What is the role of finance in the decarbonization of China’s construction industry?


Green Financing in China's Construction Industry

And why has China’s steel industry pushed back its timetable for reaching peak carbon, from 2025 to 2030? Read on to find out.

Cutting emissions from high-carbon construction industries, such as steel and cement making, is crucial to China’s efforts to meet its dual carbon targets, of peaking by 2030 and neutrality before 2060. Therefore, finding ways to rapidly decarbonize through net-zero building has become a sector’s priority.

However, there are still many uncertainties over slashing emissions in the longer term in China's construction industry. There is no doubt that low-carbon restructuring, and adopting and commercializing greener technologies, will be tough to do at scale. Support from the financial markets is sorely needed.

A recent report from the Climate Bonds Initiative (CBI), which works to mobilize global capital for climate action, found China needs to spend between 2.2 trillion and 12.5 trillion yuan (US$346 billion–$1.97 trillion) each year on combatting climate change. Government funding alone will not be enough: private sector and social capital must be leveraged.

“Green finance” is, however, hard to come by in the construction industry. "Green finance" has grown tremendously as a result of strong demand from emerging industries such as renewable energy. But high-carbon industries such as the construction industry usually don’t qualify as “green”, meaning green finance is out of reach for many firms.

China’s high-carbon industries such as the construction industry have no choice but to change. Crude steel output increased 31% between 2013 and 2020, from 813 million tons to over 1 billion, according to the CBI report. Though the carbon intensity of production dropped around 8%, overall emissions still grew by 20.71%.

One of the biggest culprits for the high carbon footprint in the construction industry is steel. The construction sector is working on three routes to decarbonization: lowering crude steel output; shifting from the basic oxygen furnace method of steelmaking towards recycling steel in electric arc furnaces, and adopting more advanced or even disruptive technologies such as hydrogen direct reduction in the production of iron (which is the main ingredient in steel). Developing new decarbonization routes and equipment, and scaling those up for commercial use, will require investment.

A report published last year by the Rocky Mountain Institute (RMI), a Colorado-based sustainability research organization, said that zero-carbon steel production will cost far more than traditional fossil fuel-powered approaches. For example, at the current hydrogen price of 40 yuan (US$6) per kilogram, making iron with hydrogen direct reduction tech will increase the cost of crude steel by 80%. And if the steel industry starts using hydrogen, or even green hydrogen produced from renewable energy, investment in infrastructure will be needed. The transition will also see furnaces retired early, which could lead to the significant stranding of assets, and that process will also require funding.

Ma Jun, chair of the Green Finance Committee of the China Society for Finance and Banking, said in an interview with 21st Century Business Herald that highly leveraged firms, small and medium-sized enterprises, and firms requiring risky low-carbon tech, are more likely to require equity financing than loans or bonds. Equity investment, and merger and acquisition funds supporting the transition, are needed, so capital markets can play a role in the process. Meanwhile, uncertainties associated with the transition mean insurance products to offset those risks are also required. According to Ma Jun, China’s steel firms are highly leveraged and need financial institutions to come up with innovative products, tools, and mechanisms, which will give them the time needed to absorb the costs of the transition, and bring them more funding opportunities.

The construction industry is obviously opening itself to new types of methods, business models, and disruptive processes. To coordinate with the latest initiatives in the sector, we are introducing a new display area called “The Yangtze River Delta Industrialization of Construction” (YICE), as part of WieTec 2022, that will present some of the latest green tech advancements in the construction industry.

YICE is focused on the solutions of sustainable construction, prefabrication, and industrialization. Building ”greener” and more sustainable buildings is one of the biggest demands of our times, and enterprises and investors are increasingly interested in disruptive technologies and innovations in this sector.

The release of new policies and initiatives incentivizes the green transition in the construction industry. If the topic of green transition in the construction industry interest you, and you are in China, join The Yangtze River Delta Industrialization of Construction Exhibition, WieTec new display area that will focus on smart construction, high-quality engineering solutions, and ultra-low energy consumption.

Yangtze River Delta Engineering Quality Alliance Conference

The conference gathers government departments in the Yangtze River Delta region, construction experts, academicians of the Chinese Academy of Engineering, senior professors, and other construction experts and scholars. High-caliber interdisciplinary projects from the Yangtze River Delta Region will be presented and the "Yangtze River Delta Quality Project Award" will be granted to outstanding, creative, and sustainable construction projects in the region.

The exhibition is divided into eight display areas: industrialization of construction, high-quality engineering solutions, transportation engineering, facilities and equipment, new building industrialization, ultra-low energy building technology, smart construction, construction engineering inspection, and construction engineering insurance. Moreover, the exhibition is complemented by multiple forums and events delivered by prominent industry experts. The audience will have the opportunity to learn about the innovations and industry opportunities, so stay tuned for more details coming soon!

For information on "green financing" in construction industry, visit https://www.climatebonds.net/, http://en.qianzhan.com/en/about/339/140528-6dfb7598.html and https://chinadialogue.org.cn/en/climate/how-can-finance-help-chinas-heavy-industries-decarbonise/