The great green grid of China
Laurence Brahm says Beijing should redouble its push for renewable energy, which would create new opportunities for growth and, in turn, bolster its political sustainability
China is the world's greatest carbon-emitting nation, responsible for much of the greenhouse gases that are quickly destroying our planet. Some 70 per cent of China's energy comes from coal. Hydropower and nuclear account for most of the remaining output, while renewable energy - mostly solar and wind - is a remarkably low 0.7 per cent.
The first response of an economist or businessman might be, "the market is too small, there is no possibility of solar and wind becoming significant power players. Market forces will rule and that means cheap coal." That is only a very short-term perspective, however.
In China, coal is cheap, while solar and wind capacity remains small and issues remain concerning the quality of energy output and scale. Still, these obstacles are technical or technological issues that can be addressed through finance and investment. All these obstacles to the mass adoption of renewable energy as a national priority can be seen as industrial opportunities.
While in the United States research and development is struggling to get costs down, in China the sheer volume of production means it is achieving the same outcome.
The truth is, in a global recession China needs a new economic stimulus. But with all its redundant roads and cement blocks, what is left to invest in? The answer is not another mortar and brick Great Wall, but the Great Grid.
First, massive state investments will be needed to convert China's fossil-fuel-based grid into one based on renewable energy. This will have to be funded by new green bond issues. This comprehensive grid conversion will create waves of jobs, from the most senior engineers to blue-collar workers in every province and region.
The government will need to make a strategic decision to wipe out the coal industry altogether. Most of China's coal comes from the regions of Inner Mongolia , Shanxi and Shaanxi. Such a decision demands political will from the new leadership to placate the economic and business interests of these regions, possibly through massive investments in wind energy (of which Mongolia has a lot).
Second, industrial economic policies must encourage a new growth cycle in developing and manufacturing energy-efficient products for consumers and also those required for the production of renewable energy (solar panels and wind systems - everything needed for the new Great Grid). This will need to be encouraged through fiscal levers such as tax incentives and rebates.
This year, China has already been giving rebates to encourage consumers to purchase energy-saving TVs. This is a repeat of China's export surge in the 1990s. Export incentives will be needed to encourage exports of Chinese energy-efficient goods (in all light manufacturing and electronic product sectors) to the rest of the world.
Third, the banking and financial sector will need to take a leading role. On one level, to provide favourable lending through "green credit" for low carbon developments in the property sector and, on another, for companies investing in renewable or energy-efficient products. It is not all about carbon trading.
Capital-market regulatory authorities could favour the listing of energy-efficient or renewable-energy-driven companies, introducing new standards of stakeholder value.
Here is the twisted irony and potential business opportunity: renewable energy accounts for less than 1 per cent of China's energy needs while China now leads the world in both investment in renewable energy and production of renewable and energy efficiency systems.
Cleaning up the environment and reducing the carbon footprint is in China's self-interest.
The global financial recession is already affecting China and Beijing fears an economic slowdown will breed social unrest. If it wishes to continue using its current growth model, then Beijing needs a new approach and green growth presents an opportunity.
In the end, it may be a question of political sustainability as well as economic opportunity. Just as the Great Wall proved the best defence for previous dynasties, the Great Grid may prove to be this government's best defence. For the rest of China, it is a business opportunity.
The ultimate power to reduce absolute carbon output in China lies with its leadership. The tools to achieve this are its regulatory and fiscal levers.
China's banking sector has sensed that a massive green financing opportunity is available and waiting to be seized. But it has not been clear how this opportunity could be tapped.
Enter the concept of a low-carbon, city financing mechanism. This is the response to the challenge of how to establish financing products and services for a host of interconnected urban services - both publicly and privately managed - from green buildings and waste treatment to a plethora of related products needed to make a city work. Imagine entire buildings where the glass windows are actually solar panels. As futuristic as it might sound, this is something China could accomplish.
The vision of a pilot programme is under way. The Housing Ministry has selected several test cities including Suzhou and Baoding , to become trial green cities during the coming five-year plan. The China Banking Regulatory Commission wants to come up with guidelines for financing.
For those outside the system, the edifice of growth and short-term profit seemed insurmountable. For those of us on the inside, China's economy has become very fragile. It needs massive financial and industrial reforms, driven with new products for each, and a way to use massive stimulus to drive the economy. And a new green economy may prove the only way to do this.
