Tianping Auto Insurance is on a "green travel" crusade. In addition to competitive vehicle insurance packages, the Shanghai-based company has taken to using its 12-province network to distribute information to clients on energy saving and low-carbon lifestyles. There is even talk of reforming product and marketing lines so that the company can become paper-free.
"Environmental protection is everyone’s responsibility and obligation… As an insurance enterprise in a risk management industry, Tianping is duty-bound to practice it," the company told CHINA ECONOMIC REVIEW.
Tianping’s decision in August to become the first Chinese company to go carbon neutral – it paid US$40,627 for 8,026 tons of carbon credits accumulated by commuters during the 2008 Olympics – was, therefore, a logical and ethical step. Commercial interest and positive PR were not factors, the company stressed, although the purchase of the offsets inevitably brought media attention.
Hu Wu, chairman of Tianping, tried to stay on-message during a video interview with Sohu.com, but was finally cornered by a question about the kudos that might come with being name-checked as corporate China’s carbon-neutral pioneer. "I think it is lucky," he admitted.
How long Tianping’s luck holds out largely depends on how quickly Beijing can get the carbon bandwagon rolling. Tianping stands out from the crowd because domestic firms are not required to limit their greenhouse gas emissions. In the meantime, China has emerged as the world’s largest emitter of carbon dioxide (CO2). The country’s coal, oil and natural gas consumption generated 6.89 gigatons of CO2 last year, over 20% of the global total, according to calculations by BP. The US placed second with 6.37 gigatons.
Growth at a cost
China’s rapid economic growth has come at a severe environmental cost – air pollution, land degradation and contamination, water scarcity and pollution – and Beijing has begun to address this. But policymakers are in no mood to make specific commitments on CO2 emissions: Growth will continue to be driven by two engines, industrialization and urbanization, and both are hungry for energy.
China’s basic stance differs little from those of other developing nations. These countries’ long and prickly dialogue with the developed world over who should do what – and when – about climate change will take center stage in Copenhagen next month. The Danish capital is playing host to talks intended to deliver a successor to the Kyoto Protocol, which expires at the end of 2012, but optimism is muted on the Chinese side.
"I see some opportunities to reach an agreement, but I also see large gaps between the parties on several key issues," said Dr Zou Ji, a professor in the Department of Environmental Economics and Management at Renmin University.
Zou, who until recently was a member of China’s climate change negotiation team, thinks a deal will come out of Copenhagen, but that it’s likely to be short on detail – little more than a political face-saving exercise. The Kyoto Protocol itself took time to complete, eventually being ratified a good four years after its adoption in 1997, once the operational details were finalized.
Any substantive deal would require compromise on all sides. The draft agreement for Copenhagen refers to the developed world making collective emission cuts of 25-40% on 1990 levels by 2020 while developing countries take "nationally appropriate mitigation actions." China wants developed nations to make cuts of at least 40% by 2020 and contribute 0.5-1% of GDP to help the developing world mitigate emissions. So far, the EU has agreed to a minimum 20% cut in emissions and the US has agreed to nothing. A cap-and-trade bill – outlining cuts of 17% on 2005 levels by 2020 – is making its way through the US Congress, but not without political opposition. Much of it focuses on China’s refusal to put a date on promises to cut emissions.
This is not to say Beijing has been uncooperative. Addressing the UN climate change summit in New York in September, Chinese President Hu Jintao said efforts would be made to reduce carbon intensity, the amount of CO2 produced per unit of GDP, by 2020 from 2005 levels (although this doesn’t mean overall emissions won’t continue to rise). This extended an efficiency pledge in China’s 11th Five-Year Plan. Carbon intensity, efficiency and pollution reduction targets are all expected in the next five-year plan, which runs from 2011 to 2015.
A recent report by the China Academy of Sciences concludes that China could achieve a 40-60% reduction in energy intensity by 2020 from 2005 levels, thereby cutting carbon emissions per unit of GDP by about 50%.
However, the same report observes that developed and developing nations approach climate change in very different ways. While the developed world can tackle emissions early on, the priority of developing countries is development. All Beijing’s environmental goals must therefore be viewed in the context of its objective to maintain strong economic growth. The energy intensity target is a case in point.
