The Energy and Climate Change Committee - Energy Low-Carbon Growth Links with ChinaWritten evidence submitted by the Department of Energy and Climate Change (DECC)

Executive Summary

The UK is committed to working with China to help tackle climate change and Government cooperation on low carbon activities has strengthened over the last few years. The UK Government continues to discuss low carbon policy options and objectives for the international negotiations with China’s leaders and actively shares UK experience on how to accelerate the transition to a low carbon economy.

The China-UK Working Group on Climate Change, established in 2006, has driven forward this bilateral co-operation and the signing of a Declaration on Climate Change in 2008 reinforced this collaboration. The UK has initiated and delivered various bilateral programmes and activities, both with the National Development Reform Commission (NDRC) and various Chinese organisations, which we believe have helped inform China’s policy research on tackling emissions. These programmes have also strengthened links between UK/China policy experts and think tanks and provide a solid foundation for future bilateral cooperation.

HMG MoUs on low carbon cooperation facilitate the range of interventions that the UK is undertaking with China, from DECC’s support for the development of carbon markets in China’s Low Carbon Pilot provinces, to the work being undertaken by UK Trade & Investment (UKTI) to support China’s Sustainable Cities initiative, ensuring that UK business expertise is part of China’s continued urban development. We will continue to look for ways in which we can further enhance our strong bi-lateral relationship.

Committee Questions

What progress has been made in deepening cooperation between the UK and China to achieve a low-carbon transition and how should this cooperation be taken forward?

1. There has been a continued deepening of cooperation between the UK and Chinese Governments across a range of low carbon areas over the last few years. Most recently, in October 2011, the UK and China signed a new five-year “Framework MoU” on UK-China Co-operation on Climate Change which was designed to enhance policy dialogue and practical co-operation between the countries on climate change, and provides a framework for engagement between the countries on low carbon issues. 2011 also saw the launch of more than 30 new climate change and energy projects in China under the FCO’s Prosperity Fund which is designed to promote sustainable global growth Examples of projects funded in China include:

low-carbon planning;

promoting wind power;

creating the conditions for effective and robust carbon trading;

raising the low-carbon ambitions of Chinese cities;

low-carbon product labelling;

setting standards for Chinese eco-cities; and

tackling emissions from coal.

2. In addition to the immediate impact of individual projects, the hands-on approach the UK has been able to take, assisted by the significant funding made available has helped create an environment in which the UK is able to help influence Chinese policy making over a wide range of issues related to energy and climate change. The Economic and Financial Dialogue in September 2011 included over 20 deliverables based on China Prosperity programme projects. The ability to draw on this programme resource has enabled the UK to underpin its high-level dialogue on issues such as low-carbon development with offers of practical policy co-operation.

3. In addition, the FCO Prosperity Fund is supporting DECC’s work with the Energy Research Institute (ERI) of the Chinese Government to replicate/improve the 2050 pathways analysis. The aim of the work is to have a functioning 2050 Pathways Calculator for China in the summer of 2012. DECC officials are working with ERI colleagues on the energy and climate change analysis for this project. A Chinese member of ERI will be visiting DECC in February in order to develop further the 2050 web-tool for Chinese purposes.

4. The UK is also supporting low carbon work with China by providing £7 million of International Climate Fund (ICF) money to the World Bank’s Partnership for Market Readiness (PMR) a fund designed to help middle income countries to develop and pilot market based policies to reduce greenhouse gas emissions. In 2011 the PMR agreed grants of $350,000 to nine countries (including China) to help them plan the design, piloting and eventual implementation of market-based policies for greenhouse gas mitigation. China is expected to submit its business case for funding early this year.

5. The first UK-China Energy Dialogue was held alongside the Prime Minister’s 2010 visit to Beijing and was chaired by the then Minister for Energy, ZHANG Guobao and the DECC Secretary of State, Chris Huhne. The Dialogue has provided an improved platform for exchanges and facilitated the visit to the UK last year of a delegation of Chinese wind power investors.

