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Climate Change

Making State-Owned Enterprises Work for Climate in China and Beyond

Op-eds & Essays by Philippe Benoit • September 24, 2020

WASHINGTON — President Xi Jinping announced on Tuesday China’s aim to become carbon neutral before 2060. Achieving this goal will require the support and engagement of China’s state-owned enterprises (SOEs), as they currently generate more than half of the country’s energy sector emissions. SOEs are major drivers of greenhouse gas emissions globally, particularly in emerging economies

Across power, industry and transport, these companies emit in the aggregate over 6.2 gigatons of carbon dioxide equivalent annually, which is more than any other country except China.

SOEs are also major providers of low-carbon alternatives (over half of the world’s zero-carbon utility-scale power generation capacity is state-owned).  SOEs’ major role in driving emissions means that there will be no climate success without them.

Government officials and climate stakeholders currently meeting in New York (virtually) at the United Nations and for Climate Week need to give greater attention to engaging these SOEs on climate.

In this article, we present several tools that governments can use to prompt their SOEs to take climate action. We also describe the independent capacity of these enterprises to lead on low-carbon action, as well as their ability to resist government pressure to advance the climate effort.

Finally, we discuss one of the most important hurdles to effective engagement by most SOEs: what has often been too modest climate ambition from their government shareholder.

An oft-overlooked feature of SOEs is that the same governments that signed the Paris Agreement hold direct ownership over these enterprises (particularly in large, emerging economies such as China, India, Indonesia, Mexico, Russia and Saudi Arabia).

Ownership provides a government with several distinctive tools to “push” SOE climate action that are more direct than the legislative and regulatory instruments largely used to influence private sector behavior. A government can, as shareholder, issue directives to its SOE though the company’s board of directors.

It can also appoint and remove senior executives (both through the board and often even directly). Selecting appropriate executive leadership with the commitment and managerial capacity to implement low-carbon programs can be decisive in driving effective SOE action on climate.

Governments also provide direction to SOEs through more informal exchanges between public officials and the company’s CEO and board members.  Lastly, governments can work to incentivize low-carbon action by middle managers (frequently the critical decision-makers in larger SOEs) by directing the company to adopt climate-friendly personnel and evaluation policies.

Governments can also deploy financial and bureaucratic resources to “pull” SOEs towards low-carbon action. For example, they can direct public funding to low-carbon investments (and away from high-carbon ones). State-owned commercial and development banks are often mobilized to deliver this climate-targeted financing, typically on preferential terms designed to accelerate uptake.

Governments also catalyze low-carbon investments by providing critical complementary infrastructure, such as the construction (often by another state-owned company) of a transmission line to an SOE’s remote renewable generation site. In addition, government funding for research and development can reduce costs for low-carbon projects, making them more attractive to SOEs (as well as the private sector).  Governments have even created new specialized SOEs to deploy specific low-carbon technologies. 

Government policies which pressure markets broadly, referred to herein as “press” tools, will also influence SOEs.

These include carbon taxes and emissions trading systems (ETS), which continue to dominate the policy discourse on emissions reduction strategies.  Although the two instruments are considered among the most effective for reducing emissions,  their impact on SOEs is likely to be more muted than on private sector companies, in part because SOEs often face multiple mandates beyond financial returns and profits.

For example, power sector SOEs are often required by their government shareholders to prioritize reliable electricity supply at low cost, as well as support other economic, social and political goals, such as employment, access expansion or using specific state-owned suppliers.

These factors lessen the responsiveness of SOEs to market-based instruments that make low-carbon alternatives more attractive in financial terms. Because costs and profitability do remain important considerations for SOEs even in the face of non-financial mandates, market-based instruments can still be useful climate tools to influence their operational and investment choices (such as the national ETS being considered for China).

These instruments, however, are unlikely to result in the same degree of meaningful decarbonization by SOEs foreseen for the private sector unless they are accompanied by some of the other measures described in this article.

Of course, an SOE might also simply decide to pursue low-carbon goals to serve its own corporate objectives, even in the absence of explicit government pressure. SOEs are often major corporations with substantial assets, financial resources, commercial know-how and technical capacity, enabling them to develop and implement robust low-carbon programs.

Motivating an SOE to act on climate in furtherance of its own corporate interests can be a highly effective way to advance low-carbon company action. A powerful SOE, however, is also able to exercise economic and political clout to resist government initiatives, including low-carbon ones.

Arguably, the most important determinant of how much an SOE engages in the low-carbon transition is the extent to which its government shareholder prioritizes climate goals. Even the most powerful SOEs respond to the preferences and directions of their country’s ultimate leadership.

To date, unfortunately, governments have exhibited only a modest commitment to these goals, especially relative to the perceived short-term economic and political gains generated by incumbent high-carbon assets.

The result has been tepid policies, programs and overall government signals on climate that have failed to produce the low-carbon actions needed from SOEs (and the private sector) to meet the temperature goals of the Paris Agreement.

Although there is some room for optimism given recent governmental pronouncements targeting carbon neutrality, a deeper understanding and appreciation among national stakeholders of how the low-carbon transition will best serve economic growth, poverty alleviation and social improvement objectives is needed to strengthen domestic resolve on climate and the government’s interest in using SOEs to this end.

For deep global emissions reductions to be achievable, SOEs must play a leading role in China and other countries where these enterprises are major actors in energy production and consumption.

Government ownership presents an under-explored avenue to engage these companies in advancing the climate effort.  A combination of “push”, “pull” and “press” measures will be needed.  In addition, a self-motivated SOE will further help to advance climate action.

As we move on from Climate Week into the lead-up to COP26 next year, governments and the climate community need to focus on developing initiatives that promote SOE engagement in low-carbon action.

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Climate Change

Making State-Owned Enterprises Work for Climate in China and Beyond

Op-eds & Essays by Philippe Benoit • September 24, 2020