China's Five-Year Plan: Banking on Sustainability as a Growth Engine
Since 1951, the Chinese government has issued a Five-Year Plan (FYP) as a strategic guideline for economic and social policy in the upcoming half-decade. Though not officially mandatory, FYPs have always been closely adhered to in shaping subsequent legally-binding policy, and they can be reliably treated as a blueprint for future planning in China.
Sustainability is viewed as one of the most viable paths to business growth
Priorities have changed dramatically as China's economic structure has evolved into a more market-driven 'state capitalism' model, and the two most recent FYPs in 2006 and 2011 have embraced sustainability. While this is significant in itself for one of the world's two largest carbon emitters (the other being the United States), the most recent plan is notable for not only the 'what' of its green goals but for the 'why'. Sustainability is being viewed not as just an environmental necessity but as one of the most viable paths to business growth and job creation in the world's largest nation -soon to have the world's largest economy.
This analysis explores the major sustainability goals of the 12th FYP, the Chinese government's incentives to meet those objectives, and the impact on real estate and industry, including greentech, in China and beyond. We also take a look at Australia, another Pacific Rim country entering 2012 with some of the world's most aggressive new green legislation.
Green means go in China
For over 60 years the FYP has been China's largest policy-making event, generating the country's social and economic road map for the next five years. It covers a wide range of social and economic issues including growth, industrial policy, healthcare, environmental issues and energy. It dictates 'end goals', and primarily relies on regional and local stakeholder groups to achieve them. The one constant over the years is that state and local officials who contribute to achieving the FYP priorities are rewarded with recognition and political advancement, so this makes achieving them a very high priority.
Taking strides toward transparent sustainable measurement and reporting
The 2006 FYP ushered in China's first important strides toward transparent sustainable measurement and reporting. For the first time, the nation not only reported on but set aggressive greentech targets to reduce:
- Energy use per unit of GDP
- Water use per unit of value-added industrial output
- Sulfur dioxide emissions
From 2006-2010 China exceeded all of those targets except one, achieving 19.1 of a mandated 20 percent reduction in the energy/GDP goal.
The 12th FYP, rolled out in 2011, established new metrics for continued improvement in all of these areas, but also added specific goals for:
- Reduction of carbon emissions per unit of GDP of 17 percent by 2015 over the 2010 level
- Increased share of non-fossil fuel in primary energy consumption
- Reduction of nitrogen from ammonia and nitrogen oxides
Also included as non-mandatory targets are 8 percent GDP growth for 'Strategic Emerging Industries' (such as cleantech) and annual energy consumption of 4 billion tons coal equivalent.
China's main manufacturing hub to exceed FYP sustainability targets by 2015
Perhaps the most sweeping of the new mandates in the 12th FYP is the carbon reduction requirement. China's planning agency, the National Development and Reform Commission, has informed seven provinces and cities that they need to set emissions caps to prepare for sustainability measures such as a carbon trading program. Guangdong province, China's main manufacturing hub and largest emitter, has already received approval for its own plan, which exceeds FYP requirements by cutting carbon intensity by 19 percent and increasing non-fossil fuels to 20 percent of its primary energy mix by 2015.
Sustainability equals growth in the new China
There are three key themes running through China's most recent FYP:
- Promote a GDP growth rate target of 7 percent
- Move from investment and export-led growth toward domestic consumption
- Promote the service industry
- Consolidate specific sectors
- Support China's 'Strategic Emerging Industries'
- Close the urban/rural divide and promote urbanization
- Support regional development in western and central China
- Close the income gap with higher minimum wages
Energy and environment:
- Create more mandatory 'green' targets
- Promote industries for energy savings and clean energy
- Set green development indicators to hold local officials accountable
- Expand renewable energy such as hydro, solar, wind and nuclear
China's Premier Wen Jiabao said in 2011: "We can no longer sacrifice the environment for the sake of rapid development and rash construction." In reality, however, the drivers behind the FYP's embrace of sustainability reach far deeper than altruism. China needs to create a whopping 25 million new jobs each year to maintain its growth level within its 1.34 billion population. The nation's leadership clearly believes that sustainability and greentech industries are among the most opportunistic routes to that economic success.
