Caixin
Nov 09, 2021 02:04 PM
OPINION

Opinion: China Is in a Unique Position to Finance the Green-Tech Revolution

While many countries are marshalling their financial services to adequately support industry innovation, China is advantaged given the state’s vital role in both the financial sector and beyond. Photo: VCG
While many countries are marshalling their financial services to adequately support industry innovation, China is advantaged given the state’s vital role in both the financial sector and beyond. Photo: VCG

While the world is looking to new breakthroughs at the Glasgow Climate Summit, China is committed to strengthening its 2030 climate target, peaking emissions before 2030, and achieving net-zero by 2060. Despite the 10-year lag compared to most Western countries’ “net-zero by 2050” goal, we genuinely think China may be the best positioned to lead this global change for good given its unique economic structure.

Achieving net-zero will require tremendous innovation for both energy transition and industrial decarbonization. The technologies under development will be responsible for reducing over 40% of global greenhouse gas (GHG) emissions by 2050. Unfortunately, these new technologies are sometimes less attractive to the market-driven economy, considering the significant externality they embody and the longer-term payback cycle (since the real impact of climate actions only kick in in the long run).

In the lead-up to the summit in Paris in 2015, the focus was on estimating the research and development (R&D) needs across sectors and technologies. We have now moved past early-stage R&D through successful venture funding, but still lack the maturity for market-based financing. Therefore, funding for commercial-scale deployment and testing is urgently required. According to our latest analysis in collaboration with the World Economic Forum, approximately $50 trillion in incremental investment is required by 2050 to transition the global economy to net-zero emissions and avert a climate catastrophe. However, most countries cannot easily provide such support, and it will remain a global challenge unless a more inclusive stakeholder capitalist model is adopted.

While many countries are marshalling their financial services to adequately support industry innovation, China is advantaged given the state’s vital role in both the financial sector and beyond. This offers China a unique opportunity to champion the green-tech revolution through homegrown yet globally appealing innovations and strong financial sector support. To foster this revolution, China will need to consider: How best to ensure innovative companies have access to both public and private capital via technology-specific financing blueprints?

To do this effectively, mechanisms that activate collaboration among multiple stakeholders are necessary, and the way China has modernized its infrastructure is a good case study of “public-private partnership” that can still be applied. This though would require all parts of the financial services sector to work together: investors (insurance companies, pension funds, and private equity), side by side with banks, regulators, and the private sector.

Transformative business models are essential, where industry participants and capital providers work together to establish new contracts and ways of doing business to increase the probability of commercial success. Transformation can be achieved through measures to stimulate demand and establish reliable, scalable supply. This could involve guaranteed pricing and off-take contracts to ensure viability in the early stage, in addition to access to viably priced funding and industry expertise.

 

Targeted public intervention is critical. The key is to design incentive schemes rewarding early movers who adopt innovative carbon-removal technological solutions, and de-risking schemes mitigating the investment risks unique to these innovative solutions. The key here is to ensure policy/regulation activities do not unintentionally divert capital away from the “greening” of hard-to-abate sectors. Thus, the government would need to set clear expectations and timelines to ensure clarity on the desired overarching outcomes.

At the same time, financial institutions in China would need to take a more strategic approach to risk allocation for innovative solutions that can help achieve decarbonization goals versus conventional projects. The current risk appetite and underwriting approaches, for both the banking and insurance sectors, would need to evolve. First movers could be future leaders in future industries driving local and global “green” growth. However, for this paradigm shift to occur, banks would need to establish clear views on future growth sectors and ensure funding flows to them over time. Regulators would also need to create accommodative support for the priority sectors driving decarbonization efforts.

If China gets it right, it could emerge as a green-tech leader vital to not only its domestic GHG goals but also those of its global peers. Who’s to say the next “green” Alibaba, Tencent, JD, or Huawei isn’t right around the corner. With the support of the state, governance model, and financial sector, China is uniquely positioned to lead the charge on solving this truly global challenge.

Jason Ekberg is a partner at consultancy Oliver Wyman. Hang Qian is a partner at consultancy Oliver Wyman based in Shanghai.

The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.

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