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The Green Team Speaks to…XING’AN GE

Mr. Xing’an GE is the President and CEO of China Emissions Exchange Shenzhen (CEEX), and the Secretary-General of Shenzhen Green Finance Committee (Shenzhen GFC). He is also the member of the Advisory Committee of Sustainable Finance under UNDP China. With more than ten years of experience in climate change and carbon trading, Mr. GE has been deeply involved in the design and operation of Shenzhen Emission Trading Scheme (SZ ETS). He joined the Financial Standards Working Group of China Financial Standardization Technical Committee, and completed the study on green private equity (PE) funds for 2018 G20 Green Finance Working Group. He also led the SZ GFC to join, on behalf of Shenzhen, the International Network of Financial Centers for Sustainability (FC4S) launched by UNEP. He graduated from the University of Massachusetts Amherst with a Master degree in public policy and administration and a Bachelor degree in Law from Nanjing University.

Xing’an Ge

The Interim Regulations on the Management of Carbon Emissions Trading (Draft for Comments) issued by the Ministry of Ecology and Environment in April 2019 sent a positive signal to the market since China officially launched its plan to build a national carbon market in December 2017. What role will the Shenzhen EEX play, and what are the opportunities and challenges, once the national carbon market is fully functional?

Since Shenzhen firstly initiated its carbon trading pilot on June 18, 2013, it has undergone over five compliance periods smoothly. Although the smallest pilot in size, Shenzhen has ranked first in market liquidity consistently and this trend continues annually.

Shenzhen will advance its pilot carbon market and continue to play a role in achieving the goal of capping the total amount of local greenhouse gas emission. Led by the municipal government, Shenzhen will explore a new model for synergy of pollutant control, energy conservation, and emissions reductions that would make better use of the ETS, combine pollution control with ecological conservation, and provide opportunities for nurturing the local infant carbon management services industry. To boost business growth, the Shenzhen pilot will provide experiences for the national carbon market as other industries join the national ETS, compel low-carbon transformation for local enterprises, and provide local businesses with investment and financing channels for low-carbon development.

The Shenzhen pilot faces both opportunities and challenges as the national carbon market becomes fully operational. As the smallest among the pilots, market size is the biggest challenge. Compared to other pilots, Shenzhen is characterized by having more green-tech development and a low number of energy-intensive industries. This signifies that Shenzhen will have a relatively small number of industries and enterprises covered by China’s national carbon market.

Yet, these challenges present opportunities at the same time. As mentioned, the Shenzhen market is distinctively differentiated from the national carbon market, but bearing these regional characteristics in mind, Shenzhen will fully leverage its rich and valuable experiences in terms of its legal system, market designing, capacity building and innovation of carbon financing products and services to facilitate smooth transition to the national carbon market. It also plans to expand the focus of emissions controls from just the industrial sector to the building and transport sectors as well as target individual behaviors that produce high emissions.

Fintech is playing a transformative role in the financial system as well as green and sustainable development. China is achieving rapid growth in this space. China’s State Council recently issued the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) and indicated it would launch a fintech pilot in Shenzhen. What are your thoughts on the application of fintech in support of green finance and sustainable development?

As an early adopter of China’s fintech innovation model, Shenzhen is a leader in terms of the number of fintech firms, industrial penetration, and local government support for fintech development. Under the GBA framework, the green finance development in Shenzhen will focus on using the cluster of financial institutions in the area to boost fintech in green finance and sustainable development.

Renmin University estimated the demand for green finance in 2017 to be 2.186 trillion RMB, but actual green financing for that year was only 0.94 trillion RMB. The gap between green finance supply and demand remains due to firmly held beliefs in the economics around green business and green projects that remain unchanged, and how financial institutions perceive them in terms of risk assessment. But fintech can realize increased creditability, greater efficiency, lower costs, and more control of risks. It can bridge demand for and supply of green finance, strengthen control of corporate operational risk and industrial risk, and help financial institutions innovate their risk assessment and decision-making models. Shenzhen will include fintech applications to create an innovative model of green finance to serve the real economy and facilitate supply-side structural reform.

The Shenzhen GFC was officially launched in June 2017 and you were responsible for its implementation. What role will Shenzhen GFC play in promoting green finance development in Shenzhen, facilitating the development of the GBA, and providing services for greening the Belt & Role Initiative? What do you have on the agenda?

