Less Red Ribbon Equals More Ribbon Cutting Events for Clean Energy

There is an interesting article by William Chandler and Holly Gwin at the (somewhat) new Energy and Climate Program of the Carnegie Endowment for International Peace, Financing Energy Efficiency in China. Chandler and Gwin argue that "Removing barriers to clean energy investment in China may contribute more to climate protection than any global climate treaty." We have become more acutely aware that cheap coal is not preventing the development of clean energy projects in China, and the government seems genuinely committed to cutting emissions as evidenced by their high "automobile fuel economy targets" and their plan "cut energy intensity by 20 percent by 2010." Chandler and Gwin argue that red tape in four areas is restricting the growth of clean energy:

• "Restrictions on debt financing"
• "Restrictions on foreign equity investments"
• "Asymmetric policies at the central and local levels"
• "Confiscatory tax policy"
  

"Restrictions on Debt Financing"
Among the problems identified by Chandler and Gwin:

• "Chinese equity markets provide only about 25 percent of the capital provided by comparable markets in other developing economies, and commercial debt provides only 2 percent"
• Corporate bonds are illegal in China, but they "provide $5 trillion per year in financing in the U.S." and there is no reason China corporations should be missing out on this financing opportunity
  
• Financing is being channeled to SOEs rather than private companies which actually account for the majority of GDP
• "All interest payments are assessed a 10 percent withholding tax"
• Interest rates are capped at "roughly 8 percent" which discourages "risk-based" lending. Clean energy projects are risky, but "Returns on energy investments in China often exceed 50 percent per year," and allowing higher interest rates might encourage banks to more readily lend to clean energy projects.
• The roughly 10 percent interest rate cap on foreign shareholder loans has the same discouraging effect on the willingness of shareholders to finance clean energy projects.
  

"Restrictions on Foreign Equity Investments"
The problems identified by Chandler and Gwin:

• "Foreign investors' ability to repatriate foreign exchange" is strictly controlled, and "is an anachronism in a nation with a $1.4 trillion foreign exchange surplus."
• Prohibition on preferred stock in China.
• China does not allow a priority investment return to foreign investors in a CJV that develops and sells carbon credits under the CDM. The CJV is the only business form allowed for CER/CDM projects, and this restriction on business structure might discourage investment.
  

"Confiscatory Tax Policy"
China's value added tax (VAT) on clean energy is not a true VAT, but instead requires clean energy projects to "pay 17 percent of revenue as VAT." Meanwhile, coal-burning energy facilities are only assessed a 13 percent VAT. Also, clean energy producers are no longer afforded an income tax break under the new corporate income tax. Chandler and Gwin argue that revisions to both of these tax policies could encourage investment in clean energy projects in China.

Chandler and Gwin's Priority List for the Chinese Government for Promoting "Clean Energy Development"

• "Exempt clean energy investments from foreign exchange, foreign-invested enterprise, and industrial policy controls;"
• "provide tax exemptions for clean energy companies and services—particularly in regards to the value added tax (VAT), which sucks up 17 percent of total revenues;"
• "make risk-based clean energy lending more worthwhile for banks;"
• "provide loan guarantees for energy-efficiency projects in China;"
• "reduce required paperwork for clean energy investment; and"
• "address restrictions created through the emissions trading system that actually increase risk to investors."
  

Closing Remarks
Chandler and Gwin are literally invested in this research. Chandler is the president of Transition Energy and the co-founder of the Dalian East Energy Development, Ltd. (DEED), and Gwin is the general counsel and co-founder of Transition Energy. Transition Energy develops "financing for clean energy projects around the world," and DEED is a clean energy CJV in China and co-founded by Transition Energy. However, they are probably as aware as one could be of the difficulties in developing clean energy projects in China, and they have raised valid concerns that make it difficult to develop the clean energy that Beijing has verbally committed itself to. Clean energy is heavily dependent on cutting-edge technology, and Beijing would probably be wise to take a close look Chandler and Gwin's paper.

As for the Carnegie Endowment, this is a perfect paper for them. The Carnegie Endowment believes in peace through prosperity, and prosperity through a free and open global market. Slash that red tape and let's all get wealthy together. I wish my French was good enough to come up with a witty pun expressing the ability of laissez-faire capitalism to promote peace between the United States and a communist country. C'est la vie.