China, People's Republic of
Over the past years, it has become clear that China’s rapid economic development has come at a significant environmental cost. China has responded with an ambitious law reform program that has resulted in a multitude of major environmental laws or revisions over the past two decades and significantly increased resources spent on addressing environmental problems. However, public concerns about environmental issues have continued to be flashpoints for public unrest and violent clashes with public authorities.
The use of environmental tort claims to compensate pollution victims or to protect the environment and human health is still in an early stage of development in China. Nevertheless, tort cases play an outsized role in China’s environmental law system. From 2004 to 2009, China’s courts heard more environmental pollution-related tort cases than pollution-related administrative and criminal cases combined. Since 1998, the number of environmental lawsuits filed with the courts increased at an annual average of 25%.
The China Utility-Based Energy Efficiency Finance Program (CHUEE) is established to provide market-based solutions that will promote novel and sustainable financing model to promote energy efficiency in the private sector. In March 2008, participating banks in the CHUEE program approved 70 energy efficiency loans, with a loan portfolio of US$ 243 million. Interestingly, projects financed by the loans contribute to a net annual reduction of greenhouse gases of 4.3 million tons.
Responsible Party:
Regulated Community
I. Objectives or Impact:
Pressures from population growth create a heavy demand for energy resources. In China, economic growth puts a heavy toll on energy resources. Since 2001, energy consumption was seen to increase much faster than GDP. The increase in the country’s living standards created a demand for products. Also, the flourishing of the heavy industry in China is quite rapid due to its growing position in the world market as a competitive player in the sector. Interestingly, the demand pressures might naturally prompt producers to churn out large volume of products at the expense of efficiency, especially in energy use. The China Utility-Based Energy Efficiency Finance Program (CHUEE) is established to provide market-based solutions that will promote novel and sustainable financing model to promote energy efficiency in the private sector.
II. Description of the Good Practice (Outputs):
Past experiences show that investments and efforts to promote energy efficiency, both in the household and firm levels, can be profitable. For example, conversion to less carbon-intensive energy sources is doable, and in fact can be a source of income. However, a major barrier to actual implementation is the scarcity in financing. It is typical that local banks have a skeptical view on the profitability of environment projects per se. Also, the guidelines of banks are often not aligned with the peculiarities of environment and renewable energy projects (e.g. long gestation periods, issues on track records of borrowers). Also, banks are most often not equipped to evaluate these projects. The International Finance Corporation (IFC) of the World Bank leverages its experience with renewable projects in promoting energy efficiency via the development of novel financial models and schemes. The CHUEE program is co-funded by the IFC, the Global Environment Facility, and the Finnish and Norwegian governments. The program offers a risk-sharing facility for partner banks and tailored advisory services that aim to develop the partner banks’ capacity to appraise projects, and at the same time develop its approval process and credit-underwriting procedures.
III. Outcomes or Results:
Recently, the IFC signed a memorandum of understanding with the China Export-Import Bank to provide capacity building on the bank’s environmental and social risk management policy and practices for overseas investment. Since 2007, more than 1,400 product managers, credit officers, and loan officers from 100 business outlets in the country received energy efficiency financing training from the IFC. The participating banks included the Industrial Bank, the Bank of Bejing, and Shanghai Pudong Development Bank. Industrial Bank is the initial bank partner in the program. The linkage between IFC and the Industrial Bank started in 2004, with the IFC’s initial investment of US$ 52 million on the bank. The first-phase of the risk-sharing arrangement in 2006 made possible the creation of a facility that has been used to leverage a portfolio of US$ 65.7 million of energy efficiency equipment and project loans for small and medium-scale projects. Projects typically pursued were industrial boiler retrofitting, wasted heat recovery, co- and tri-generation projects for district heating, power saving, and optimization of industrial energy use. The initial efforts of the IFC and Industrial Bank attracted two prominent international co-investors, namely the Hang Seng Bank of Hong Kong and Singapore’s GIC Special Investments. In March 2008, participating banks in the CHUEE program approved 70 energy efficiency loans, with a loan portfolio of US$ 243 million. Interestingly, projects financed by the loans contribute to a net annual reduction of greenhouse gases of 4.3 million tons.
A. Policy Framework:
One of the crucial steps for endeavors like this is how to fully incorporate a lending program for environment projects within the bank. Given the financial viability of environment projects, resistance from the top management of formal institutions is present. In the case of the CHUEE program, a memorandum of understanding was undertaken between IFC and the partner bank. A careful and explicit risk-sharing arrangement needs to be laid out due to perceived technical and financial risks of energy conservation investments and lending among industrial enterprises and banks.
On the side of the government, policy and regulatory interventions are required complements to encourage industrial enterprises to invest on energy efficient practices. This is pressing given a presence of the large size and share of energy-intensive industries in the economy. Strong regulatory policies, especially command-and-control schemes, and monitoring activities, might be required especially if inefficient practices are already widespread.
B. Budgetary and Financial Requirements:
(see materials and resources; further information)
C. Human Resources:
Initially, reliance for technical support for evaluation from outside expertise might be heavy. In China, support was given for staffing development, capacity building, and training. Trainings were also provided to instill due-diligence on skills related with project development and appraisal of energy efficient projects.
D. Material Resources:
Aside from the financing requirements and support for partner banks, resources might also be required for energy conservation investment promotion, particularly via project demonstrations. Testing of business models and institutional arrangements will require resources for pre-investment activities like feasibility studies and the development of new financing mechanisms.
E. Institutional Support:
For programs that aim to introduce novel practices, support from the banking sector might be required. For China, the IFC supported a series of national workshops to present successful case studies of subprojects.