Since its establishment, the Shenzhen GFC has been devoted to building a platform to coordinate business, government, and regulatory authorities for the development of green finance and ecological conservation. Based on Shenzhen’s economic and industrial characteristics, the Shenzhen GFC has proposed a green finance innovation program to build the city’s new green finance capacity and fill the gaps in China’s green finance development. Additionally, the Shenzhen GFC has advocated to institutionalize Shenzhen’s green finance development plan, supported the Futian district’s efforts to be included in the second batch of national green finance pilot zones, assisted the Shenzhen Sub-branch of People’s Bank of China (PBOC) with rediscount preferred loan for green SMEs, and organized business promotion activities between banks and green businesses.

The Shenzhen GFC has also actively collaborated with Hong Kong and other international partners to respond to the ideas of ecological conservation, green development, and sustainability featured in plans for the GBA. Engagement in the region included joint research on green finance, introducing innovative green finance products and services, raising awareness, strengthening capacity building, and advancing the implementation of green finance policies. The Shenzhen GFC aims to replicate the best practices of Shenzhen in the GBA area and nationwide, support the national strategy of greening the Belt and Road, and facilitate finance to play a more active role in green transformation and ecological conservation.

Going forward, the Shenzhen GFC will focus on six things:

  • Advance cooperation for greater integration of green finance in the GBA
  • Promote implementation of Shenzhen’s policies on green finance
  • Explore development of a sustainable green finance model and green finance’s role in serving the real economy by leveraging the Green Finance for Real Economy Laboratory jointly launched by the Shenzhen GFC and the FC4S
  • Strengthen green finance capacity building
  • Ignite green finance development including helping Shenzhen’s core financial area develop a distinctive green finance model, championing green finance innovation and practice in Qianhai pilot free trade zone, assisting the Shenzhen EEX to develop innovative green finance business, and building capacity with more green finance products
  • Support national standards development by participating in PBOC’s studies of green finance progress and green finance terminology, International Organization for Standardization’s (ISO) TC322 sustainable finance terminology, and UNDP SDG sustainable bond standard

Developing a nationally unified and internationally compatible green finance standards system is one of the PBOC’s priority tasks on green finance and you are taking the lead on the study for developing green fund standards. What are the opportunities and challenges for green funds, especially green PE funds in China?

Given the long investment horizons and relatively high risks that characterize the green industries and the increasing demand for green capital, only relying on traditional financing channels such as bank credit and bonds have proved insufficient to close the gap. Developing green funds is imperative. A green PE fund has three features—

  • Long duration to provide long-term and stable financing support for the green industries
  • Professional resources to help the green business grow rapidly by providing resource and management support
  • Focus on long-term returns that unlocks financing channels to near-term unprofitable companies, but that have great long-term potential

Therefore, green funds, particularly green PE funds, can diversify risks thorough professional asset allocation and portfolios can grow with “green” assets, allowing investors to participate in green development and reap its benefits.

Challenges faced by green funds include lack of the standards for evaluation and certification acceptable at home and abroad, and balancing between the greenness of an investment and its return risk ratio. As part of the national green finance standardization work, with the support of PBOC research bureau and the Energy Foundation, Shenzhen GFC led the research behind the Key Guidelines on the Green Private Equity Fund Standard (draft for discussion) completed in May with participation of Shenzhen EEX, Tsing Capital, Eco Capital and Goolun Capital. As a representative of China, I attended the first meeting of the ISO Standards Committee’s TC 322 Sustainable Finance in March, and reported the progress of our work to the group, generating much attention. With establishment of a set of green fund evaluation and certification standards, we hope that it will be able to steer government policies toward supporting and incentivizing the growth of green funds, provide channels for investors to participate in green projects and enjoy returns, resulting in greater support and more financing towards green industries.

As a leader in the carbon market and green finance space, how do you advocate living a low carbon lifestyle in your daily life?

I am a great believer in sports and exercise. Apart from jogging, I often do other sports, like body-building and hiking. In my daily life, if walking can get me to my destination, then I will not drive. And when not at work, then I wear lightweight clothing like sport apparel to reduce my air conditioning needs. I also care about resource recycling, including recycling of old clothes, electrical appliances, and plastic waste. I have joined my colleagues in a number of community activities like the Shenzhen Mill 100 Kilometers, Low-Carbon Walk and marches organized by the Shenzhen Yantian district and the SEE Foundation, to help raise public low-carbon awareness and cultivate public low-carbon behavior. The hope is that more and more people—the youth especially—pay attention to low-carbon development and the carbon trading market.

