Removing barriers to clean energy investment in China may contribute more to climate protection than any global climate treaty. The incentives and rules of such a treaty will be blunted and frustrated by distortions of the world’s largest potential clean energy marketplace unless policy makers recognize and deal with the realities of that market.

This paper describes problem areas and suggests policy adjustments for domestic and international cooperation to reduce the growth of greenhouse gas emissions in China.

China fortunately has made energy efficiency and sustainable energy development top policy priorities. Only Europe has set automobile fuel economy targets higher than China. No nation has a more exacting goal than China’s plan to cut energy intensity by 20 percent by 2010.

But unintended consequences of regulatory policies—red tape— obstruct clean energy development in China. Lending controls, foreign investment laws, company formation regulations, and even the Clean Development Mechanism (CDM), a kind of emissions trading system between rich and poor countries created by the Kyoto Protocol of the United Nations Framework Convention on Climate Change (UNFCCC), increase financial risks and costs for project developers through unnecessary expenses and lengthy wrangles for approvals. These poorly understood barriers to clean energy investment frustrate China’s admirable commitment to ambitious clean energy goals.

Although customers for clean energy are motivated by high energy prices and energy shortages, the Chinese marketplace lacks certain basic mechanisms to implement clean energy measures. A gap separates objectives set by the national government and implementation of them by provincial and local government leaders.

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Leading climate expert and Carnegie Senior Associate William Chandler and co-author Holly Gwin demonstrate that financial reform is a sine qua non for curbing China’s greenhouse gas emissions in a new report.  China has enacted national policies to promote clean and renewable energy, but these laws have been undermined by unnecessary financial hurdles and bureaucratic struggles that increase financial risks and costs for potential investors.

Chandler argues that restrictions on debt financing and foreign equity investment, unfavorable tax policies, and even the United Nations’ emissions trading system all discourage foreign investment in clean energy in China. 

The paper identifies steps China can take independently that will simultaneously benefit its economy and decrease its carbon emissions even as the world continues to work toward a climate treaty.

Chandler concludes that to encourage investment in clean energy, China should:

• Exempt clean energy investments from foreign exchange, foreign-invested enterprise, and industrial policy controls;
• provide tax exemptions for clean energy companies and services—particularly in regards to the value added tax (VAT), which sucks up 17 percent of total revenues;
• make risk-based clean energy lending more worthwhile for banks;
• provide loan guarantees for energy-efficiency projects in China;
• reduce required paperwork for clean energy investment; and
• address restrictions created through the emissions trading system that actually increase risk to investors.

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About the Authors:

William Chandler is a senior associate at the Carnegie Endowment and director of Energy and Climate Program. Chandler has spent over 35 years working in energy and environmental policy and was a lead author for the Nobel Prize winning Intergovernmental Panel on Climate Change.  He is president of Transition Energy, co-founder of DEED China, and founder and former director of Advanced International Studies at the Joint Global Change Research Institute. Chandler received the 1992 Champion of Energy-Efficiency Award from the American Council for an Energy Efficient Economy for his work. In 1999, he received the first Global Climate Leadership Award from the International Energy Agency. He has authored or co-authored ten books which have been favorably reviewed by scholarly and popular critics and translated into several foreign languages.

Holly Gwin is general counsel and co-founder of Transition Energy. Gwin served six years in the Clinton administration as general counsel and staff director of the White House Office of Science and Technology Policy, where she reported directly to the President’s science advisor. She also worked as staff director of the President’s Commission on Gulf War Veteran’s Illnesses, and previously served as General Counsel of the U.S. Congress Office of Technology Assessment. Gwin has published widely in science policy. She holds a law degree from the University of Tennessee and is a member of the District of Columbia Bar.

Carnegie Energy and Climate Program:

The Carnegie Endowment for International Peace is proud to publish this report from the new Carnegie Energy and Climate Program. Established in late 2007, the program integrates thinking on energy technology, environmental science, and political economy and engages experts around the world in research collaborations to develop actionable information and change the way policy makers think about energy policy.

The program provides the leadership needed to reduce risks stemming from global climate change and competition for scarce resources.

For more information, please visit
www.CarnegieEndowment.org/energyandclimate.

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