mammals, 14% of birds and 34% of conifers. The extinction rate is estimated to be between 1,000 and 10,000 times the natural rate. Those are incredible statistics and a stark warning that, globally, the international community must do better at protecting wildlife and the ecosystems on which we all depend.

China is one of the mega-biodiversity countries on Earth, positioned in two of the world’s major ecozones: the Palearctic and the Indomalaya. This vast country is home to around 35,000 species of vascular plants, ranking it third in the world only after Brazil and Colombia. The incredible wildlife of China shares habitat with, and bears acute pressure from, the world’s largest population of humans. More than 900 species of vertebrates are threatened, vulnerable or in danger of local extinction in China, due mainly to human activity such as habitat destruction, pollution and poaching for food and fur.

Fortunately, as in many countries, there is much work ongoing in China to better understand the value of nature and strengthen protection of the most important places and species. On this agenda, the Paulson Institute is working with the Chinese government in three main areas: national parks, coastal wetlands and market mechanisms.

National Parks

China is currently implementing plans for its first group of national parks, due to be announced in 2020. The value of a network of wild spaces is unquestionable. Aside from providing a safe haven for nationally significant ecological and cultural heritage, a network of National Parks will also help generate considerable economic benefits. For example, a 2016 study showed National Parks are worth USD 92 billion to the U.S. economy. The Paulson Institute is bringing in international experience from the U.S. and other countries to inform China’s policymaking. Several of China’s pilot national parks are home to endangered species of global importance, such as Giant Panda, Snow Leopard, Pallas’s Cat and Siberian Tiger and, once the National Parks are formally established, the future of these animals, and the local communities living alongside them, will be a little brighter.

Wetlands

We know from research published in the Paulson Institute’s Coastal Wetlands Blueprint that China’s coastal wetlands alone provide economic benefits of USD 30 billion each year. However, despite offering significant ecosystem services, wetlands have been under immense pressure. For example, the Blueprint reveals how, in the last 50 years, 53% of China’s temperate coastal wetlands, 73% of its mangroves, and 80% of its coral reefs have been lost due to land reclamation, unsustainable aquaculture, invasive alien species and pollution. As a result, the number of migratory birds along the East Asian-Australasian Flyway has decreased by 5-9% annually – a red flag for the health of the ecosystem.

Fortunately, following the publication of the Blueprint, the benefits provided by coastal wetlands are being acknowledged at the highest levelIn February 2017, the Chinese government added 14 key coastal wetlands to a tentative list of sites to be considered for World Heritage status and, in July 2018, the State Council issued a circular strictly curtailing further land reclamation along China’s coast. Now, the Paulson Institute is working to provide training for protected area managers to help ensure wetlands are managed effectively. The future of the migratory bird species that rely on China’s coastal wetlands – including the critically endangered Spoon-billed Sandpiper and Far Eastern Curlew – is now a little more secure.

Market Mechanisms

At the end of 2018, nine Chinese ministries led by the National Development and Reform Commission (NDRC) released an action plan to promote market-based ecological conservation and compensation mechanisms. The overall principle of the action plan is to build a policy environment in which those who benefit from ecosystem services – such as provision of fresh water, water purification, flood control, provision of food – contribute financially and those who protect, maintain and restore ecosystems are properly compensated. The Paulson Institute is providing international experience on market-based financing mechanisms for conservation, ecological compensation and restoration. For example, we are exploring the concept of mitigation banking for wetlands. This concept is a mechanism for compensating for unavoidable damage to wetlands caused by economic development activities. Under the mitigation banking mechanism, developers must first try to avoid, and then minimize, any impact on wetlands. For unavoidable damage, developers must pay the cost of replacing the lost ecosystem functions by restoring or creating wetlands elsewhere by themselves or by purchasing mitigation credit from the companies whose business is restoration of the degraded wetlands.

Helping to better understand, and value, the benefits provided by nature is a key step in protecting both important places and the creatures that inhabit them. The examples above are steps in the right direction and, on this Earth Day, it is worth reflecting on how we can all do more to slow, stop and reverse the decline in biodiversity. Nothing less than our future depends on it.

Contemporary China Speakers Series: “Traversing China, the US, and the spaces in between”— April 29

The Paulson Institute and Harris Public Policy invite you to join our lecture and discussion series on contemporary China.

Traversing China, the US, and the spaces in between

Featuring:
Jiayang Fan
Staff Writer, The New Yorker

Jiayang Fan is on the editorial staff of The New Yorker. She regularly writes about social, economic, and political issues in China for Newyorker.com. She is also a frequent contributor to the New York Times Book Review, Slate, the LA Review of Books, and VQR, among other publications.