The Fourth Anniversary of the China Green Finance Committee

China has been actively promoting high-quality development of green finance and this year marks the fourth anniversary of the China Green Finance Committee (China GFC)—the platform for developing green finance action in China that was originally established in 2015 in advance of China’s hosting of the G20. In the past four years, China GFC and its 200 plus members have played important roles in terms of facilitating policy research, raising awareness, developing products and tools, and catalyzing international cooperation including for last year’s release of the Green Investment Principles for the Belt and Road.

In May, the China GFC held its annual meeting, which focused on the following areas:

  • Local green finance innovation and development
  • Establishment of an international green finance center in Beijing
  • Green investment along the Belt and Road Initiative
  • Green finance product development and innovation
  • Information disclosure and environmental, social and governance (ESG) investment
  • Financial services in support of green consumption, small and medium-sized enterprises (SMEs) and green agriculture

Kate Li, Associate Director of Green Finance Center at the Paulson Institute, spoke on a panel on how financial services support of green consumption, SMEs and green agriculture, and shared international cases on utilizing fintech to promote inclusive financing.

In remarks at the meeting, Chen Yulu, Deputy Governor of the People’s Bank of China emphasized that “China’s green finance has entered a new stage of in-depth development.” Going forward, China will focus on four tasks— conduct more research studies on green finance, develop green finance standards system, promote green finance products and services innovation, and enhance international cooperation in green finance. As China aims to execute these tasks, the China GFC will clearly have an exciting and critical role to play in supporting the development of a robust green finance market in China.

China’s Yellow Sea Coastal Wetlands Inscribed as World Heritage Site

Spoon-billed Sandpiper. (Photo: kajornyot/Getty Images)

In a move encouraged by the Paulson Institute, delegates chose to inscribe the “Migratory Bird Sanctuaries along the Coast of the Yellow Sea-Bohai Gulf of China (Phase I)” as part of the World Heritage List on July 5th at the 43rd session of the World Heritage Committee, held in Baku, Azerbaijan. This designation marked China’s first coastal wetland World Heritage Site and its 54th World Heritage Site in total. The Institute has collaborated with conservation organizations all over the world to strongly support this nomination.

The designated sanctuaries are located in coastal Yancheng, Jiangsu Province, and include the largest intertidal mudflats in the world. Located at the heart of East Asian-Australasian Flyway—the most threatened migratory flyway in the world—these sites support a large number of endangered and critically endangered species and provide important stopover, moulting, and wintering sites for millions of migratory waterbirds each year.

Rose Niu, Chief Conservation Officer of the Paulson Institute, lauded the inscription of the coastal wetlands in Yancheng. “This a significant milestone in coastal wetland conservation in China,” she said. “The inscription builds on the work of the Paulson Institute to highlight the importance of China’s coastal wetlands, and the resulting change in policy by the Chinese government to ban further land reclamation. The Paulson Institute will continue to support the conservation and sustainable management of coastal wetlands in China, including through our support for the Phase II nomination of Migratory Bird Sanctuaries along the Coast of the Yellow Sea-Bohai Gulf of China, and our ongoing support for coastal wetland and biodiversity conservation.”

Seventeen migratory bird species listed on the IUCN Red List have been recorded at the newly designated sites, including one critically endangered species (Spoon-billed Sandpiper) and five endangered species (Black-faced Spoonbill, Oriental Stork, Red-crowned Crane, Nordmann’s Greenshank, and Great Knot). Importantly, these mudflats host more than 90% of the remaining global population of Spoon-billed Sandpiper during their post-breeding moult, and 80% of the global population of Red-crowned crane during the winter. Some long-distance migratory species, such as Black-faced Spoonbill, Nordmann’s Greenshank, Eurasian Curlew, and Great Knot, use the area as a staging site to refuel during migration. The IUCN’s evaluation report indicates that the area provides indispensable natural habitats for many rare and endangered migratory birds, and has outstanding global conservation value.

Rudong Mudflats. (Photo: Jia Yifei)

The World Heritage Site inscription is the latest step towards protecting these globally important sites. Just five years ago, there were fears for the future of the intertidal mudflats along the Yellow Sea and the migratory waterbirds that depend on them. Around 60% of China’s intertidal mudflats had been lost in the previous few decades and much of the remaining area was under threat. To address these issues, the Paulson Institute partnered in February 2014 with the Convention on Wetlands Management Office, the People’s Republic of China, the Institute of Geographic Sciences and Natural Resources Research, the Chinese Academy of Sciences, and the Lao Niu Foundation to produce a comprehensive analysis of the value of coastal wetlands and devise a set of policy recommendations for coastal wetland conservation.

