Green shoots

Jul 19th 2007 | SHANGHAI

From The Economist print edition

A new venture hopes to promote clean-technology investment in China

CHINA is not feted for its stewardship of the environment. One recent World Bank report found that 16 of the world's 20 most polluted cities were in China; and a draft version of another puts the total economic cost of outdoor air and water pollution at around $100 billion a year, or 5.8% of China's GDP. By some estimates, China has now overtaken America to become the world's largest producer of greenhouse gases. Environmental protests, such as one that took place in Xiamen last month in response to a plan to build a chemical plant in the city, are on the rise.

The pollution that has resulted from China's growth is a huge problem, but to investors it presents an enormous opportunity. Venture-capital investment in clean tech in China is picking up, increasing by 147% from $170m in 2005 to $420m last year, according to the Cleantech Group, an industry research body. Most of this investment was in solar energy, a booming field in which several Chinese firms have gone public in the past year. But though China has now become the world's third-largest manufacturer of solar panels, most of them are exported, thanks to the subsidies offered in the developed world.

Several initiatives aim to promote the development and deployment of clean technologies within China itself. The most prominent is the Clean Development Mechanism (CDM) of the Kyoto protocol, the United Nations' treaty on climate change. Under the CDM, projects that reduce emissions of greenhouse gases in poor countries earn credits, which can be purchased by rich countries in lieu of reducing their own emissions as required by the treaty. The Chinese government has already approved 524 such projects; China accounted for 61% of the CDM market last year, which was worth nearly $5 billion.

The Chinese government is also introducing environmental targets of its own in areas such as building regulations, appliance efficiency and the energy consumption of big companies. Meeting them will require vast sums to be spent on new technologies, and several schemes involving local and foreign institutions aim to encourage that investment. The latest, announced in Beijing this week, is a non-profit, public-private organisation called the Joint US-China Co-operation on Clean Energy (JUCCCE). It grew out of an energy conference that took place in Shanghai in April and is headed by Peggy Liu, a former Silicon Valley executive who is now a venture capitalist in China.

Ms Liu says its aim is to compress 30 years of clean-tech development into just ten, in part by bringing together innovators and investors. It will promote investment in both reducing energy demand and greening supply. It is particularly enthusiastic about the prospects for trimming energy consumption in buildings, which can be two or three times more energy-hungry in China than elsewhere. Rob Watson, a JUCCCE member and the man behind LEED, a popular standard used to certify green buildings around the world, says he has been commuting to China regularly in recent years to advise local builders and contractors. He likens the energy-distribution system to a “leaky bucket” and says plugging the obvious holes could have a big impact relatively quickly.

Last year the government set a goal of reducing the energy consumption of new buildings by 50%, and in some cases by 65%. Yet success depends not only on the strength of regulations, but also on the zeal with which local authorities enforce them. As in the rest of the world, relatively few green technologies are competitive without subsidies or incentives of some sort. A shining exception is solar-powered water heaters, of which China has more than any other country. Chinese firms sold $2.6 billion of them last year alone.

The combination of environmental degradation, economic growth and manufacturing prowess means that China “has the opportunity to be at the forefront in finding solutions to the energy problem that the world faces”, says Richard Branson, a British businessman who is investing in a range of clean-tech initiatives. In the 1960s, after all, Japan was also a fast-growing, polluted country; yet today Japanese firms are the leading manufacturers of hybrid cars and solar panels.