6. The UK-China Sustainable Development Dialogue (SDD), co-managed by NDRC with funding primarily from DfID and Defra, has delivered over 40 projects with China in areas including forestry, fisheries, agriculture, biodiversity, sustainable urban development, chemicals management, business resource use efficiency and environmental governance, with several overlaps with the climate agenda. For example, the UK/China Sustainable Agriculture Innovation Network under the dialogue (supported by FCO Prosperity Funding) is revealing that the manufacture and (over)use of nitrogen fertiliser in China accounts for up to 8% of China’s total GHG emissions, and that about 30% of this could be removed without any impact on food security (as well as reductions in other environmental pollution).

7. The Chinese Government’s New Energy Plan is a High Value Opportunity (HVO) for UK businesses and UKTI has identified Wind, Smart Grids and Civil Nuclear, as three areas on which to focus.

8. The UK-China Sustainable Cities Initiative was proposed at the 2007 Joint Economic and Trade Committee (JETC) in London and was part of the overarching BIS-China MoU signed that year. The Initiative encourages and seeks to maximise cooperation in trade and investment in the urban development and environmental sectors, between policy makers in government and government agencies in China and the UK and to stimulate business activities between enterprises, business organisations and professional institutions, through the identification of specific Chinese cities.

9. There has also been ongoing work with China on the transport sector and DfT has an existing MoU and Action Plan with China, the objective of which is to enhance cooperation in the transport sector.

10. The Chengdu Declaration (stemming from the 2nd Asia-Europe Transport Ministerial Meeting) also provides DfT with a useful vehicle to engage the Chinese and other Asian members on the green transport agenda.

11. The UK-China Eco-cities & Green Buildings Group was re-launched in its current form in March 2010 and brings together UK and China expertise to develop a road map for building sustainability and energy efficiency based upon international best practice.

12. DFID is working with China as part of its new Global Development Partnership Programme (GDPP) which includes work on adaptation and low carbon development. DFID is also likely to support various smaller scale low-carbon activities, such as analysis of China’s investments in clean energy in developing countries, and support to China’s pilot carbon trading schemes, on the basis that they could become the model for many other developing countries. Finally, DFID has a comprehensive work programme until June 2013 for sharing with other developing countries China’s approach to adaptation.

13. Scientific collaboration too has an important role to play in improving international relations and strengthening the contribution of science to policy making. It has built trust in and developed a common understanding of the scientific evidence that underpins policy action to tackle climate change. The UK funds a number of collaborative science projects to further understanding of dangerous climate change and the action needed to tackle it. Flagship projects include the joint UK-Swiss-China project on Adapting to Climate Change (ACCC) in China, which is funded by DfID and DECC and managed by DfID, and the Avoiding Dangerous Climate Change (AVOID) programme on China’s technology options for meeting 2050 emissions targets consistent with the 2°C goal.

14. Looking ahead the Government is keen to build on the progress already made, strengthen its relationship with China at all levels, encourage trade and investment, engage with policy development and help support China where practicable in its delivery of its low carbon objectives in its current Five Year Plan (2011–15) and encourage greater ambition in the future.

What progress has been made in implementing the MOUs between the UK and China, including the DECC-National Development and Reform Commission MOU?

15. The Framework MoU between DECC and the NDRC (the latest of which was signed in October 2011) provides the umbrella for the full range of HMG activity on low carbon co-operation with China. The main development since October has been the new call for bids for low carbon projects which will receive FCO’s Prosperity funding. Later this year the UK will host a UK-China Climate Change Working Group under the Framework MoU and a UK-China Energy Dialogue, the first of which was held in 2010. The Energy Dialogue, as agreed in the 2011 MoU, has provided an improved platform for exchanges and facilitated the visit of a representative of the team responsible for producing the DECC 2050 Pathways model to China as well as an incoming delegation of wind power investors to the UK.

