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Suggestions for Chinese climate policy: domestic and international

Mitigating climate change should be balanced with the development agenda; an agenda which requires a large amount of climate investment. Finance has an important role to play in coping with climate change. It was in this context, that climate financing came into being; making investment in activities mitigating and adapting, to transfer resources to manage risks, build climate financing incentive mechanism, and promote global low-carbon sustainable development.


International Progress in Climate Finance


(1) Climate financing and the UN Climate Change Conferences


Climate Finance is an innovative finance plan trying to combat climate change. It is a financial modus operandi that uses multi-channel funding sources and diversified tools to promote global low-carbon development and enhance the resilience of human society to climate change. Climate finance is derived from the negotiations of the United Nations Climate Change Conference on funding mechanisms. The United Nations Framework Convention on Climate Change (UNFCCC) defines climate finance as finance from public, private, or other channels to support mitigation.


The “climate" in climate financing refers to the response to the threat of climate change and includes two aspects: mitigation and adaptation. The mitigation channel focuses on reducing and limiting greenhouse gas emissions or strengthening greenhouse gas sequestration, including improving energy efficiency, developing renewable energy, carbon capture and storage, clean transportation, the recycling of waste, agriculture and forestry, and other land activities to increase natural carbon sinks. Adaptation is about increasing the ability and resilience of society to reduce the impact of climate change, including managing water resources, environmental health, agriculture and forestry, fisheries, human health, and the prevention of climate disasters.


(2) Funding as the focus of international climate negotiations


In 2009, at the 15th Conference of the Parties to the United Nations Framework Convention on Climate Change was held in Copenhagen, Denmark, at which the developed countries collectively committed to provide developing countries with nearly $30 billion USD in new funding in the period of 2010-2012. In addition, developed countries promised to mobilize $100 billion USD in climate funding for developing countries each year by 2020. At subsequent United Nations Climate Change Conferences, the topic of climate funding has been the focus of continous negotiations. As the most important financing mechanism under the UNFCCC, the Green Climate Fund (GCF) was formally established at the Cancun Climate Change Conference in 2010 and approved at the Durban Climate Change Conference in 2011.


2015 marked the successful conclusion of the Paris Climate Change Conference, which marked a new stage in global climate governance. At this point, the global climate change governance system has changed its "top-down" mandatory allocation of greenhouse gas emission reductions advocated by the European Unions to a “bottom-up" national independent contributions (Intended Nationally Determined Contributions, INDC) approach.


The Paris Agreement has made significant progress in climate funding. The funding goal, “to make capital flows consistent with the path of low greenhouse gas emissions and climate-resilient development,” has become one of three major goals alongside mitigation and adaptation. The Paris Agreement extends the main body of funding to all developed countries, not just the developed countries listed in Annex I of the United Nations Framework Convention on Climate Change; and says that other parties are encouraged to continue to provide funding to developing countries.


In 2018, the parties to the Katowice Climate Change Conference adopted most of the implementation under the Paris Agreement, reaffirmed its funding commitments, and urged developed countries to increase their level of financial support and their development roadmap to achieve the goal of collectively raising $100 billion USD annually for the mitigation and adaptation initiatives by 2020.


(3) China’s increased role in global climate negotiations


During the Copenhagen Climate Change Conference, China became an important participant in the international climate negotiations, speaking on behalf of developing countries. Since then, the "Four Basic Countries" (China, South Africa, India, and Brazil), have made their voice heard and have played a key role at the climate negotiations and the transformation of international governance models, while adhering to the basic principle of "common but differentiated responsibilities" and implemented them into Paris Agreement.

In the wake of the Paris Agreement, China has changed from a follower to a leader in the climate governance system. Not only has it proposed actual emission reduction targets in its independent contributions, it has also demonstrated the responsibility of a major global power, with the coordination of joint responsibilities of major powers under the Paris Agreement.


In September 2016, China used the occasion of the Hangzhou G20 Summit to promote the formal entry of China and the United States into the Paris Agreement. In December 2018, following the Katowice Climate Change Conference with the completed negotiations around the implementation details of large parts of the Paris Agreement, China has made important contributions to the success of the conference.


At the 25th United Nations Climate Change Conference in Madrid, Spain, in December 2019, China hosted a total of 29 themed side events, demonstrating the countries experience in green and low-carbon development, and its participation in global climate governance and response.


In addition, China has carried out extensive cooperation with international organizations, such as the World Bank, the Asian Development Bank, and the United Nations Development Programme, and has continued to strengthen dialogue and exchanges with developed countries on climate change and clean energy, while actively promoting South-South cooperation on climate change. Through Chinese banks, the Asian Infrastructure Investment Bank, and the Silk Road Fund, China seeks to guide and promote more capital investment in climate change mitigation and adaptation.


