The Green Team Speaks to Xu Lin

Mr. Xu Lin is the Chairman of the US-China Green Fund (UCGF). He began his career in the Long-term Planning Department of the State Development Planning Commission in 1989. Mr. Xu has since taken on roles that include Director-General of the Department of Fiscal and Financial Affairs and the Department of Development Planning of China’s National Development and Reform Commission (NDRC), and Director of China Center for Urban Development. Throughout his career, Mr. Xu has participated in the formulation of several Chinese Five-Year Plans for economic and social development, urbanization plans, regional development plans and policies, and major industrial policies.

In September 2020, President Xi announced China's carbon peak and carbon neutrality goals. They are among China's top priorities. These two goals have been included in the 14th Five-Year Plan and have been identified as economic priorities for 2021. During your time at NDRC, you were involved in drafting China's five-year plans. In your opinion, what are the biggest challenges and opportunities for China in the next five years? What are your suggestions for advancing China’s carbon-related goals?

LIN: President Xi Jinping’s announcement of China’s new goals for addressing climate change at the UN General Assembly should not come as a surprise given the evolution of China's development policy. China has attached great importance to economic, social, and environmental sustainability since it signed SD21 (the UN’s agenda for sustainable development in the 21st century) and has focused on sustainable development in every five-year plan since then.

The Chinese government takes environmental issues very seriously, not only because officials’ feet are held to the fire, but also because the government must respond to people's aspirations for a better life.

China has made sustainability indicators such as pollutant reduction, environmental governance, and energy consumption per unit of GDP binding KPIs for government officials, which are actually highly relevant signals for addressing climate change. Creating a mechanism for planning and enforcing these binding indicators is an important initiative achieved through the five-year plans. If central government ministries and local government officials do not take measures to meet the binding targets proposed in the five-year plan, they will be held accountable. It is precisely because of this mechanism that China has had success in achieving progress on its environmental targets.

The Chinese government takes environmental issues very seriously, not only because officials’ feet are held to the fire, but also because the government must respond to people's aspirations for a better life. With the increasing level of economic development, Chinese people demand a better quality of life including demands related to the environment and climate change. People want to breathe cleaner air, drink cleaner water, and eat safer food.

In addition, as China proposed the idea of a community with a shared future for mankind, the international community also asks China to take more responsibility to reduce carbon emissions. Therefore, China's five-year plans, as the most important outlines of the Chinese government’s development policy, must respond positively to these issues and come up with practical solutions and initiatives.

In addition, as China proposed the idea of a community with a shared future for mankind, the international community also asks China to take more responsibility to reduce carbon emissions.

The challenge is that, in order to achieve the new carbon emission targets, China must act quickly to accelerate the process of improving energy efficiency and promoting green energy substitution, as well as create new incentives and a favorable policy environment. To this end, China's 14th Five-Year Plan will likely propose specific requirements and policy initiatives on how to achieve the new emission reduction targets, as well as the deployment and arrangements of the five-year plans of local governments and relevant central government ministries.

I have participated in several regional discussions on the preparation of the 14th Five-Year Plan, and all of them have made required carbon peak and carbon neutrality targets and proposed specific measures to promote the green and low-carbon transformation of economic and social development. Some enterprises have also responded positively by proposing carbon neutral action plans for the future. And in my opinion, China should focus on the following areas in order to achieve carbon peak and carbon neutrality goals:

1. Increase the R&D, promotion, and application of energy-saving technologies, and use the most advanced energy efficiency and intelligent technologies to promote energy conservation in buildings, industries, and everyday life to increase China's overall energy efficiency on par with developed countries such as Japan and Germany. At present, there is still a gap of about 40% between China and the countries with the highest energy efficiency in the world, and it is imperative to bridge that gap with no time to lose.
2. Accelerate the restructuring of the energy mix and increase the production and consumption of green energy. This includes further increasing the production and consumption of solar, wind, and biomass energy, accelerating the R&D of solar and hydrogen energy-related fields, such as material technology, energy storage technology, smart grid technology, high-efficiency motors, and carbon capture and sequestration technology, and replacing fossil energy with green energy or low-carbon energy. In the past 10 years, the cost of wind power generation was cut by 70%, and the cost of photovoltaic power generation was slashed by 80%. In the future, photovoltaic is expected to become the cheapest energy source. Experience and knowledge gained from this can support the development of hydrogen energy better, eventually replacing fossil fuels.
3. Improve the incentive mechanism for carbon emission reduction. For one, the allocation and trading system based on the total annual carbon emissions should be implemented as soon as possible. This will allow for the value of carbon emission reduction instruments to be realized in the market through trading. Another example is treating forests as carbon sinks. Since China's reform and opening up, the national forest coverage increased from 12.7% to 23.3%, which required significant inputs but also created tremendous ecological value. Monetizing this ecological value requires good definition, trading, and evaluation of property rights. Once such a mechanism is created, more market players will be motivated to participate in the construction of forest carbon sinks and the improvement of the ecological environment. Obviously, we also need to establish a systematic carbon finance mechanism and a green financial service system to encourage good behavior.
4. Advocate a global zero-tariff trade and investment facilitation system for carbon emission reduction technologies, products, and services, and prohibit any political or non-political restrictions on the import, export, and cross-border investment of such technologies.