16. The DECC-NDRC MoU on Low Carbon Co-operation (signed in January 2011) was designed to boost China’s efforts to make its low carbon pilot zones a success. The pilots will be crucial in the generation of evidence that China can make a successful low carbon transition. The UK is currently the only country offering dedicated partnership to China in its low carbon pilot effort. Approval has recently been given under the MoU to fund scoping studies to identify low carbon projects covering emissions trading, low carbon development and product standards in Chongqing, Hubei and Guangdong; and a project to develop an evaluation system which will provide a basis on which to approve the construction of low carbon communities in Chongqing municipality.

17. The objective of DfT’s existing MoU with the Chinese Ministry of Transport (MoT) on Low Carbon Emissions and Technology is to enhance cooperation in the transport sector, to develop trade services in the areas of transport between China and UK by exploring business opportunities in all specified areas, collaborating over low carbon technologies and to regularly exchange information on policies, rules and regulations. Since its inception in 2009 developments have mainly centred around deepening our overall cooperation with China. This includes: strengthening bilateral relations; promoting commercial opportunities (High Value Opportunities) and sharing expertise on low carbon technologies. As a result, there have been two high profile Ministerial (DfT) visits to China in 2011 and we are looking to build on this in 2012 and beyond.

18. The UK-China Eco-cities & Green Buildings Group was re-launched in its current form in March 2010 on the basis of a new MOU between the Ministry of Housing & Urban-Rural Development and BIS. The Group brings together UK and China expertise to develop a road map for building sustainability and energy efficiency based upon international best practice. It is also working on an eco-city standards project funded by the FCO’s Prosperity Fund. The project will help China progress eco-city policies into mainstream practice, helping to achieve the balanced environmental, social and economic aims of the 12th Five Year Plan. The project will formulate eco-city standards, indicators and delivery strategies for eco-cities, an associated capacity building programme and a focussed communications and dissemination programme.

19. DFID is working with China as part of its new Global Development Partnership Programme (GDPP). The GDPP (formalised through the MoU signed during the Prime Ministerial UK-China Summit in June 2011) includes work on two specific work streams: on reducing greenhouse gas emissions from the agricultural sector, and on the potential for a “low carbon technology centre” in China to help address some of the market failures which are preventing the more rapid and widespread deployment of Chinese small and medium scale technologies which could deliver clean, low carbon energy in developing countries. The Adapting to Climate Change in China (ACCC) project focuses on linking climate change research with policy making and development.

20. The UK-China Sustainable Cities Initiative is part of the overarching BIS-China MoU signed in 2007 (and extended in November 2010 during the Prime Minister’s Summit visit). UKTI now has individual city MoUs and Project Action Plans in place with municipal authorities in four cities: Wuhan, Changsha, Chongqing and Hangzhou.

How can the UK contribute further to the development of China’s climate change mitigation policies, such as those policies governing emissions trading, carbon capture and storage and energy efficiency?

21. China is committed to piloting emissions trading during the current Five Year Plan, but there is a great deal of work needed to ensure that technical and regulatory mechanisms appropriate to China are put in place. The UK will consider what further help it can give on the basis of the results of some of the projects currently being undertaken and following assessment of new projects proposed for funding under the prosperity programme.

22. The action that China is taking on piloting emissions trading schemes with a view to a possible country wide system in future will require them to gather and share energy and emissions data to a greater extent. We will continue work towards developing a dialogue between experts in the UK and those institutions responsible for collecting emission data, carbon accounting and reporting in China. The dialogue aims to assess the progress in building capacity, identify urgent gaps, and put in motion new projects that would enable them to construct and strengthen the institutions during this Five Year Plan that will underpin a successful national carbon market.

