China's Belt and Road should be green - and green-financed
CHINA'S Belt-&-Road Initiative is being billed by President Xi Jinping as "the project of the century". But this ambitious trade network that will encompass almost two-thirds of the world's population and 29 per cent of global GDP must also be economically sustainable and environmentally friendly.
The initiative aims to increase infrastructure investment and promote cross-border trade so that goods, services and capital can flow easily on land - the "belt" that connects China, Central Asia, Russia and Europe - and by sea, the "road" that links China to South-east Asia, India and Africa. It effectively creates a New Silk Road.
Infrastructure provides the lifeblood of an economy. Energy systems power homes and factories, transport systems get people to work, water supplies maintain good health. Through a virtuous cycle, infrastructure investment drives economic growth that in turn drives further infrastructure demand.
China has been building its domestic infrastructure for many years, but as its economy matures and this spending gets lower, the vast foreign-exchange reserves it has accumulated, about US$3 trillion, give it a "back-up" supply of capital for financing global infrastructure.
And as China's influence on the world stage grows, there is an opportunity to showcase green leadership abroad. China's endeavours overseas can significantly influence the trajectory of global emissions as well as its overall environmental footprint.
The country is the world's largest emitter of greenhouse gases, but it has swiftly embraced a "green" agenda domestically. It acknowledges its important role in limiting global average temperature rises to within 2 deg C through the Paris Agreement.
The carbon intensity of its economy has fallen steadily since the reforms that started to open China in the late 1970s. The country now emits 73 per cent less carbon dioxide per unit of real GDP than it did 35 years ago, though it still accounts for around a quarter of total global greenhouse gases.
ACHIEVABLE TARGETS
Domestic environmental-related targets have been incorporated in economic planning since 2006. The legal, regulatory and institutional framework for environmental protection has been expanded widely. We think the medium-term environmental targets are achievable; they include energy-intensity goals and pollution reduction.
Environmental protection is fundamentally compatible with growth, and in our opinion, good for it. Greener energy and environmental-friendly technology drive new growth opportunities, and a healthier and more productive labour force reduces the fiscal burden on healthcare.
Besides being the world's factory and, increasingly, the world's innovator, China's endeavours overseas can significantly influence global emissions. Success at home - in renewable-energy capacity and improving energy efficiency, and in world-class infrastructure and public transportation - can be replicated abroad.
Many international financiers still do not take into account climate considerations when providing capital. However, there are signs this is changing.
Infrastructure should be designed and constructed to last, coping with not only historic patterns of usage, but also future wear and tear that could be outside the boundaries of current planning. The severity of extreme events such as floods, storms and wildfires that have caused devastation in the past year was magnified by climate change. Infrastructure should thus be embedded with a higher level of climate-resilience. Even if higher risk-tolerance raises costs, preparation by resilience is more cost-effective than rebuilding after a disaster.
Infrastructure usually lasts many decades and the emissions profile is likely to remain fixed throughout that time. It is thus important to avoid high-carbon "lock-in" by choosing infrastructure that adopts newer technologies, embeds more efficiencies and embraces more sustainability.
There is also a growing consensus that the construction and operation of infrastructure systems should be sustainable rather than causing degradation to the earth's atmosphere, air quality, waterways and land, or to the ecosystems and peoples' livelihoods.
LOWER-CARBON INVESTMENTS
Historically, high-carbon investments were seen as lower-risk, yielding higher reward than low-carbon investments. However, more financial institutions are beginning to shun higher-carbon activities in favour of lower-carbon investments. For example, the World Bank will cease to fund oil and gas exploration after 2019, while some investors are spurning oil-sands or coal-fired power generation.
We believe green financing has an important role to play in realising a lower-carbon future. President Xi has offered strong policy support and Chinese banks are beginning to issue Belt-&-Road-focused green bonds, instruments whose proceeds finance green projects. But better labelling of green finance would raise its awareness among other investors and thus encourage them to consider the environmental sustainability of their own investments.
China's green-bond market is among the largest in the world: the US$30 billion issued last year comprised more than a fifth of the global green-bond total and compares with just US$1 billion in 2015.
Indeed, 2017 saw the issuance of a US$2.15 billion "One Belt One Road Green Climate Bonds" that will refinance renewable energy, low-carbon and low-emission transport, energy efficiency and management of sustainable water-resource projects.
Other green financing tools could include loans, securities, insurance, banking and funds that favour environmentally-friendly ventures. Transparency and disclosure are important to ensure environmental integrity is upheld, but if "the project of the century" is to be climate-resilient and sustainable, it should also be "green-financed".
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