Monday, April 29, 2019
12:30 – 1:30 p.m.
The Quadrangle Club
2nd Floor, Library
1155 East 57th Street
Chicago, IL 60637

Please click here to register

Box lunches will be provided to registered attendees.
Seating is on a first-come, first-served basis.

 

Breaking the Green Building Deadlock

(Photo: aaaaimages/Getty Images)

By Kevin Mo

In March 2019, the Chaoyang District government in Beijing announced the historical signing of a green insurance contract for securing green performance of a new building. It had taken three years from the Paulson Institute’s innovative green insurance model in a policy paper to the development of insurance products to the actual signing of a green insurance contract, which broke the longstanding deadlock troubling the green building market worldwide.

A brief history of green buildings

Green buildings have been touted as a promising solution to transform the building industry into a more environmentally responsible one, featuring energy efficiency, resource efficiency, healthy indoor air quality, and a series of other green considerations.

One of the most popular green building certification programs has been the Leadership in Energy and Environmental Design (LEED) program, developed by the U.S. Green Building Council in 1997. At almost the same time, the U.S. and China started to collaborate on a historical energy efficiency demonstration building project in Beijing, eventually owned by China’s Ministry of Science and Technology. The building was occupied in 2004 and earned the first LEED certification in China.

China started to develop its own national green building certification standard in 2006, the so-called Three-Star Program (TSP), and certified its first green building in 2008. In the program’s first five years, the total floor area of TSP-certified green buildings was less than ten thousand square meters, almost negligible compared to the 10 billion square meters of new buildings constructed in China over that period.

In 2013, the State Council released a National Green Building Action Plan, significantly jumpstarting the green building market. In the following three years, TSP certified 472 million square meters of green buildings, surpassing LEED as the world’s top green building certification program by total certified floor area.

China’s Green Building Program Has Grown Quickly Since 2013 (10,000 square meters)

Source: Green Building Center, Ministry of Housing and Urban-Rural Development

The design-performance mismatch

A common problem in most green building certification programs is the design-performance mismatch. In both the U.S. and China, green building certification programs started with a checklist of design details. As long as a building’s blueprints earned enough points to qualify for a certain green level, the building received a green building certification regardless of its actual performance after construction.

Unfortunately, a green building design does not guarantee green performance after construction and occupancy. Although green-certified building design does not necessarily mean green performance, developers usually charge higher premiums to sell buildings that have green-certified designs.

To address the design-performance mismatch, one solution could be to add another layer of certification for the performance stage, after a building has been occupied. Again, many developers simply ignore the second certification—by the time a building is ready for its performance rating, the developers have already made out with a ‘green’ profit. In fact, among all of China’s certified green buildings, less than five percent hold green performance certificates; most are green-certified by paperwork only.

The mismatch between design and performance has been a universal impediment to green building programs in the world.

Financially reinforced deadlock

As if this problem was not serious enough, governments worldwide promoting green development often jump on the bandwagon by offering incentives to green buildings. It is convenient for governments to demonstrate their green commitment by incentivizing certified green buildings. But if those buildings are certified by design on paper only, the gap between design and performance certifications will only be further widened. And when government incentives reward undesirable behaviors, it builds nothing but distrust between developers and consumers, eventually damaging the credibility of green building programs.

The green building market gets further skewed when bankers enter the fray.

A December 2017 report released by the former China Banking Regulatory Commission (CBRC) showed that 21 major Chinese banks had issued green credits totaling RMB 8.22 trillion among 12 green categories in the first half of 2017. Category Nine, for green buildings and energy efficient buildings, was issued a whopping total of RMB 730 billion in green credits from 1H 2013 to 1H 2017.

The banks decided whether or not a building was green based on design certificates. Therefore, banks probably cannot be blamed for missing due diligence, as they simply did not have the necessary institutional knowledge to make good judgment calls.

What if banks could issue green credits based on performance certificates, rather than design certificates? Regrettably, it would be simply too late, since construction loans are made before construction.

The term mismatch, between credit issuance before construction and green performance certification after construction, presents a huge dilemma that is financially reinforced by the current approach to green credits.

Green Loans for Energy-Efficient and Green Buildings are Rising Steadily (100 million RMB)

Source:Disclosure of statistics on green credits, by China Banking Regulatory Commission, Dec 2017

An innovative scheme to break the deadlock

In 2016, the Paulson Institute published a policy paper ‘Financing Energy Efficient Buildings in Chinese Cities,’ sponsored by the Bloomberg Philanthropies. The paper identified huge financial needs and gaps in the Chinese green building market. It proposed an innovative model that introduced the concept of green insurance for scaling green performance-centered green buildings, addressing the two mismatches: one between building design and actual performance, and the other between credit issuance and performance rating.

