China’s green finance policy should support coal consumption reduction

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China should develop a comprehensive set of financial policies to limit investment in coal mining and coal-related industries and expand investment in clean energy and renewable energy in order to promote its energy transition and the peaking of coal consumption at 4.0 – 4.2 billion tons before 2020, according to a new study released today by the People’s Bank of China Research Institute and Greenovation Hub as part of the China Coal Cap Project, a joint initiative of academic, governmental and non-profit researchers.

DownloadReport: Financial policy framework for China's energy transition and total coal use control 

 

BEIJING (April 23, 2015) – China should develop a comprehensive set of financial policies to limit investment in coal mining and coal-related industries and expand investment in clean energy and renewable energy in order to promote its energy transition and the peaking of coal consumption at 4.0 - 4.2 billion tons before 2020, according to a new study released today by the People’s Bank of China Research Institute and Greenovation Hub as part of the China Coal Cap Project, a joint initiative of academic, governmental and non-profit researchers with the support of the Natural Resource Defense Council (NRDC) and World Wildlife Foundation (WWF). These policies should set appropriate mechanisms to either discourage or encourage investments and loans in relevant industries, and expand related financial services and products to support scale up of clean energy.

 

Analyzing Trends in Financing of Coal Related Sectors in China

 

With regard to coal related sectors, the report analyzed 5.508 trillion RMB in loans for the period January 2008 to March 2014 from 16 Chinese public banks, including the 5 largest commercial banks, to 168 publicly listed, A-share coal related enterprises, including in coal mining, coal power, iron and steel and building materials. From 2008 to 2011, the loans to these coal related sectors maintained steady and relatively fast growth. From 2012 to 2013, the total value of loans to large coal related enterprises grew more rapidly, with the total value of loans in 2013 204.5% larger than the value of loans in 2012, a 45.6% increase in the rate of annual growth. The bank loans to public coal related enterprises were primarily concentrated in the coal mining sector, with the value of individual loans in this sector being particularly large; coal mining industry loans were primarily concentrated in Xinjiang, Shanxi, Shaanxi, Henan and other provinces rich in traditional energy. Loans for Guangdong, Heilongjiang, Sichuan and other provinces were primarily concentrated in thermal power and building materials.

 

The Huge Potential for Increasing Investment in Renewable Energy, Energy Efficiency and Emissions Reductions, Especially through Encouraging the Participation of Private Capital

 

According to Bloomberg New Energy Finance data, China’s clean energy investments in 2014 reached $89.5 billion, the highest in the world, representing 29% of global investment, a 32% increase from 2013. Even though China entered the clean energy sector relatively late, its development in the last ten years has been extremely rapid, showing the potential for expanding China’s investment in clean energy.

Moreover, studies have shown that from 2015 to 2020, China will need 2.9 trillion RMB ($475 billion) annually in investment in clean energy, energy efficiency and emissions reductions for industry, buildings and transportation. Within this figure, the need for green finance each year is about 2 trillion RMB ($328 billion). The capacity for the government to invest public finances in energy efficiency, environmental protection and clean energy is limited, so there is a need to stimulate the development of market finance and to encourage the participation of private capital. Therefore it is extremely important to establish a strong green finance system, and develop mechanisms to reform resource allocation through effective financial measures.

 

Challenges in Financing the Energy Transition and the Need to Limit Credit for the Coal Industry

 

Coal is the dominant driver of China’s high carbon, high pollution energy consumption model, which is currently transitioning towards one that seeks to reduce and replace coal in the energy system and to use coal more cleanly. This transition has urgent financing requirements, but there are a number of issues with current energy financing that are obstructing further progress. The most important of these include that: 1) credit finance is concentrated in the coal industry; 2) access to credit for renewable energy is too narrow and limited; and 3) the majority of investments in energy efficiency and emission reduction are self-financed by industry or come through government subsidies; financing through the commercial loan market is still relatively small.

In the coal industry, outside financing primarily comes from bank loans. As a result, the main priority for capping coal consumption is to control the coal industry’s access to credit. In order to evaluate the effectiveness of coal cap policies and to deepen research on the impact that the coal industry’s loans have on the scale of its investment and production, this report analyzes the effect of credit policies in helping to cap coal cap production and consumption. Under a scenario in which GDP grows at 7.5%, if banks restrict the total loans for coal industry fixed assets to no more than 24 billion RMB ($3.9 billion, approximately 40% of 2013 levels), then coal production in 2020 may be limited to no more than 3.856 billion tons. Based on research that indicates that the proportion of coal production to coal consumption is about 95:100, this would allow China to realize the target of peaking coal consumption peak before 2020 at 4.0-4.2 billion tons. It would also help China to avoid investment risks in future stranded assets.

At the report release event, Yang Fuqiang, NRDC’s Senior Advisor for Energy, Environment, and Climate Change, stated that, “We need to establish a complete policy system for green credit, green bonds, green securities, and green insurance that inhibits the development of surplus production capacity in coal, steel, cement, and other industries and encourages efficient energy production and the adoption of energy efficient technology. We should construct and expand a green financial system that guides the capital and financial products markets to support cleaner energies to replace coal such as natural gas, solar, wind, and other renewable energy industries.”

 

Acknowledgement: 

The study is supported by the Natural Resource Defense Council (NRDC) and World Wildlife Foundation (WWF)