Achieving the level of decarbonisation needed to avert significant climate change risks, says Christine Loh SBS, OBE, JP, Chief Development Strategist, Institute for the Environment, The Hong Kong University of Science and Technology, will require an all-hands-on-deck approach where the public and private sectors cooperate to transform industries and businesses through both technological and management innovations.
A major global focus in 2021 is climate change. This is not only because of the weather disasters that have overwhelmed so many parts of the world, but also because governments from over 190 countries are gathering in Glasgow next month (November 2021) to continue negotiation on the implementation of the multilateral 2015 Paris Agreement that deals with the existential threats arising from climate change.
In other words, climate change is taking centre stage in world and national affairs. The extreme rains in the Mainland and Central Europe, the sustained extreme heat in the western parts of Canada and the US, the wildfires in California, Turkey and the Mediterranean, and the fast-melting glaciers in Greenland are focusing the attention of rich and emerging economies on the risks of climate change. The latest report by the United Nations (UN) Intergovernmental Panel on Climate Change, published on 9 August 2021 to provide policymakers with scientific assessments on climate change, noted that global warming is happening faster and affecting every region of the world. It isn’t only that poor countries can’t cope – even developed countries are having trouble dealing with this issue. The report makes it clear that both targets agreed in Paris in 2015 (to keep the global temperature rise to well below 2°C, and preferably under 1.5°C, from pre-industrial levels this century) will be broken unless huge cuts in carbon emissions take place.
Climate change is caused by humans pumping out gigantic quantities of greenhouse gases that have been warming the atmosphere since the Industrial Revolution, mainly through the burning of fossil fuels and especially coal, since that has the highest carbon emissions. Fossil fuels still provide about 84% of the world’s energy. Replacing fossil fuels with clean energy requires not only a technical and industrial revolution, but also a financial revolution to fund decarbonisation, while at the same time increasing clean energy supply to developing economies. Many parts of the world, such as in Asia and Africa, do not have enough energy to even keep the lights on for basic daily activities.
The Mainland accepts the challenge. It is the largest developing economy in the world where 57% of the country’s energy still comes from coal. On 22 September 2020, it pledged to achieve peak carbon by 2030 and carbon neutrality by 2060. Carbon neutrality is achieved when carbon dioxide emissions are equal to the amount of carbon dioxide being removed from the atmosphere. This was a major piece of good news because the Mainland is the largest carbon emitter in the world, contributing about 28% of global emissions. Moreover, at the UN Summit on Biodiversity held on 30 September 2020, the Mainland expressed its commitment to biodiversity protection since decarbonisation and restoration of ecosystems need to go hand in hand.
Correcting ‘unbalanced, uncoordinated and unsustainable’ growth
The Mainland’s carbon commitments did not come out of the blue, although they surprised many people at the time. The government had been planning for change even before former Premier Wen Jiabao’s famous criticism in 2007 that the country’s economic path was ‘unbalanced, uncoordinated and unsustainable’. In 2012, the ruling party amended its constitution to add ‘ecological progress’ as a new pursuit. This gave the ruling party, and party officials, clear direction that they have to put the environment on an equal footing with economic growth. In 2013, the government issued the 10 Measures to Fight Air Pollution, which was followed in subsequent years by similar mandates on water pollution and soil pollution. Watershed protection has become a serious priority, as has repairing polluted lands and restoring biodiversity.
By 2018, the government was ready to amend the national constitution. By adding ‘ecological civilisation’ as a constitutional mandate, the country’s political and policy frameworks were in place to put ecological health alongside economic and social developments. The government has also launched various pilot schemes, one of which became a fully fledged national carbon emissions trading scheme in July this year (2021), as well as other trials that will shape policy in the foreseeable future, such as ecosystem value accounting.
Greening finance to support ecological civilisation
It should not be overlooked that the People’s Bank of China published the groundbreaking report, Establishing China’s Green Financial System, in 2015. This was one of the earliest comprehensive reports in the world by a central bank on why and how to reform the financial system in order to raise capital to achieve environmental goals. Significantly, this report was prepared together with the UN Environment Programme, which meant the country absorbed high-level international thinking on how to green finance. In 2016, as host country for the G20 meeting held in Hangzhou, the Mainland used the occasion to discuss green finance, which followed its efforts to help shape and shepherd the 2015 Paris Agreement through the UN for the countries of the world to avoid dangerous climate change by limiting global warming to below 2°C, and to pursue efforts to limit it to 1.5°C, compared with pre-industrial levels.
Green finance has become a shorthand description for directing capital towards zero-to-low carbon projects and environmentally sustainable projects. The capital needed is enormous. According to a report released by a climate change think-tank at Tsinghua University in 2020, it could cost the Mainland RMB174 trillion (about US$26 trillion) in total. The cost of transforming the energy and electricity sector alone is estimated to cost RMB138 trillion from 2020–2050, or 2.6% of GDP annually. The transformation for other economies will likewise be in the trillions. Hence, governments must play a decisive role.
