Assessing Progress and Challenges in China’s Climate Finance Pilots with 1,500 Projects Across 23 Cities

Key Takeaways:
1. Chongqing’s Climate Innovation:
CCHP station in Chongqing secures a $60 million loan for a climate investment, setting a model for collaborative platforms.
2. China’s Climate Pilots:
23 pilot jurisdictions showcase diverse climate initiatives, with 18 actively implementing projects, revealing varied progress and database surprises.
3. Green Finance’s Impact:
Green and climate finance merge, revealing China’s unique projects requiring expert assessments, and a leadership dichotomy shaping policy challenges.

Bonus Insight:
Despite challenges, China’s climate finance journey is a captivating tale of innovation, adaptability, and commitment to a greener future.

China's climate finance initiatives, green finance, and challenges – exploring the journey to a sustainable future.

Amid the bustling landscape of Chongqing, China’s south-western megacity, a dynamic energy venture has secured a substantial 470 million yuan (US$60 million) loan from the Bank of China. The ambitious endeavor is dedicated to financing a groundbreaking Combined Cooling, Heat, and Power (CCHP) station, poised to revolutionize energy efficiency in the vicinity.

The significance of this project transcends conventional funding, as it qualifies as a climate investment, unlocking a cascade of benefits. Notably, the project is entitled to a noteworthy discount on market interest rates, a strategic move aimed at fostering sustainability and eco-friendly initiatives. A project official shared insights, revealing that even a modest reduction of one percentage point in interest could translate into an impressive annual financing cost saving exceeding 40 million yuan.

What sets this initiative apart is its integration into a cutting-edge “government–bank–business” platform, an innovative creation orchestrated by the local government explicitly to champion climate investments. This platform, now a pivotal element in Chongqing’s economic ecosystem, invites both businesses and banks to participate actively. Oversight is entrusted to local environmental authorities, ensuring a cohesive and accountable approach to climate-centric endeavors.

The operational framework is intriguingly simple yet effective: businesses present their projects on the platform, elucidating how each contributes to emission reduction. Upon approval by the environmental bureau, the project seamlessly integrates into the database. Financial institutions then embark on a selective process, aligning their investments with predefined objectives.

Zooming out from Chongqing’s local dynamism, this innovative platform aligns with a broader paradigm shift in China’s climate finance landscape. In the wake of China’s resolute commitment to achieve carbon neutrality by 2060, the central government, in October 2020, issued a visionary directive promoting climate finance. This directive, echoing in global forums as China’s Nationally Determined Contribution (NDC), galvanized the inception of local finance and investment pilot schemes.

Fast forward to December 2021, the government formally unveiled detailed plans for these pioneering pilot schemes, igniting a transformative journey. Now, two years into this groundbreaking undertaking, questions linger – What strides have been taken? What unique characteristics define China’s evolving climate finance landscape?

The answer lies in the interconnected web of initiatives, where localities like Chongqing exemplify the convergence of visionary goals and tangible action. As China charts its course toward a carbon-neutral future, these climate finance pilots serve as crucibles of innovation, offering a glimpse into the nation’s evolving approach to combating climate change.

In this era of dynamic progress, each project and platform becomes a beacon illuminating the path towards a sustainable and resilient future, demonstrating that in the grand tapestry of climate finance, China is weaving a narrative of innovation, collaboration, and tangible impact.

Climate Finance Pilots

In the energetic landscape of China’s climate finance evolution, a pivotal chapter unfolds through a series of innovative pilot schemes. August 2022 marked a significant milestone when the Ministry of Ecology and Environment (MEE) unveiled a list of 23 jurisdictions pioneering these experimental climate finance initiatives. This impressive lineup comprised 12 cities and 11 sub-city administrative districts, each chosen with meticulous consideration of their local circumstances.

As of mid-October in that same year, 18 of these pioneering jurisdictions had embarked on their climate finance journey, as reported by Southern Finance, a reputable business media outlet. Within this dynamic framework, eight had unveiled comprehensive local working plans, while ten had disseminated essential documents like project application guides and assessment standards. Furthermore, an impressive 16 had established dedicated bodies or online platforms entrusted with administering the actual investments, illustrating a multifaceted approach to driving climate-focused financial endeavors.

Ding Hui, head of the general office at the MEE’s Department of Climate Change, shared a glimpse into the scale of this initiative, revealing that details of a staggering 1,500 projects had been compiled by the end of 2022. The collective investment needs associated with these ventures totaled an astronomical 2 trillion yuan, underscoring the magnitude of China’s commitment to climate finance.

The meticulous selection process, described by Cui Ying, deputy head of the International Institute of Green Finance, emphasized stringent criteria. Factors such as a three-year track record of meeting climate targets, a clean slate devoid of major environmental incidents, and a locality’s experiences with climate change efforts all played pivotal roles. Considerations extended to past designations as low-carbon or climate-adaptable cities, participation in carbon markets, and ambitious plans for the future, encompassing organizational frameworks, local policies, and the promotion of financial products like green bonds and funds.