The resulting outcome, known as the “Blueprint of Coastal Wetland Conservation and Management in China,” was published in October 2015. Following its release, the benefits provided by coastal wetlands have been recognized by the Chinese government at the highest levels. In early 2017, the Chinese government added 16 key coastal wetlands to a tentative list of sites to be considered for World Heritage status, many of which were recommended by the Blueprint project for priority protection. This was followed by a July 2018 circular from the State Council halting further ‘business-related’ land reclamation along China’s coast. Currently, the Paulson Institute is providing training for managers of protected wetland areas and is working to ensure important wetlands in China are managed and conserved effectively.

There is still much work to be done to ensure the long-term protection and sustainable management of China’s coastal wetlands. However, after the decision in Baku, the future of these globally important sites and the migratory shorebirds that depend on them is a little brighter.

Henry Paulson: “Balkanising technology will backfire on the US”

Washington’s decision to blacklist Huawei, preventing US companies from buying its products, may be a death sentence for China’s leading technology group. It is hard to see how Huawei can survive without a negotiated settlement between presidents Donald Trump and Xi Jinping.

But this fight is about more than the fate of one company. After 30 years of globalisation, we now face the very real prospect that an economic iron curtain may descend. Technology has become a core problem in the US-China relationship, blurring the lines between economic competitiveness and national security. The battle is about whose economy will drive the technology of the future and set the standards for it.

These issues are among the most intractable because they strike at the core of each country’s national security and competitiveness, and there is no playbook for resolving them. Increasingly, the west and China will compete over whose technologies and standards will become dominant. The battle could fragment the world as some regions choose Chinese products and standards while others opt for infrastructure that is dependent on US and western technology and standards. One likely source of friction is the competition to build and deploy 5G architecture, which will underpin a vast array of commercial and military technologies.

Mutual efforts to exclude one another’s technologies from national supply chains would break the global innovation ecosystem. For strictly military systems, there is of course a straightforward national security basis for exclusion. But few hardware or software systems are straightforwardly military any more.

The US faces a twofold problem. First, other countries are unlikely to sever their technology relationships with China. A full-blown US push to freeze out applications with widespread or beneficial commercial uses is likely to flounder when other countries refuse to go along.

Some wealthy democracies may follow the US and seek to strip Chinese equipment out of their backbone technological systems. But most, and maybe all, developing economies will not and neither will some US allies.

America also risks isolating itself. The Huawei supply ban will reverberate well beyond China because it sets a precedent. Others may stop doing business with American companies and relying on US suppliers rather than run the risk that Washington might step in and inflict great harm on them by terminating the commercial relationship.

Understandably, Americans abhor China’s history of pervasive technology theft and forced technology transfer. They also rightly dislike the Chinese models of internet governance and regulation. But innovation cannot be separated from competitiveness. Balkanising technology could harm global innovation, hurting the competitiveness not just of Chinese firms but also of US companies around the world.

US policymakers are now focused on finding ways to hurt China and weaken its technological progress in advanced and emerging industries such as artificial intelligence, quantum computing, and advanced manufacturing. But they aren’t focused enough on what that effort might mean for America’s own technological progress and economic competitiveness, both of which underpin our national security.

As much as business and innovation leaders welcome the actions the US government is now taking to protect vital new technologies, they worry that government bureaucrats will introduce controls without fully considering the impact on America’s global position and its access to some of the world’s largest and fastest-growing markets.

Detaching the US from Chinese entrepreneurs, scientists and inventors — and the ecosystem in which they foster innovation — will undermine America’s own ability to innovate. China and other countries will continue to jointly make progress by working with one another.

At worst, we could sequester so much important technology in the US that American companies would no longer be able to participate in the international research collaborations and supply chains that fuel the fastest-growing industries. The US would also lose its place as the world’s most attractive investment destination.

The whole world will be watching when Messrs Trump and Xi attend the G20 meeting in Osaka on Friday. Business and government leaders everywhere hope the two leaders can reboot the trade negotiations and drive them to a successful conclusion. But as arduous as these talks have been, this challenge pales in comparison to managing the looming technology competition.

This is the paramount challenge for US economic and national security because innovation is one of America’s defining strengths. We need to protect it — but without erecting an economic iron curtain that weakens us by closing us off from other innovative economies and people.

The writer, a former US Treasury secretary, chairs the Paulson Institute

This article first appeared in the Financial Times.

Addressing Air Pollution on World Environment Day

(Photo: zhongguo/Getty Images)

 

Today, China is hosting World Environment Day, focusing on air pollution. The intention is to highlight the significant impact of air pollution worldwide and to urge governments, industry, communities and individuals to work together to improve air quality in cities and regions across the world.

