Financing Building Energy Efficiency: A Challenge and Opportunity for China’s Cities

(Photo: DuKai photographer/Getty Images)

By Kevin Mo

China has made a number of remarkable environmental commitments over the past several months, from the Paris Agreement in December, in which it agreed to peak carbon by 2030 or earlier, to the new 13th Five Year Plan, which maps out the country’s transition to a more sustainable, low-carbon, services-oriented economic model. Now comes the challenge: how to translate these critical high-level commitments into action on the ground, especially in China’s fast-growing cities.

A trend for low carbon transition

Cities are major carbon emitters, in large part because they contain so many buildings. As China’s cities shift toward a more services-based economic model, heavy industries that used to dominate Chinese cities will close down or relocate. Buildings will account for a steadily growing share of carbon budget. And cities will also continue to grow: with 500 million people already moved to cities in the past 35 years, Chinese cities will see another 100 million migrants, translating to more buildings and more building energy use.

Some Chinese megacities have signaled this trend. In Beijing, for example, the service sector accounts for more than 70 percent of GDP, more than in any other Chinese city, and over half of Beijing’s carbon emissions come from buildings. Shanghai’s urban centers display a similar pattern, and its Changning District sees 75 percent of carbon emissions from its building sector.

As China urbanizes and moves toward a service-based economy, buildings could hold the ultimate key to determine whether or not China can make a smooth transition to sustainable economies, critical for the country to fulfill its carbon commitments. Just a couple of days ago, Mr. Fatih Birol, executive director of the International Energy Agency, warned that energy inefficient and substandard construction in developing countries lock the world into high greenhouse gas emissions for decades, and the world’s number one priority in tackling climate change must be to ensure those buildings meet higher standards of efficiency and safety.

Huge financial gap

To control carbon emissions from buildings, China’s cities will need to both promote greener new construction and also retrofit tens of billions of existing buildings. But where will the money come from?

According to a new report produced by the Paulson Institute in collaboration with Bloomberg Philanthropies and China Green Finance Committee, during the 13th Five Year Plan Period, an estimated 1.65 trillion yuan (about 254 billion USD) will be needed for Chinese cities to build new greener buildings and retrofit existing buildings. The government can only fund less than 10 percent of the total. In the past eight years, China has renovated over 800 million square meters of residential buildings in northern China, with over 80 percent of the funds coming from government. This is a great achievement but not a sustainable model, given that tens of billions of inefficient buildings waiting for renovation. New financial policies, innovative products and mechanisms must be developed to break down the barriers for private capital to access green industry.

In addition, over-reliance on public finances and skewed incentive structures have led to excessive government intervention, which discourages private capital from entering the building energy efficiency market. Ultimately, the shortage of funds will make it difficult for China to peak greenhouse gas emissions from urban buildings any time soon.

A number of additional factors contribute to the problem. The lack of positive long-term building energy policy also discourages potential investors. At present, China doesn’t have green building legislation or a long-term roadmap toward zero energy buildings. Green buildings are built on a voluntary basis, and the national building energy efficiency plan only covers five-years out. Companies are therefore reluctant to invest in the research and development of green building technologies and products with a payback period longer than five years.

Most green buildings are evaluated based on design drawings, which often don’t translate into green performance in operation, so Ministry of Finance is reluctant to implement the incentive policy on green buildings that was announced in 2013.

Lack of transparency makes financing difficult, too. There are regulations requiring disclosure of building energy performance data, but they are never seriously enforced. Due to a lack of clear information in the market, consumers can’t find energy-efficient buildings; energy service providers can’t identify high-energy consuming buildings; and owners have no idea whether their buildings perform well or not.

How to fix the problem?

First, the government should adopt a long-term national building energy plan that clearly specifies the ultimate goal is zero energy buildings, with a feasible roadmap and mandate to consistently update building energy codes to achieve this goal. This will send a clear signal to the private sector and encourage investors to drive more capital on research, development and deployment of advanced building technologies and innovative products.

The government should also adopt diversified and innovative financing tools, including green building industry funds and urban energy-efficiency renovation bonds that cover the entire building supply chain. Meanwhile, discounted loans for green buildings, certified by a third party, would go a long way toward encouraging developers to build green buildings. At the same time, the government can encourage consumers to buy green homes by urging banks to provide loans at concessional rates. Suggested by the report, a guarantee framework for greener buildings, based on a third-party rating system, would help enhance builders’ credit to attract private capital and incentives and subsidies from the central and local governments.

The international financial community can help drive green buildings, too, and so the government should strengthen international cooperation and tap into international green loans and funds. China should also consider relaxing restrictions on investment quotas and asset movement in-and-out of the country for investors who want to put their money into China’s energy efficiency retrofitting projects and green buildings.

What’s the bottom line? For now, because of continued government intervention without a long-term national building policy, pent-up demand in the market for green buildings isn’t being unleashed. Private capital is discouraged. The stakes are high, as China has set ambitious carbon emission goals. Buildings offer an enormous opportunity—for both commercial returns and carbon savings. But if China wants to capture the enormous carbon abatement potentials, then the way forward is transparency and a coordinated set of market-focused policies that will encourage private capital to jump into the market.