China's climate finance related policies in recent years


(1) Policy foundation for climate finance development


China issued the 13th Five Year Plan in 2016, with enshrined efforts to control greenhouse gas emissions. The plan proposes for China to lead the energy revolution towards a low carbon economy, to build a low carbon industrial system, promote urbanization and low carbon development, accelerate regional low carbon efforts. It includes the the goal of building and operating a national carbon emissions trading market, strengthening low-carbon technological innovation, strengthening support for basic capabilities, and conducting extensive international cooperation to measure the effective control greenhouse gas emissions. The National Climate Change Adaptation Strategy aims to get adaption working in seven areas: infrastructure, agriculture, water resources, coastal zones and related sea areas, forests and other ecosystems, human health, tourism and other industries.


On August 31, 2016, the People's Bank of China and other seven ministries and commissions jointly issued the Guiding Opinions on Building a Green Financial System, which became the guiding document for China's development of green finance. Under the Guiding Opinions, China has formed a supporting system for the development of green industries with green financial instruments such as green credit, green bonds, green insurance, and green funds. The variety of financing instruments have broadened the financing channels for the green industries. It has solved many of the financing dilemmas in green projects and accelerated the development of green industries. Climate finance and green finance have a lot of overlap, but each has its own focus. Green finance serves environmental protection, climate finance serves to respond to climate change.


(2) The construction of the carbon emission trading market


Carbon emission trading markets are widely used globally as a tool for reducing greenhouse gas emissions. In October 2011, the National Development and Reform Commission approved the launch of carbon emissions trading pilot projects in Beijing, Tianjin, Shanghai, Chongqing, Hubei, Guangdong, and Shenzhen. The seven pilot regions started trading in 2013-2014. In December 2016, two additional pilot areas in Sichuan and Fujian were added. The nine carbon pilot zones have the commonality of design in trading policies, while having regional characteristics reflected in their local condition and expertise. These zones are providing ideas and experiences for the construction of the national carbon market.

As of June 2019, the cumulative trading volume of quotas in the seven pilot carbon emission trading pilot regions was about 330 million tons of carbon dioxide equivalent, and the cumulative trading volume was about 7.11 billion yuan. In some of these pilot zones, the use of carbon finance and financing instruments have been deployed.


Based on the operation of the pilot carbon market, in December 2017 the intentions of a national carbon carbon emissions trading system were announced. The construction of the national carbon market is focused on the power generation industry. The market construction of the national system is divided into three phases:


First, the infrastructure construction period, which aims to completes a unified national data reporting system, with registration, trading, and carbon market management. As of current, the second phase, a simulated system of this is in operation, where simulated trading of the power generation industry quotas to improve the carbon market management is being run.

The third phase is focused on perfecting and aligning the national carbon markets trading operations. Spot trading of carbon quotas will be conducted in the power industry and gradually expanded to cover more industries- The state of including the Chinese Certified Emission Reduction (CCER) system into the carbon market will happen as soon as possible.

At present, the national carbon market is in the period of infrastructure construction, and Hubei and Shanghai are leading the construction of registration systems and transaction settlement systems, respectively.


In April 2019, the Ministry of Ecology and Environment released the draft of the “Interim Regulations on the Management of Carbon Emissions Trading” to solicit opinions from the public. This document provides the policy foundation and the legislative guarantees for the operation of China's carbon market. In September 2019, the Ministry of Ecology and Environment released the "Implementation Plan for Carbon Dioxide Emission Quota Allocation for Key Emission Units in Power Generation Industry", which clarified the quota allocation plan and further promoted carbon market development. In December 2019, the Ministry of Finance issued the "Interim Provisions on Accounting Treatment of Carbon Emissions Trading", which regulates the accounting treatment related to carbon emissions trading.


(3) The strengthening of climate financing in China


Green finance is emerging as a financial solution to promote the green transition of the economy. Some predictions show that in the next five years, China will need to invest at least 2 to 4 trillion RMB each year to deal with environmental and climate change issues. Various green financial instruments such as green credit, green bonds, and green insurance can mobilize and encourage more social capital to enter the field, effectively curb pollution investment, and continue to provide long-term funding support for climate change activities.

As the main channel for China's green investment and financing os green credit. Green transportation and clean energy projects have been the two main areas for green credit funding inflows. As of the end of the third quarter of 2019, the balance of loans invested in these two areas reached 4.32 trillion RMB and 2.42 trillion RMB, respectively, according to the PBOC. Innovations in green credit products, such as pledged loans for carbon emission rights assets, have broadened financing channels for mitigation and adaptation to climate change activities.


The size of China's green bond market has continued to expand under the dual effects of favorable policy stimulus and the effective financial supervision. According to the IIGFs green bond data statistics a total of 360.03 billion RMB of labeled green bonds (including green ABS) was issued in and outside China in 2019. 31 green asset securitization products (green ABS, green ABN) were issued, raising funds of 38.23258 billion RMB; 21 Chinese-funded entities issued 21 green bonds in the international bond market, with a scale of approximately 76.307 billion RMB. Many of the bonds raised were invested in projects addressing climate change such as energy conservation, clean energy, clean transportation, ecological protection, and adaptation to climate change.