China's industrial system is sizeable and implementing carbon emission reduction requirements will be a serious challenge for both the government and high-carbon industries. Advancing the industrial low carbon transition will require extensive government and private investment, which means there will be many investment opportunities. What do you think are the biggest investment opportunities (please list three)?

LIN: The industrial sector is the largest energy consumer in China, and although its share of overall GDP continues to decline, it remains the largest energy consumer and carbon emitter. In particular, steel manufacturing, building materials manufacturing, and power generation are all traditional fossil energy consumers and high-carbon industries in China. The solution to this problem is threefold.

1. Upgrade Industry—Substitute in high value-added, low energy-consuming industries and reduce the share of high-carbon industrial sectors.
2. Energy Conservation—Promote adoption in industrial sectors, which can save at least 30% of energy consumption if the most advanced energy-saving technologies are used to retrofit equipment for example.
3. Accelerate Transition—Facilitate the sector’s movement away from high-carbon fuels and raw materials to low-carbon ones.

In all of these areas, there are many opportunities for private investment. Take energy efficiency: the companies we have invested in and researched have a good record of attracting private investment, and the annual return on investment can reach as high as 30%, which is very attractive to private capital. However, a major challenge is that the financial system does not serve private SMEs adequately, which hamper the growth of private companies that provide energy conservation services.

As the Chairman of the UCGF, can you share with us the plans of UCGF in promoting carbon peaking and carbon neutrality?

LIN: UCGF is an institutional investor focusing on green investments. Our criteria for selecting investment targets include technology innovation, technology application, and business models that are conducive to reducing greenhouse gas emissions and improving energy efficiency. These will be our core investment areas in the future. We are currently raising money for the second fund. And among the investment projects we are preparing for, there are many renewable energy technology companies, hydrogen energy technology development and utilization companies, and integrated energy service technology companies, which can either increase the share of non-fossil energy production and consumption or improve energy efficiency.

In addition, we work with local governments and enterprises in some regions to invest in the construction and operation of green and low-carbon industrial parks, covering the planning, design, and construction of plants, office buildings, residential housing, and integrated energy systems based on zero-carbon and low-carbon concepts. We also work with our portfolio companies to introduce high value-added and low-emission industries to realize the vision of green and low-carbon industrial parks that are comprised of mixed-use communities integrated with intelligent ecosystems promoting efficient operation and high profitability. This dual development model combines the fund's green investment with the development of green and low-carbon industrial parks and sets us apart from other institutional investors.

Due to the impact of COVID-19, the pace of fund raising and investment of many institutions slowed in 2020. What progress did the UCGF make?

LIN: We, like many institutional investors, have been adversely affected in our fund raising and investment. Nonetheless, we have made progress in a number of areas. First, we have restructured the GP and incorporated a new entity called the US-China Green Fund Management Company Limited. It will be solely responsible for the fund raising and the management of the second fund and all future funds. The LPs of the management company have been largely finalized, and the professional management team has been put in place. Second, fund raising has been vigorous. So far, the LPs have indicated their intention of investing about RMB 8 billion.

Third, in the process of raising the first fund, we have looked at hundreds of green investment targets and projects. We are continuously conducting research and screening of these projects and will complete the fundraising and investment of a dedicated fund for four projects with an investment of about RMB 200 million in the first quarter of this year. Fourth, we have signed framework agreements with Nantong (Jiangsu), Hohhot (Inner Mongolia), and Zhuzhou (Hunan) for the investment, construction, and operation of low-carbon industrial parks with digital economy, green health care, and green new materials as the leading industries.

Lastly, we have expanded our research on investment strategies and priorities including how to explore promising investment opportunities in the future based on consumer demand and the upgrading of consumer spending structure, how to explore potential investment opportunities in the supply and demand generated by technological breakthroughs, how to explore new investment opportunities driven by carbon neutrality in the renewable energy industrial chain, and how to accurately grasp the meaning of macro policy changes on the valuation of primary and secondary markets.

How do you advocate and practice green and low carbon development and climate change mitigation in your daily life?

LIN: As a professional who focuses on green investment and advocates for green and low-carbon development, I must lead by example in my daily life. For example, I try to conserve water, especially hot water, buy energy-efficient appliances, save electricity, reduce driving, walk or use public transportation within short distances, and take high-speed trains when the journey takes less than four hours. I also participate in philanthropic activities and make personal donations to help with environmental protection. Of course, if I buy a new car, I will buy an electric car. I hope that through my personal example, I will influence my family and my colleagues and friends to practice green and low-carbon behaviors in their daily life.