Why does air pollution occur?
Globally, air pollution has become a major health concern. 92% of people worldwide are not breathing clean air and approximately 7 million people worldwide die prematurely each year from the impacts of air pollution, with about 4 million of these deaths occurring in Asia-Pacific.

The manufacturing of everyday goods, such as smart phones, washing machines and cars, requires significant energy use. Generating the energy needed to power economic activity, in particular the burning of fossil fuels such as coal, causes harmful pollutants to be emitted to the atmosphere.

Often there is no direct cost to a manufacturer to pollute the air, and thus there is little economic incentive for that company to spend money to reduce its environmental impact. The costs of pollution are instead passed on to society and the environment in the form of health costs and environmental degradation. In economics, these costs are called “externalities.

Air pollution is an example of a negative externality. Because the costs to the environment and society of pollution are not paid by the producer (for example, a power station), the retail price of energy is lower than it technically should be, resulting in higher consumer demand and higher production. This means there is a greater environmental cost to production than is economically efficient. The inefficient allocation of resources caused by not accounting for externalities is often described as “market failure. Many countries, including the United States, United Kingdom, China and India have faced serious air pollution during their development phases.

How do we address externalities and correct market failure?
There are several ways to address the issue of externalities. Two of the most common policies are:

  • Standards (safety or technology): a legal form of regulation that limits how much pollutant a company or facility can emit. Authorities regulate behavior directly by dictating a maximum level of pollution that a factory may emit (known as a safety standard), or by requiring firms to impose the adoption of technologies for reducing emissions (a technology standard). Although very simple, this type of regulation is sometimes criticised as being too inflexible, as it imposes the same costs on each company or facility, regardless of the actual cost of reducing pollution.
  • Incentive-based regulation (e.g. tradable emissions right): a more flexible, but more complex system that sets the total amount of pollution acceptable but leaves companies and facilities to work out the cheapest way to achieve the overall target. Those who find it cheaper to reduce pollution are incentivized to ‘over-achieve’ and sell the credits to those who find it relatively expensive to make reductions themselves. This kind of system is more economically efficient, but often more complex to manage.
(Photo: Lintao Zhang/Staff/Getty Images)

 

China’s Air Pollution Timeline
It is well documented that China is facing multiple and serious environmental problems due to its recent rapid industrialization, including chronic air pollution in many of its major cities. In recent years, the government has been using a range of measures to try to improve the country’s air quality:

  • September 2013: The State Council releases its Action Plan for Air Pollution Prevention and Control (2013-2017), focusing on reducing levels of PM2.5 and including funding of USD 277 billion
  • March 2014: Premier Li Keqiang declares “war on pollution” at the annual National People’s Congress
  • April 2014: Amendments are made to the Environment Protection Law to strengthen compliance and enforcement
  • July 2018: China releases a new 2018-2020 Three-year Action Plan for Winning the Blue Sky War

These measures have helped China to make significant improvements to air quality. The 2013 Action Plan set PM2.5 targets for key regions, requiring significant reductions between 2013 and 2017 – for example, 15% in the Pearl River Delta and 33% in Beijing.

To meet these targets, Beijing has used direct regulatory measures, such as closing coal-fired power plants, and restricting coal burning for heating purposes. Nevertheless, these measures enabled the city to achieve a 35% reduction in annual average PM2.5. By 2017, China’s three biggest city clusters (Beijing-Tianjin-Hebei, and the Pearl and Yangtze deltas) had all beat their targets.

However, despite this progress, no Chinese city has yet reached the World Health Organization’s recommended annual average PM2.5 level of 10µg/m³. According to Greenpeace, as of the end of 2017, only 107 of China’s 338 cities of prefectural level or higher had reached the WHO’s interim standard of 35µg/m³.

What is the Paulson Institute doing to help?
Tackling China’s air pollution is a key priority for the Paulson Institute and several of its programs advocate for policies to improve air quality through the adoption of clean technologies and the sustainable solutions. For example, the Paulson Institute’s Green Finance program is exploring how to direct investment into sustainable and low-pollution solutions, the Institute’s work to explore market mechanisms is helping to properly value the environment in economic decision-making, and the Paulson Prize for Sustainability is promoting China-based initiatives that present innovative and scalable solutions to economic and environmental challenges.

On this World Environment Day, we must all redouble our efforts to improve air quality for billions of people around the world. With only 8% of the world’s population enjoying clean air, we have much work to do!