What’s next for cleantech funding in China?

Over the past few months we’ve taken a look at what China’s cleantech industry hopes to achieve in the race to reach carbon neutrality. We’ve focused on specific technologies, promising technologies, and government plans. 

Now, in the last edition of our cleantech newsletter series, we ask: where is the money coming from?

China has long been synonymous with pollution. The country’s journey from an agrarian society to an industrialized one took decades, rather than centuries. The cost of this speed is polluted waterways, smog-filled skies, and contaminated soil. 

Since the early 2000s rampant industrialization has slowly (mostly very slowly) been giving way to the notion that sustainability, rather than growth at all costs, should be a priority.

The move to cut emissions came to a head in September last year when China’s current president, Xi Jinping, announced plans to reach peak carbon emissions by 2030 and carbon neutrality by 2060. 

It had a marked effect. When the Chinese government backs an agenda, it ripples through society—and completely transforms industries. Xi’s pledge has led China’s companies to publish carbon neutrality plans, pledge to cut emissions, and look to find ways to fund green initiatives. 

So what’s next for cleantech in China? In the last edition of this newsletter we look into the money side of the industry. Companies are exploring ways to raise money to back their ambitious plans to go green through innovative methods such as green bonds, green VC and carbon markets.

Ambitious pledges

Since Xi’s speech, some of China’s biggest tech companies have released plans to reach carbon neutrality—without much detail. This is likely to continue as governments, both local and national, exert pressure on firms as carbon deadlines near, requiring them to fund their own green transformations. The promises create some accountability, allowing the public to hold them to their stated goals. 

Alibaba-affiliate Ant Group has vowed to hit carbon net zero by 2030. JD Logistics and Baidu have pledged to go completely renewable by the same year. Tencent has announced that it has a plan for eventual carbon neutrality, without a timeline. 

But none have laid out concrete plans detailing how they will reach these goals. Key to reaching carbon neutrality will be lowering their carbon emissions in data centers. In China’s competitive tech sector, data is power—but it also requires a lot of electricity..

In 2018, data centers in China used 161 terawatt-hours (TWh) of electricity, according to 2019 research by Greenpeace and the North China Electric Power University. That’s enough to power a mid-sized nation, and is four times higher than New Zealand’s total energy consumption in 2018. 

If the electricity came from renewable sources, this wouldn’t be a problem. For the most part, it doesn’t, and increasing the amount of renewable energy tech companies use will be a significant focus in the next few years.

The rise of Chinese green bonds

Developing new technologies is expensive. But so is going green. Chinese companies are looking for ways to fund their environmentally friendly initiatives.

One answer is green bonds, in which companies sell bonds to finance eco-friendly projects. They’re not new in China, but they are novel among Chinese tech companies. This avenue of funding could provide a way for China’s big tech company to go green without taking money out of their R&D coffers.

Baidu is one of the first tech companies to go this way. Earlier this month, the company raised $1 billion in a green bond sale, the proceeds of which could be used to build energy-efficient data centers and office buildings, electric self-driving cars, and greening its supply chain, all of which were key features in a carbon neutrality plan the company released in June.

Baidu is not alone. More broadly, Chinese companies are looking at the green bond mechanism. Between April and June this year, companies in China issued more green bonds than in the previous two years, reaching $18.1 billion, according to the Climate Bonds Initiative. 

But a review of how these bonds work is needed to make them more effective. Guidelines from China’s central planner allow up to half of the money raised from these green bond sales to be used for purposes other than sustainability projects, which could make “greenwashing” a systematic problem.

The green VC

Not every company can sell bonds to fund green expansion plans. For cleantech startups, raising money is key, and several VCs in China are looking for the next big thing in environmentally friendly technology. China-focused VCs are signalling that they are gearing up for new rounds of cleantech investments, which could lead to a boom in the industry.

In March, cleantech company Envision Group and venture capital firm Sequoia Capital China set up a carbon neutrality tech fund worth RMB 10 billion (around $1.5 billion). “The fund will cooperate with enterprises and governments to create a carbon-neutral technology innovation ecosystem,” the companies said in a statement. 

Also in March, GCL Energy Technology and CICC Capital, an arm of China Capital Investment Group, launched a RMB 10 billion fund. The fund will focus on decarbonizing the auto sector and will raise around RMB 4 billion in its first phase, China Daily reported on March 31. 

Another venture investor is Tsing Capital. The firm has backed a slew of startups that have become household names in cleantech, including drone maker eHang, China Hydro, and US-based Lucid Motors.

While these are small compared to the government-backed funds in China, they do point to a larger trend of venture capital firms and corporate VCs looking to back upcoming cleantech companies that aim to solve novel environmental issues. 

Expanded carbon market

In July, China launched its long-awaited national carbon trading platform, expecting 2,000 power stations to take part in the first phase of trading. It didn’t work out quite as planned: the government gave out too many credits and the price of each credit has fallen below the amount they were trading at when the exchange first opened. 

If expanded and reformed, the carbon trading platform could significantly reduce Chinese companies’ carbon emissions and create a way for them to make green plans profitable by selling off excess carbon credits. 

Currently, China’s trading scheme has no cap on how many emissions permits can be bought and sold. “The Emissions Trading Scheme, as it is currently designed, will have a very marginal impact on [reducing] emissions,” said Li Shuo, a policy adviser at Greenpeace China. “A cap-and-trade system without absolute emissions-based trading benchmarks is a convoluted exercise.” 

Officials appear to be open to changing the way the system works over time, so long as it doesn’t put too much financial pressure on businesses. In the next few years, reforming the system and putting caps in place, while also opening the market up to companies outside of the energy sector, could have more of an effect on carbon emissions in China.