"The plan was for a four-fold increase in GDP growth while doubling energy consumption by 2020," said Yu Jie, head of policy for China at the Climate Group, a NGO. "Within five years – so, 15 years early – China reached the energy consumption figure. The government realized it couldn’t sustain its economy in terms of energy security and this led to the target in the 11th Five-Year Plan."
A similar sensitivity to domestic needs lies behind China’s unwillingness to commit to specific emissions cuts.
The country’s urban dwellers will increase from 46.8% of the total population in 2009 to 63.3%, or 827.9 million people in 2029, according to Global Demographics, a research firm. More urban dwellers and the creation of new urban centers will create huge new demand for energy. (See: Juggling trick, p35). Zou of Renmin University estimates that people in urban areas use 2.7 times more energy per capita than those in the countryside.
Where’s the peak?
Subject to these forces, the official government line is that China’s carbon emissions might not peak until around 2050. A report published in August by a group of Chinese think tanks, including the State Council Development Research Center, suggests that emissions could peak in 2030 under a "low-carbon" or "advanced low-carbon" scenario.
It’s debatable whether either of these approaches would be sufficient. (McKinsey & Company estimates that if China continues on its current energy efficiency trajectory annual emissions will still more than double to reach 14.5 gigatons by 2030.) But analysts are united in their belief that China can’t act alone: Significant technological support is required from overseas if the goals are to be realized.
"Technological advances are the way out," said Zou. "You cannot stop the increase in population or the increase in income levels, but you can do something to change the technology."
Consequently, technology transfer has emerged as a significant negotiating point at Copenhagen. Indeed, the possibility of a Sino-US agreement on the issue is highlighted as one of the major potential breakthroughs of President Barack Obama’s visit to China in November.
Yet for all the hype, technology transfer is nothing new to China – it happens all the time through mergers and acquisitions, licensing deals, joint ventures, and so on. And according to Dr Zhang Xiliang, deputy director of the Institute of Energy, Environment and Economy at Tsinghua University, certain areas of the country’s cleantech market have already benefited significantly from these transfers, wind power in particular.
China’s installed wind power capacity stood at 12 gigawatts by the end of last year, up from just 550 megawatts in 2003. Between 2004 and 2008, domestic and joint venture manufacturers’ share of the market rose from one-quarter to three-quarters. The three largest local operators, Goldwind, Sinovel and Dongfang Electric, accounted for more than 57% of the increase in installed capacity last year.
The numbers appear to tell the story of a successful transfer: Favorable government policies brought in foreign technology and manufacturing became localized. As expertise and output rose, costs per unit sold declined, and the market moved toward mass commercialization. The solar power sector has undergone a similar evolution, with companies reporting a 50% drop in production costs.
A partnership between Goldwind and German wind turbine maker Vensys that began as licensing deals and joint development projects culminated last year in the former taking over the latter.
Transfers are rarely that pure, though. As Zhang noted in a recent report on the wind power sector, foreign companies hand over technology as a "black box" – the design systems are there but not the databases and know-how used to develop these systems. This makes it harder to tailor products to local conditions.
"[Foreign participation] has taken China’s wind industry directly to a high level, avoiding many detours," a Dongfang Electric spokesperson told CHINA ECONOMIC REVIEW. "However, we still need to develop our own core technology and R&D capabilities."
This is the crux of the dispute over technology transfer. Under the Kyoto Protocol, developed countries agreed to provide the developing world with technological support. But in China’s eyes, the system intended to facilitate this – the clean development mechanism, or CDM (See: Carbon trading: A divisive issue, p18) – hasn’t lived up to expectations.
"We haven’t given them any intellectual property (IP), at least not in the sense they were hoping for," said a Beijing-based diplomat familiar with the negotiations, who asked not to be named.
China’s preferred mechanism for large-scale technology transfer is a central, UN-mandated body that oversees all exchanges. This body would be responsible for administering the international funds that Beijing is calling for.
Western critics say this system is dated, reflecting a time when China didn’t have much of the technology it now possesses. It also fails to acknowledge that much Western technology is privately owned. If there were to be a direct transfer of IP, foreign firms would prefer a sector-based system that has a tangible impact on China’s emissions – for example, where the value and scale of the technology transferred depends on the size of carbon intensity cuts Beijing commits to a particular area.