F. Planning, Scheduling or Sequencing of Activities:
The gestation period of programs that aim to promote sound practices on energy conservation is long, especially given perceptions on the nature of environmental investments. For China, the memorandum of understanding occurred in 2004. The initial years might just be devoted towards analyzing the capabilities of the banking sector with regard to business development. The development of strategies, financing models, and appropriate sectoral arrangements and practices, might occur after two years. Scaling-up of the lending activities might happen during the later years of the program.
Industrial growth is the primary driver for the rapid development of China. However, the growth experienced in the industrial sector was accompanied by heavy consumption of resources, resulting to generation of pollution. Interestingly, large firms were not solely responsible for the generated pollution in the country. Small and medium-scale enterprises (SMEs) located in villages and towns also contributed to the pollution problem. The pace of development and the growth of the industries put pressure in China’s resource use. Air pollution also is a threat due to coal combustion.
Responsible Party:
Compliance
I. Objectives or Impact:
Industrial growth is the primary driver for the rapid development of China. However, the growth experienced in the industrial sector was accompanied by heavy consumption of resources, resulting to generation of pollution. Interestingly, large firms were not solely responsible for the generated pollution in the country. Small and medium-scale enterprises (SMEs) located in villages and towns also contributed to the pollution problem. The pace of development and the growth of the industries put pressure in China’s resource use. Air pollution also is a threat due to coal combustion.
The Cleaner Production Law promotes cleaner production, efficiency of the utilization rate of resources, and reduction and avoidance of generation of pollutants. The law mainly addresses the problems caused by overuse of resources due to utilization of outdated technologies and facilities. The law particularly helps small and medium-scale enterprises to shift production practices. This is quite important in the country since SMEs play an important role in economic development. However, these firms also have a substantial share in industrial pollution loads.
The law also identifies the key role of local governments in providing solution to the problem. This is quite critical since SMEs are more often than not, are clustered together. Most of the SMEs are township and village enterprises which uses outdated technologies and facilities.
II. Description of the Good Practice (Outputs):
The Cleaner Production program is touted as the key strategy for achieving sustainable development. The application of the program started from the conduct of demonstration projects in industrial sectors. The program also has a long history in the country. It started laying foundation by focusing on the introduction of the methodology, personnel training, and demonstration. This initial phase extended from 1992 to 1997. From 1998 to 2002, efforts were geared towards the study and formulation of the law.
From the policy formulated, it was identified to use compulsory mechanisms. This came in the form of direct restriction of toxic and harmful substances, particularly for SMEs. It also required the industry to adopt waste abatement plans and release environment reports.
Support mechanisms were also provided by the law. This came in the form of provision of expertise, information, technologies, and funding for cleaner production practices. Various incentives are given to firms in order to induce them to shift production practices. Products produced from wastes and materials reclaimed from wastes benefit from reduced taxation or exemption from value-added tax. Costs incurred for cleaner production auditing and training are also allowed to be booked as operating costs for the firms. Funds from the Small and Medium-Sized Enterprise Development Fund are also set aside to support cleaner production for SMEs. In some provinces, R&D programs supportive of cleaner production are given priority in application of bank loans.
III. Outcomes or Results:
Interestingly, in provinces where the local economy is more developed, firms responded positively on economic incentives. In some provinces and cities, more stringent regulations are required because of the severity of environment problems. There are a number of cases where firms and enterprises failing national standards on environmental standards become compliant given the clean production law. Firms initially started with pursuing cleaner production by looking at end-of-pipe treatment. Eventually, some firms realized that disposal costs increases production costs and creates negative image for the entire company.
One firm, HeNan Lotus Monosodium Glutamate Group Limited, showed gains on profit margins when it adopted cleaner production techniques. Initially, pollution control was pursued via end-of-pipe treatment efforts. Eventually, the firm combined this effort with material substitution and recycling. Interestingly, the procedure they applied for end-treatment resulted to the production of solid fertilizers which yields considerable profit for the company (annual profit of RMB 280 million yuan).
The firm also integrated environment targets in the production management level. Bonuses are distributed according to conditions of cleaner productions. Specifically, with outstanding achievements, staff bonuses can be elevated by five percent. On the other hand, non-attainment of environment targets results to cutting down of bonus by one percent and five percent for staff and leaders respectively.
IV. Essential Elements for Success:
Policy Framework: Enabling Policy, Regulation, Inter-agency/Multiparty Agreements
The Cleaner Production law is a product of careful promotion, awareness campaigns, and demonstration projects. In its initial stage, cleaner production was integrated with the existing environment policies of the country. Support from the regional and local Environment Bureaus was solicited. Modified policies supportive of cleaner production were also introduced, namely: policy on environmental impact assessment and pollution discharge licensing system.
Provinces also promoted cleaner production by pursuing supporting activities at the local level. These activities came in the form of establishment of funds for cleaner production processes, setting evaluation standards, promotion of the use of environmental labels in products, IECs, and offering of tax and price incentives.
Human Resources and Skills
Since the cleaner production promotes eventual shift of production approaches, training and awareness raising were conducted on the earlier stages. Training programs came in the form of demonstration projects. These primarily targets managers and technical staff directly involved in the production management. Cooperation with other countries during the demonstration projects was present during the demonstration projects.
Material and Resources & Institutional Support
Since a shift of production techniques can be costly for a firm, support for cleaner production efforts is necessary. The establishment of funding mechanisms supportive of cleaner production is necessary. Tax and price incentives play a key role in assisting firms. Economic departments and local governments also adopted policies that encourage cleaner production. Specific endeavors like material replacement, conventional technologies process innovation, solid fertilizer production, and methane utilization are encouraged.
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