The Mainland’s way is to make environmental protection a constitutional principle for both the ruling party and the nation. The set targets and timelines, plus the ensuing laws and regulations, are mandatory for the governance of the country. Party and government officials must align their development plans according to those goals within a legally enforceable regulatory framework, and companies too must improve performance accordingly, otherwise they will be penalised. Even in free-market economies, such as those of the European Union, it is recognised that the market alone cannot turn the ship around without clear and consistent policy and incentives. Hence, the aim is to use policy and legal instruments to change incentives to favour investments in green and zero-to-low carbon projects.
The Mainland’s climate envoy, Xie Zhenhua, announced in late July this year (2021) that China’s decarbonisation plans would be published soon and that the top leadership had created a ‘leading small group’ (lingdao xiaozu) to guide and oversee implementation. This is important because, within the Chinese governance structure, creating leading small groups is a mechanism used by the leadership to guide and supervise the nation’s most important policies. These groups are usually chaired by a Politburo member, which shows the importance the leadership accords to the subject at hand.
Hong Kong must take note since the city serves as the nation’s international financial centre. Hong Kong needs to be a part of the ‘revolution’ to clean up the city and to help raise capital for the country’s net-zero ambition. Hong Kong also serves the Asia-Pacific region in capital raising. Under its Climate Action Plan 2030+, published in 2017, the HKSAR Government committed the city to reduce carbon emissions by 26%-36% from 2005 levels by 2030. It is about to publish an updated plan that will no doubt provide further action since the HKSAR Government has set the goal of achieving carbon neutrality by 2050.
A multidisciplinary challenge
Green finance is a multidisciplinary challenge, since it relates to a large range of investments across many sectors of business and markets. The green transition needs to be policy-led so that governments use regulatory tools to ‘internalise externalities’ in the sense that the negative environmental costs are reflected in prices. The purpose is to penalise negative outcomes and reward positive ones. The signal to the market is that investments in environmentally unsustainable projects, in particular projects with high carbon emissions, carry higher risks. This is what fuels discussions about the need to price carbon, which can be done through emissions trading or the setting of carbon taxes.
Pricing carbon is not easy. Infrastructure projects, such as renewable energy or waste-to-energy projects, involve long timeframes with multi-year projections of environmental impacts. At present, there is inadequate expertise built into the financial services industry to make such assessments. Assessments of green investments are still largely based on threshold financial rates of return. To mobilise large amounts of capital for green investment, governments and professionals need to find a way to augment these financial returns by incorporating non-financial or societal returns into total returns, such as lower climate change risks, reduced pollution, improved public health and so on. There is a lot of innovative work to be done here. Environmental, social and governance (ESG) disclosure by listed companies is an example of an emerging trend to show investors how a company is managing such risks, including climate change-related risks.
A fast transition
Essentially, the Mainland must replace coal with natural gas during a fast transition away from high-to-lower carbon fossil fuels, and then replace natural gas with renewable, nuclear and yet to be popularised energy sources, such as hydrogen, ammonia and bioenergy. The first target is for the country to achieve peak carbon by 2030. Research by Tsinghua University shows it must then reduce carbon emissions at 8%–10% per year from 2030 onwards. These are tall orders, but these are the goals upon which the Mainland has based its national decarbonisation plans.
Yet, as the largest carbon emitter in the world, there is international pressure for the Mainland to peak earlier than 2030. What is certain is that climate change will continue to be part of the national and global agenda for decades to come. Speeding up will only put more demand on everyone and there is no time to waste. We can regard the achievement of carbon neutrality for the world between 2050 and 2060 as our collective date with destiny. Achieving this will require an all-hands-on-deck approach where the public and private sectors have to cooperate to transform industries and businesses through both technological and management innovations.
Hong Kong has its work cut out. It can shift from being an international finance centre to being Asia’s green finance hub. It is well placed to understand the Mainland’s pathway to ecological civilisation and decarbonisation and seek to support it, while at the same time to be conversant with the green transformation in the Asia-Pacific region. Hong Kong can provide the intellectual and human resource talents to serve this massive ‘brown to green’ transition. This requires the Hong Kong-based workforce to understand ‘sustainability 101’, not only in science, engineering and biodiversity, but also in finance, accounting, planning, design and construction, professional services and public administration.
Employers in Hong Kong are keen to hire young people with a basic grounding in environmental sustainability. Universities are providing more courses. The younger generations are attracted to environmental clean-ups, and they want to innovate to dematerialise their lifestyles towards experiential richness and well-being. The Mainland’s new development agenda, viewed through the lens of ecological civilisation and decarbonisation, offers a path worth pursuing by all. The professional bodies in Hong Kong can play a special role in continuing professional training, as well as helping to meet the needs of this fast-paced transition towards the net-zero carbon world.
Christine Loh SBS, OBE, JP, Chief Development Strategist, Institute for the Environment
The Hong Kong University of Science and Technology