"Western nations think some developing countries see technology transfer as getting a free lunch," said Chen Dongmei, director of the climate change and energy program for the WWF in Beijing.
The private sector, meanwhile, scorns any approach that involves international bureaucracy. Asked what system he would like to see introduced to work alongside CDM, Andrew Aldridge, director for Greater China at Climate Change Capital, which operates the world’s largest private carbon fund, said, "A mechanism that is not administered by the UN."
Various experts have drawn up models to fill the gap. Li Lailai, Asia center director at the Stockholm Environment Institute, advocates an inter-country joint mitigation plan. A developing country would put together a plan for reducing carbon intensity in a particular sector, identifying the technology and financial backing required from overseas. Developed countries would participate where they see commercial opportunities and the resulting emissions reductions would count toward their mitigation commitments, subject to evaluation by a UN body.
Li believes this kind of broad, government-driven mechanism is the only one capable of delivering significant technology transfer. However, she admits that the administrative challenges would be large.
Governmental or institutional involvement in these processes is often contentious, but it is seen by many as a necessity. Christopher Hazen, Asia director for WSP Environment & Energy, and formerly head of the US Commerce Department’s technology transfer office in Hong Kong, says that technology transfer by definition means government support. "It is something that doesn’t happen naturally," he said. "It is governments acting on behalf of what they see as national interest and there may be some aggregation of private sector interests in this."
There are many ways in which this can happen: funding industry benchmarking projects that uncover discrepancies ripe for commercial exploitation; carrying out pre-feasibility studies of technologies that uncover business opportunities; and funding demonstration projects to show how mature foreign technologies, which require point-of-use engineering to work in China, can be economically viable.
"It accelerates the creation of a market which might eventually develop," said Hazen. "Once a pre-feasibility study comes up with some pretty attractive results, the private sector jumps in, finalizes the concept and gets it out the door."
According to Tsinghua’s Zhang, the German government played a key catalytic role in the early stages of wind power technology transfer, helping to fund Goldwind’s development efforts.
Now that wind power has been commercialized in China, there are plenty of investors. Companies with less proven technologies, however, still struggle to find funding.
Chinese banks’ tendency to eschew small- and medium-sized enterprises in favor of lending to state-owned firms means that loan applicants without a solid financial history may well lose out. Meanwhile, venture capital (VC) and private equity (PE) investors, used to the relatively short development periods of internet enterprises, are often put off by the amount of time, capital, and regulatory negotiations required to commercialize clean technologies.
"PEs are more willing and better-placed to invest in more proven technologies," said Ruth Dobson, the sustainability and climate change partner for PricewaterhouseCoopers’s Beijing practice.
Capital and care
Dobson believes local governments – already under pressure from Beijing to promote alternative energy strategies – can play an obvious nurturing role, offering emerging cleantech firms places in high-tech investment parks and providing business development services. A good example of this overseas is the Carbon Trust, an organization supported by the UK government that provides incubation services and VC investment to fledgling companies with low carbon technologies.
The Carbon Trust is hoping to recreate its business model in China and recently signed a joint venture agreement with state-owned China Energy Conservation Investment Corporation. The fund’s startup capital – about US$16 million – is tiny compared with the average VC deal. But Tim Lancaster, the trust’s China director, stresses that the money is only intended as early stage funding.
"With any new technology, the price starts out high and this is typically where governments provide funding. When things are closer to market then companies are willing to pay. In the middle you’ve got the valley of death. An awful lot of good ideas fail here, and this is where we try to help – to carry them across," Lancaster said.
Whatever the appropriate mechanism for technology transfer – and whatever the nature of government involvement – it is clear to all concerned that success depends on acceptance by the market. This means creating a platform for commercial development. In the context of the developing world’s cleantech needs, 0.5-1% of GDP is not a lot of money; but if put to proper use this cash could leverage vast private sector commitments.
Confidence is the key, and once all the politicking is stripped away, this is perhaps what a post-Kyoto climate change agreement could deliver. "In terms of people making investment decisions, you need more than a three-year window," said Aldridge of Climate Change Capital.