In 2017, People’s Insurance of China (PICC), the largest property and casualty insurance group in Asia, signed an agreement with the Paulson Institute to develop a line of insurance products based on the concept. In 2018, the city of Beijing—already one of the most active cities in promoting green buildings—agreed to pilot the green insurance model, with funding support from the World Bank and Energy Foundation.

The newly signed green insurance contract between PICC and a green developer in the Chaoyang District signified the embodiment of the green insurance concept proposed in the Paulson Institute policy paper. It also marked a perfect representation of the Paulson Institute’s “think-and-do” motto.

There remains much left to be done

The concept of a green insurance model to break the deadlock is not exceedingly difficult to understand. Under the model, a green developer buys an insurance policy before construction to guarantee a building’s green performance after construction. A banker then issues green credits based on the insurance policy. Once the building is constructed and occupied, the insurance company will be liable if performance ratings do not meet the original promise.

However, implementation of the concept proved to be much more challenging under the pilot.

First of all, the insurance company and the bank participating in the pilot differed in risk-averse preferences. Under current regulatory policies, the bank had little flexibility to adjust its credit issuance practices. An originally designed insurance-banking interlocking mechanism ended up not being implemented. If banks were to issue green credits based on performance-guaranteed insurance policies, it would significantly boost interest from green developers. The newly established China Banking and Insurance Regulatory Commission, merging former banking regulatory commission and insurance regulatory commission, shall have incentives to encourage the insurance-banking interlocking mechanism for green buildings.

Architects and building energy professionals were challenged by the new model as well. They had been used to designing green buildings based on the prescriptive checklist offered by green building standards. Rarely were their design models sophisticated enough to accurately predict actual performance, and their green building design capacity still needs to be enhanced significantly.

Improvement of all related regulations and policies proved to be a critical tipping point. Central and local government agencies must streamline current pro-green policies to foster more market-oriented innovations.

Furthermore, banks, insurance agencies, and governments must share credit reports among each other so that all involved parties can track and share the profile of a building project, from design to construction to occupancy.

Finally, the most important task that has not yet been fully achieved is to quantify the insurance premium based on the risks presented by developers, projects, green levels, and other factors. Hopefully, the first project will help improve the actuarial model.

Nevertheless, the first pilot of the green insurance model proved to be capable of breaking the green building deadlock. Further pilots will test a policy framework that can scale performance-based green buildings through coordinated efforts between green insurance and green credit. The Paulson Institute is committed to helping expand this innovative solution to addressing crucial challenges to green building development in the world.

China Releases Green Industry Guidance Catalogue: Opportunities for US Business?

(Photo: DANNY HU/Getty Images)

 

China released its new Green Industries Guidance Catalogue to help promote green development through clarifying the definition of “green industry” as well as harmonizing differing standards for sustainability. This new catalogue, essentially a mini-industrial plan, will be an important step in energizing and growing the Chinese sustainable industry goods and services sectors.

This past March, seven Ministries came together to launch the catalogue, including the National Development and Reform Commission, the People’s Bank of China, and the Ministry of Ecology and Environment. These powerful government bodies touch upon the key aspects of green industry from finance to buildings, energy, and new technologies. Together, they have established a plan to develop and enact policies that will support the growth of the green sector, develop a regulatory and financial infrastructure to promote investment, and determine clear standards on issues from the definition of “green” to high-level building code standards.

These policies combined with the existing push for green development could lead to China establishing the standards necessary for building a competitive industry for environmental goods and services – but also becoming a major exporter of those standards.

China’s market is the largest in the world for green goods and services, estimated by Goldman Sachs to be a $1 trillion opportunity. These new guidelines could further energize the sector through creating consistency in the understanding of what constitutes a green investment or product, but also through the creation of preferential treatment for sustainable companies.

Six broad categories of goods and services are being promoted. These range from renewables, cleaner production methods, waste management, sustainable infrastructure and services that support green development such as third-party verification and consulting. The increased focus will provide significant opportunities for Chinese and foreign companies alike.

As China defines what “green” encompasses in the financial sector, a taxonomy that the rest of the world has struggled with, it will allow for more confident investing and the potential rise of innovative financing vehicles. One of the challenges in the growth of the bond and equity markets has been deciding upon a common understanding of just what “green” encompasses.