23. The UK initiated the Near Zero Emissions Coal (NZEC) project with China in 2005 which was later incorporated in the EU-led NZEC initiative. Phase I concluded in 2009 and concluded that CCS could provide a cost effective option for emissions abatement in China, that China has a number of suitable locations for CO₂ storage and that further research would be required to determine the best way for China to move forward.

24. The FCO is currently supporting two projects on CCS through its Prosperity Fund. One project is looking at early demonstration of cost-effective CCS potential in non-power industrial sectors in order to address coordination problems that currently exist between the capture and storage sectors. The second project is carrying out feasibility studies for capture-ready projects on new power plants in Guangdong province in southern China, aiming to demonstrate cost-effective ways to develop CCS. The UK will consider the results of these projects once completed and any new proposals that come forward for funding under the prosperity programme.

25. Around 70% of China’s emissions come from the industrial sector. Efficiency gains in this area will be therefore be key in terms of shifting China to a low carbon development path. We are working with China on a number of projects related to industrial energy efficiency and supply chain efficiency. We are also working to share information on the UK’s approach to improving energy efficiency through a range of policies including the carbon reduction commitment, electricity market reform, and carbon pricing. As China expands its top 1,000 high emitting enterprises efficiency programme to 10,000 enterprises, there is an opportunity to deepen our co-operation through the MoUs that we have in place.

26. Our cooperation with the Chinese Government Energy Research Institute over developing a 2050 China Pathways Calculator builds on the UK’s experience. The methodology allows the testing of different energy futures and highlights the resulting greenhouse gas emissions. The work will calculate and visualise different 2050 Pathways for China which should help their long-term national strategic energy development.

How can bilateral cooperation with China contribute to success in the UNFCCC?

27. Bilateral co-operation and collaboration with Chinese policy makers not only builds trust and understanding, but could also lead to frameworks and solutions of global relevance. Demonstrating the feasibility of tackling emissions strengthens countries’ confidence in their ability to engage under the UNFCCC.

28. We will continue to engage with China in taking forward implementation of all that was agreed in Durban, including negotiations on a single legally binding agreement and identification of additional global mitigation potential in order to help meet the objective of limiting global temperature increases to two degrees or less above pre-industrial levels.

How can UK and China better collaborate to develop the technologies needed for the low-carbon future, while managing intellectual property issues?

29. The UK’s Engineering and Physical Sciences Research Council (EPSRC) has invested £19 million into joint research with Chinese counterparts to develop the technologies needed for a low-carbon future, including solar energy, fuel cells and cleaner fossil fuels. Such partnership is deepening, with the next joint call for collaborative research to be announced imminently, focussing on smart electricity grids which are compatible with renewable energy sources. The UK Government’s Science and Innovation Network and Research Councils UK based in China also support our Universities and scientists to collaborate on low carbon technologies; in a recent example, University College London opened a Biomass Energy Development Laboratory in China in partnership with China’s Tianguan group (November 2011).

30. Weak enforcement of intellectual property rights in markets, including China, reduces companies’ willingness to transfer their most cutting edge technologies into those markets. To promote further co-operation on innovation and technology projects and to address technology transfer obstacles in the low carbon sector, in May 2009 the UK and China agreed to discuss how to create international model framework agreements for collaborative R&D projects. Alongside this the UK should continue to encourage China to strengthen its industry-academia links to complement the acquisition of overseas technologies. To help support the enforcement of intellectual property rights in China, in December 2011 the UK and China agreed to meet on a regular basis in an ongoing, multi agency, high-level intellectual property dialogue. This dialogue will be used to help promote mutual trade and investment, by finding practical ways to overcome IP issues. The UK Intellectual Property Office recently posted its first IP attaché in Beijing to provide on the ground help for UK businesses with IP related issues. By managing these intellectual property issues, we hope to further encourage innovation by the UK and China in environmentally sound technologies.

What scope is there for increasing regulatory alignment between the EU and China such as the development of common low-carbon standards for specific industries?