Policy recommendations for further development of global climate finance


(1) Listen to the positions of recipient countries and promote developed countries to honour their commitments


Climate finance is one of the key means to effectively deal with climate change. Climate funding should be “new and additional” funding provided by developed countries to developing countries under the UNFCCC framework and should be dominated by public funding. Developed countries should honour their commitments from the UN Climate Change Conference and use diversified climate financing tools to transfer climate funds to developing countries. China has independently implemented a number of emission reduction actions under its domestic and international cooperation agreements. However, China is still a developing country with high climate risks and a huge funding gap in mitigation and adaptation. There is no doubt that it needs international funding and technical support. China should adhere to the standpoint of a recipients of climate funds and work with other developing countries to promote the commitment of developed countries to invest the $100 billion USD in climate funds, as pledged under the Paris Agreement, as soon as possible.


(2) Attach importance to the demonstration effect of international climate funds and learn from international experience in climate governance


China should attach great importance to applying for international climate funds, such as the Green Climate Fund (GCF) under the UNFCCC. Although the amount of funds that can be provided through these channels are limited, its demonstration effect is very significant, especially for capacity building in backward areas of the country. Through project implementation the international climate governance experience and technology can be strengthen in Chinese domestic setting.


At present, two institutions in China have been certified as GCF's implementing agencies, namely the CDM Fund Management Center of the Ministry of Finance and the Foreign Cooperation and Exchange Center of the Ministry of Ecology and Environment. In November 2019, GCF approved a $100 million USD of investment in support of the Asian Development Bank's Green Development Fund project in Shandong. This is the first GCF fund obtained by China. The relevant experience can be used in other climate change projects in China to improve China's overall ability to respond to climate change.


(3) Setting standards for climate projects, paying equal attention to mitigation and adaptation to climate change


At present, China has not issued standards for climate projects. The formulation of standards can regulate the market behavior of participants, guide the implementation of projects that meet the requirements for climate finance, and promote a low-carbon transformation of industries. Relevant departments should establish accreditation standards for climate projects as soon as possible, referring to domestic and international standards, such as the Climate Bonds Initiative's Climate Bonds Standard, the International Capital Market Association's (ICMA's) Green Bond Principles, and the domestic 'Green Industry' Guidance Catalogue and Catalogue of Green Bond Supported Projects, etc. Each have very

specific requirements for the identification, assessment and supervision of climate projects, requiring participants to pay attention to the particularities of coping with climate change and the differences in green projects, and emphasize the project's mitigation and adaptation to climate change. These two roles provide a scientific and unified basis for production and operation of enterprises, investment in financial institutions, and supervision by government departments.


(4) Vigorously promote market-based carbon trading and moderately promote carbon finance


The national carbon market was announced in December 2017, and various infrastructure constructions are progressing steadily. The healthy and stable development of the carbon market is the cornerstone of innovation in carbon futures and other carbon financial products. The national carbon market should gradually expand its scope of industries and the number of trading entities participating in order to increase trading and create more market activity.

The promotion of carbon finance should be carried out moderately. While realizing the mutually beneficial interaction between the carbon spot market and the futures market, we must also prevent excessive speculation and excessive financialization, prevent financial risks, and give full play to the carbon market's role in controlling greenhouse gas emissions and reducing the entire society. The role of policy tools in reducing costs. As the CSRC has extensive experience in a series of issues such as market mechanisms, price regulation, financial derivatives, and risk prevention and control, it is recommended that the CSRC be introduced in the supervision for joint supervision.


(5) Strengthen its own capacity building and constructing a statistical system for climate finance


As a recipient of climate funds, no developing country has released a monitoring reports on climate capital flows. Although developing countries have questioned the accuracy of climate funding data published by developed countries, due to their lack of statistical data, they cannot verify the receiving of funds. As the largest developing country, China should strengthen its capacity building and improve its ability to monitor, report and verify climate financial flows. At this stage, China has carried out many climate-effective projects at home and abroad. These projects can not only strengthen the local capacity to cope with climate change, but also solve local people’s livelihood problems such as energy shortages and backward transportation systems. They should be strongly advocated. China should focus on building its own climate financing statistics system, setting up a special database for climate projects, statistics and management of climate projects, and focus on project funding flows and emission reduction effects. In this way, on the one hand, it can provide data support for international negotiations on climate change, on the other hand, it can also conduct climate change activities in a more targeted manner. In addition, typical projects with significant climate effects in the project library can be promoted to form large-scale demonstration effects.


This article was published in Environmental Protection Issue 24, 2019


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