Each pilot jurisdiction emerged as a distinct player in the collective fight against climate change, as highlighted by Chen Yingjie, a senior project official with Greenovation Hub’s climate and energy group. For instance, traditional coal-producing cities like Taiyuan and Changzhi in Shanxi province targeted finance to transition “two high” industries with elevated carbon and air pollutant emissions. In contrast, the Wuchang district in Wuhan positioned itself as a regional hub for carbon trading, while Liuzhou in Guangxi concentrated on fortifying climate resilience in the face of extreme weather events.

Despite these ambitious initiatives, progress exhibited a mixed bag of outcomes. By mid-October, only 14 pilots had successfully integrated their projects into local databases, according to Southern Finance’s data. Variances across jurisdictions were evident, with notable successes in places like Liangjiang New District in Chongqing, Xihai’an New District in Qingdao, and Xixian New Area in Shaanxi. These regions had proactively positioned themselves for climate financing well before China’s dual carbon targets were announced.

Interestingly, the approach to adopting MEE’s reference standards varied. Some jurisdictions adhered to the standards as-is, while others refined them to align with local nuances, enhancing their effectiveness in matching projects with funding. Xie Wenhong, China programme manager for the Climate Bonds Initiative, shed light on a surprising revelation – the suitability of the project database approach to China’s unique circumstances.

Contrary to initial expectations, the perceived “good and green” projects didn’t get immediately snapped up by investors. Instead, the database became a lifeline for many smaller financial institutions, including local branches of larger banks and smaller urban and rural commercial banks. The complexity of determining a project’s alignment with climate goals, including technical taxonomy, data assessment, and accuracy checks, proved to be a stumbling block for these entities. The project database, however, emerged as a beacon of clarity, simplifying the qualification process for these institutions.

In essence, China’s climate finance narrative is a tapestry woven with diverse experiences, showcasing both successes and challenges. The journey towards a sustainable future is marked by innovation, adaptability, and a nuanced understanding of local dynamics. As these pilots continue to shape the landscape, China’s evolution in climate finance unveils itself as a captivating narrative of resilience, collaboration, and a commitment to a greener tomorrow.

Green Finance and Climate Finance

Over the years, climate finance intertwines with its green counterpart, forming an integral part of the financial ecosystem. Loans, bonds, and funds find their home in both realms, with climate finance claiming a significant share. Li Xiaowen, deputy secretary-general of the Climate Investment and Finance Association, reveals that a substantial portion of green loans, approximately 90%, is directed towards climate projects.

However, China’s unique approach unveils distinct characteristics in climate finance. Unlike traditional pollution-reduction projects, the climate benefits of these initiatives are not always overt. This divergence prompts the need for professional scientific assessments, leading to the separate management of climate finance and green finance by different authorities.

Divergent Leadership, Converging Goals

A comparison of official documents exposes a fascinating dichotomy. In climate finance, the Ministry of Ecology and Environment (MEE) spearheads the initiative, collaborating with financial authorities such as the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission. Conversely, green finance sees financial institutions taking the lead, with environmental authorities playing a less prominent role.

This difference in approach transcends into the implementation of policies on the ground. While green finance focuses on producing new financial products, climate finance adopts a macro view, emphasizing institutional design and the significance of project databases in supporting dual carbon targets.

The Genetic Code of Green Finance in Climate Finance

Despite being largely overshadowed by climate finance, the genetic code of green finance persists in shaping its narrative. Decisions on climate projects often echo the logic of old industrial policy, with historical investments directed towards green industries in need of support. The evolution of assessment methodologies and taxonomies reflects refinement following the introduction of dual carbon targets, highlighting the need for consistency.

Navigating Challenges in Climate Finance

While China boasts a robust top-down policy framework for climate finance, it grapples with universal challenges. Insufficient investment in climate adaptation projects poses a significant hurdle, with low returns deterring investor interest. The complexity of assessing the effectiveness of adaptation work further exacerbates the situation, requiring a delicate balance between investor returns and public-sector intervention.

The call for more private capital resonates, with a substantial gap between current investment levels and the staggering requirements projected by 2060. Despite the existence of public climate finance, standing at about 470 billion yuan annually, private investment becomes imperative to bridge the divide.

Greenwashing: Navigating the Authenticity Challenge

Amidst global concerns about greenwashing, China grapples with the challenge of ensuring genuine climate benefits in its projects. The lack of applicable standards and the influence of green financing approaches contribute to the misalignment of projects. The need for better monitoring, reporting, and verification (MRV) emerges as a critical requirement, demanding investment institutions to assess project effectiveness and enhance accountability.

In the quest to curb greenwashing, the market demands associated costs. Without consequences for deceptive practices, the integrity of the financial landscape remains at risk, urging stakeholders to prioritize transparency and accountability.