In China, green growth now trumps unbridled consumption for future economic strength
Unlike in some nations, recent years have proven that China's sustainable goals are not just 'greenwashing' ideals that are ultimately ignored. During the recent recession, the Chinese government pumped a massive infusion of cash into state-owned industries, creating a surge in manufacturing production. By late 2009 leaders realized that this boost threatened the green goals of the current FYP. In 2010 they ordered regional authorities to get sustainability numbers back on track, enabling local leaders with 'Iron Fist' authority, such as ordering 'brownouts' of heavy industrial districts. Many factories were forced to close until the power was turned back on. This dramatic gesture demonstrated that in the world's highest producing nation, green growth now trumps unbridled consumption for future economic strength.
Aggressive green goals
China plans to ramp up power generation capacity from its 950 GW 2010 level to 1,350 GW by 2015. In doing so, the FYP calls for a renewable energy increase during that period from 26.4 to 33 percent of the overall electrical power mix. By comparison, 14.3 percent of overall power supply in the U.S., the world's other major consumer, came from renewables during the first six months of 2011.
Targets for 2015 among China's three largest renewable electric power sources include:
- Hydro (75% of the present renewable mix):
57% increase in installed capacity from 2010 levels, from 211 to 331 GW
- Wind (23% of the present renewable mix): 200% increase in installed capacity from 2010, from 35 to 105 GW Offshore installations are planned for 15 GW of the new capacity
- Solar (1% of the present renewable mix): 733% increase in installed capacity from 2010, from 0.6 to 5 GW capacity
Water has been similarly targeted for sustainable improvement. The current FYP calls for reducing economic loss from flood by 0.7 percent of GDP; improving management of water supply and waste water; and controlling phosphorus, nitrogen, heavy metals and ammonia nitrogen pollution.
Specific water targets include:
- Water supply: 60% water intensity reduction by 2020, and 30% consumption reduction in industry.Also, 40 billion cubic meters addition to urban water supply capacity and 70% improvement of large irrigation districts
- Waste water:
Nearly 50% more standards by 2015, incl. more urban wastewater treatment plants and rural small-scale treatment systems
The current FYP also includes aggressive targets for green building such as:
- New buildings: A 65 percent reduction in energy consumption compared to 1980 building stock, an increase in the number of buildings that qualify for China's 3-Star sustainability rating, and a housing industrialization program
- Retrofits: Secondary energy audits for large urban public buildings, and continuation of national energy efficiency programs
While China's FYP mandates exponential growth for most renewable energies, it is also slowly putting the brakes on fossil fuel sources.
The plan calls for differences from 2010 to 2015 including:
- 30% reduction in total oil consumption and carbon intensity from new vehicles
- 15% emissions reduction and 30 percent lower energy use for passenger operators such as buses and taxis
- 20% emissions reduction and 12 percent lower energy use for freight operators such as trucks and barges
Coal, the backbone of China's energy supply (at 47 percent of the world's total consumption), is not going away anytime soon. Although its share of the energy mix is mandated to reduce from 70 to 63 percent, consumption is projected to grow by 18 percent, from 3.2 to 3.8 billion tons. Much of this demand will be met by new generation 'clean coal' plants replacing older ones. The government is expected to increase capacity for other conventional energy forms such as oil and natural gas, and nuclear as well. Nuclear alone is forecast to increase from 11 GW production capacity in 2010 to 50 GW by 2015, with the help of a $75 million investment from the United States.
"What I love about China is that it's transparent... you don't have to guess. You just say, 'What's the next Five-Year Plan? Okay, here's our company strategy... here's where we're going." - General Electric CEO Jeffrey Immelt, speaking at the 2010 Shanghai World Expo
Green pastures for cleantech players
It is easier to apply for loans and purchase land for an industrial development that will run on renewable energy.
All of this means a huge playing field of opportunity for greentech manufacturers, energy suppliers and investors. Though many of the 'how tos' of the current FYP are being worked out, the Chinese government has used a 'carrot and stick' approach in recent years to help achieve its sustainability mandates. It is easier to apply for loans and purchase land for an industrial development that will run on renewable energy. And thanks to government tax credits and other incentives, prices are competitive with -sometimes even lower than -rates for power from conventional sources. As a result, mandates to meet FYP goals through required use of renewable energy seem less onerous because the price is frequently more attractive.