In addition, developing a consistent definition of what constitutes a “green” company will create opportunities for increased micro-lending for small and medium-sized enterprises (SMEs).  Already, China’s major banks, such as the Industrial and Commercial Bank of China, will lend to established sustainable companies at a preferential rate, but often SMEs are too small to qualify for these loans. With the massive rise in fintech, companies such as Pintec or Ant Financial can provide microloans at a slightly preferential rate which provides capital to growing firms, but also provides financial incentive for small companies to “go green.” It is a virtuous circle.

China has also clarified how clean coal will be treated in these new guidelines. The country has taken a step forward in removing clean coal from qualifying for green bonds. Yet for the catalogue, the Ministries have chosen to retain coal in the definition of green for goods and services. They argue that coal still accounts for 60% of primary energy production and that it would be irresponsible – and unrealistic – to remove it. The compromise position is that only “clean coal” will be considered and the intent will be to promote its greater adoption.

Lastly, the new policies attempt to merge the standards that have been created through different pieces of legislation and policy guidance under one catalogue to make them accessible and easier to follow. China is rapidly moving ahead to set the standards in many of these sectors due to the fast pace of development of its own vibrant green industry—faster than the rest of the world—but also because, due to China’s sheer size, it tends to dominate.

The Green Industries Guidance Catalogue raises awareness that China’s green industry has grown 2.6 times in the last six years. As implementing guidelines are formulated to further define the opportunities, one thing that is clear is that China is moving ahead with building a vibrant “green” industry. As U.S. companies are some of the most competitive in the world in sustainability, these new guidelines should provide opportunities for firms in China.

China’s Green Finance Pilot Zones: Ready for Takeoff

The success of China’s special economic free trade zones in its opening up campaign is a tried and true recipe. Therefore, it is no surprise that China has established green finance pilot zones in the same fashion—a way to test specific policies before applying them nationally—but this time with an emphasis on experimenting with different green finance innovations.

In June 2017, China launched the first set of green finance pilot zones in Zhejiang, Jiangxi, Guangdong, Guizhou, and Xinjiang. This move as an important step toward the goal of building a robust national green finance system to help bankroll the country’s environmental protection goals. The experience gained in the local pilot zones help to inform potential successes and failures of green finance policies and to think through scale issues as policies are elevated nationally.

The key tasks for the pilot zones include enhancing the role of green finance in domestic financial institutions, promoting green credit, green insurance and green bonds, exploring establishment of the markets for environmental rights, strengthening government policies support, and developing green finance risk control mechanisms. It is expected that these innovations, policies, and practices tested in the zones can be applied nationally to unify green finance standards and improve the commercial sustainability of green finance.

Banks and financial institutions in the pilot zones have all been laboratories for testing a specific aspect of green finance. For instance, establishments in Guangzhou, as the capital of manufacturing hub Guangdong, were tasked with developing green credit facilities to curb emission and/or support energy conservation. In Guizhou, the emphasis was on green agriculture with regards to addressing the environmental waste issues in the largely bucolic province. To date, green finance zone experiences have been varied at best with the need to translate best practices and good policies for scale nationally.

Despite the mixed results, the most fruitful case to date is Huzhou in Zhejiang province. The city is where President Xi first introduced the concept that “green mountains and clear water are equal to mountains of gold and silver” to underpin the country’s environmental goals. The jury is still out on Huzhou’s green finance future, but it already some key success pillars in place including a sound governance system to encourage green finance development, a growing demand for green industry, and an established working relationship with China’s Green Finance Committee for technical support.  

Since 2017, Huzhou has played a pioneering role in green finance development including constructing a statistical system for green finance, an IT-based green financing platform, and a green finance evaluation standards and rating system applicable for green companies, projects, banks and services. As of June 2018, Huzhou’s green credit volume reached 22% of total financial credit issued by institutions in the city—that is about 9% higher than the national average due to the green credit policy incentives promoted in the city as a green finance pilot. As a result, the Bank of Huzhou has applied to be the 3rd Equator Principles Financial Institution in China, following the Industrial Bank and the Bank of Jiangsu.

In 2019, the State Council is expected to officially issue the list of the provinces and cities in China that would comprise the second tranche of green finance pilot zones. Some cities, such as, Lanzhou in Gansu province, Beijing, and Shenzhen in Guangdong province,have released their local plans for green finance development. It is likely they will be potential candidates on the list with Lanzhou as a top candidate due to its strategic location on China’s economic silk road. The new green finance pilot zones will likely endeavor to scale up green finance by improving green finance standards, further innovating green finance products and services, and finding ways to strengthen risk control mechanisms.

With the innovations tested and best practices gained in the old and new pilot zones, it should be an active year ahead for green finance in China and one that we will continue to monitor.