31. Some work is being done to share some EU policies and standards with a view to seeing whether one outcome of the comparison of international policies could be the development of common product standards. Initiatives such as the IEA Efficient Electrical End-use Equipment (4E) Implementing Agreement, provide an international forum for governments and other stakeholders to share expertise and develop understanding of electrical end-use equipment and policies and facilitate co-ordination of international approaches in the area of efficient electrical end-use equipment. Various European member states, including the UK, participate in the agreement, and China has also provided data in relation to several products.

32. Similarly, the US-led Super-efficient Appliance Deployment Initiative (SEAD), in which the UK and Sweden participate, may lead to greater global harmonisation of testing standards for various products, which in turn should lead to reduced trade barriers and ultimately to common product standards.

33. Increased harmonisation between global eco-labelling schemes, such as the EU Ecolabel and its international counterparts could also help drive industry to improve product performance on a voluntary basis. These schemes set out criteria for products meeting the highest environmental standards and can also be linked to sustainable procurement measures to stimulate the market for greener products.

Would low-carbon sectoral linkages, such as sector-based cap-and-trade or common standards, allow participants to increase their decarbonisation ambitions?

34. Sectoral approaches using carbon market instruments such as sectoral crediting and cap-and-trade can help increase the emission reduction ambition of countries while using the carbon market to attract sources of finance.

35. For example, new market mechanisms have been agreed in Durban and will have to be designed in 2012. The UK and EU would like to target specific sectors and issue credits for emissions reductions that are beyond a baseline which is set at a level lower than business as usual emissions. This ensures that these countries are making their own contribution to the global emissions reduction effort and over-achievement against their pledges is incentivised by the possibility of earning sectoral credits. Such credits could potentially be used in the EU ETS for compliance. Sectoral mechanisms could greatly reduce competitive distortions by incentivising an appropriate degree of “own-action” in the host country and contribute to creating a more level-playing field for internationally competitive industries. Similarly, countries could create cap-and-trade schemes like the EU ETS and link them to the EU ETS. By linking different cap-and-trade schemes, a broader range of emission reduction potential will be covered, which will promote cost effective abatement and decrease the overall cost of mitigation, which will therefore promote greater ambition. A network of linked ETSs would also achieve greater liquidity in the market and help avoid competitive distortions.

What scope is there to implement International Climate Financing to projects in China?

36. The 2010 Spending Review established an International Climate Fund (ICF) of £2.9 billion to enable the UK to help developing countries adapt to climate change and move to low carbon growth paths. The UK may consider multilateral climate finance projects that collaborate with a range of countries including China or projects in partnership with other donors where there is a very strong value for money case. The World Bank’s Partnership for Market Readiness Multi-donor Trust Fund which supports capacity building and piloting of market mechanisms in a range of countries, including China, is a good example of this. The UK recently contributed £7 million to this project.

37. The ICF’s work with multilaterals includes working to demonstrate that climate friendly private investments in developing countries are financially viable. We are working on two partnerships with the private sector for climate friendly funds. We and other public sector players will consider investing in these funds alongside private pension and sovereign wealth funds. The funds will invest directly in renewable energy projects and also in sub-funds to support investments in, for example, energy efficiency, renewable energy and clean technology innovations. One fund will focus specifically on Asia, which is likely to include investments in China.

How can DECC and HMG more effectively promote the strengths of the UK’s low carbon sector to China?

38. China and UK are both world-leaders in renewable technologies and both nations stand to benefit from bringing forward new energy technologies presenting significant opportunities to become partners for growth.

39. The UK also has expertise in areas such as industry and coal/gas power plant energy efficiency and there is scope to further increase consultancy in this area. China is therefore a priority market for UKTI’s green export campaign. The campaign includes promoting the UK’s low carbon strengths in China through trade missions, Ministerial visits, and media coverage, focussing in particular on sustainable cities, advanced engineering, and offshore wind.

January 2012