For those wishing to make the most of China's sustainability drive, opportunities abound for greentech companies that supply components and technological expertise for renewable energies, as well as lower-carbon fossil fuel solutions such as clean coal. Among those cited in the FYP as 'Strategic Emerging Industries' are:
- Energy saving equipment, energy service companies and recycling providers
- Renewable energies, nuclear and clean coal
- Hybrid and electric vehicles and advanced batteries
- LED lighting and green building materials
- High-speed railway equipment
- Smart grid and smart metering
Understand, though, that the Chinese themselves have given a green light to domestic renewable energy initiatives such as solar plants and cell manufacturers, as well as wind farms and windmills over the past few years, as much of the rest of the world was backing away due to the recession. By the end of this year, while China is expected to be the world's largest consumer of both wind and solar energy, it is also the largest producer of windmills and solar cells. Other nations entering the Chinese market may find it tough to establish a foothold, since they will be jumping on an already-rolling bandwagon.
Foreign companies establishing plants or offices in China will have to be as sustainable as their domestic Chinese counterparts. Offshore organizations that don't align their operations with the FYP can expect hostile local authorities, expensive and possibly scarce energy resources, and competition that will crowd them out by toeing the government's line.
Breaching China's great green wall: What foreign companies can expect
Whether you're already manufacturing or marketing in China, or preparing to venture into the nation for the first time, here's what you will encounter as a result of the 12th FYP:
- China is probably the world's greatest market for greentech products, technology and services. By the end of this year, the Chinese will be the largest consumers of wind and solar energy. Among fossil fuels, clean coal will be in demand.
- Competition for this market will be intense from the Chinese themselves, who ramped up their cleantech capability as many other nations held back during the recession. China is the largest producer of windmills and solar cells, and foreign competitors for these and many other cleantech products will find it challenging to beat their price points. Some of the best opportunities for overseas firms may be in transfers of sophisticated green technologies, or specialized expertise in areas the Chinese will need, such as offshore wind farms and utility-scale solar.
- When trying to align a China strategy for real estate with the prevailing national trends, the FYP should be the primary source for setting strategy at the highest level. Narrowing that strategy down into a portfolio or asset level or generating specific, actionable tactics can be much more difficult without clear visibility of the intricate and unique rollouts of the FYP at the ministerial, provincial, and even district level. Investors and occupiers aligning with the FYP can mitigate the risk of missed government incentive by establishing public-private partnerships with local government ministries. With support from professionals who have proven on the ground track record of working with local governments and capturing national subsidies, creating such partnerships and necessary visibility can ensure the FYP is a tool for increasing competitive advantage rather than a bureaucratic obstacle.
- Foreign companies opening manufacturing or other operations in China will likely find environmental standards for emissions tougher than those in most other locations. And there is rarely much 'wiggle room': companies must comply or face stiff penalties, even potential cutbacks in power supply. The good news is that China is ahead of the curve on bringing down the cost of renewable energy and, with support from government initiatives, clean power should be competitively priced in coming years. There should be some carbon-trading opportunities as well.
- For new industrial plants and other foreign-driven developments in China, the greener the better as far as applying for loans, purchasing land, even getting basic cooperation from regional and local authorities. A plan for a sustainable facility running on clean energy will likely pass through Chinese bureaucracy much quicker than one that is not.
Not easily replicable, but not to be ignored
China: A model for linking sustainability to economic growth
China's 12th FYP is 'game on' for most A-list global sustainability initiatives including carbon taxation; improved building standards and requirements; mandates for energy efficiency; several government incentives for solar, wind and geothermal power; and better access to grid connectivity. Why doesn't the rest of the world just fall in line?
For one thing, democracy, and the dissent inevitably accompanying it, creates an obstacle for Western powers such as the US and Europe. As New York Times columnist Thomas Friedman notes in his book, Hot, Flat and Crowded, an important advantage is "the ability of China's current generation of leaders -if they want -to cut through all their legacy industries, all the pleading special interests, all the bureaucratic obstacles, all the worries of a voter backlash, and simply order top-down the sweeping changes in prices, regulations, standards, education, and infrastructure that reflect China's long-term strategic national interests -changes that would normally take Western democracies years or decades to debate and implement." Add to that leverage the fact that the Chinese government controls its national flow of capital more directly than any other major power in the world, and the nation's fairly short history of capitalism makes it less tradition-bound and more nimble than its Western counterparts.
It is true that most of the world's economic leaders cannot mandate broad sustainable gains with the unequivocal alacrity of the Chinese. That doesn't mean that the nation and its mandates shouldn't be held up as a model for linking sustainability to economic growth, a major goal of virtually all industrialized nations. At the very least, China should be closely watched as a laboratory to see how well a green economic machine can work.
For further information please contact:
Head of Energy & Sustainability Services, Greater China