TRADE, TRADE, INVESTMENT INVESTMENT AND AND COMPETITIVENESS COMPETITIVENESS TRADE, INVESTMENT AND COMPETITIVENESS EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Promoting Innovation to Decarbonize Industry in China Marcin Piatkowski, Shahid Yusuf, and Wenting Wei © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Photo credits: iStock xijian >>> Acknowledgements This policy note was written by Marcin Piatkowski, Shahid Yusuf, and Wenting Wei. The authors are grateful for comments from Xavier Cirera, Christophe de Gouvello, Fiona Stewart, Laurent Granier, Justin Hill and Elitza Mileva from the World Bank and representatives of China’s Ministry of Science and Tech- nology. The policy note was prepared under the overall supervision of Zafer Mustafaoglu, Martin Raiser and Mara Warwick. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 3 >>> Contents Executive Summary 5 1. Introduction 7 2. China’s Industrial Emissions 9 3. Technological Solutions to Reducing Industrial Emissions 11 4. Policies to Green Industry: The OECD Experience 15 5. China’s Experience in Industrial Decarbonization and Green 23 Innovation 6. Challenges to Industrial Decarbonization Policies and Green 29 Innovation in China 7. Conclusions and Policy Recommendations 32 References 35 >>> Executive Summary The objective of this policy note is to (a) review the experience of Organisation for Economic Co-operation and Development (OECD) countries in introducing policies to support industrial decarbonization; (b) take stock of China’s progress in promoting industrial decarbonization, including through innovation; and (c) share policy recommendations based on international good practices on how to support accelerated adoption, diffusion, and invention of industrial decarbonization technologies that could help meet China’s peak carbon emissions target by 2030 and net carbon neutrality by 2060. Specifically, this policy note does the following: • It documents the evolution of carbon emissions in the industrial sector in China and discusses the prospects for reducing industrial carbon emissions to help meet the 2030 peak target. • It analyzes the role of innovation in spurring industrial decarbonization, especially in the most material and energy-intensive industries such as steel, cement, and petrochemicals. • It discusses the experience of OECD countries with public policies designed to incentivize innovation that decarbonizes industry and reduces the consumption of energy-intensive products. • It offers guidance on measures that could speed up industrial decarbonization and on policies that would both stimulate frontier innovation and promote adoption of the existing decarbonization technologies. On both counts, the note draws upon the experience of advanced economies that wrestle with similar challenges. The key finding of this note is that China has achieved notable progress in decarbonizing its industry and in building a comprehensive system to support further improvements, including by leveraging green innovation. The current trends in industrial decarbonization, however, may not be sufficient to help meet the 2030 peak carbon target and the Nationally Determined Contribution commitments to reduce the emission intensity of the economy by 65 percent below its 2005 level. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 5 The note argues that achieving these targets will require supported by a better-coordinated policy package that (a) full implementation of all the already available policy takes full advantage of market signals and by an effort instruments; (b) introduction of new instruments, including to combine regulatory changes with direct support in the those based on good practices from the OECD countries; and form of fiscal incentives and grants. In addition, young (c) an increase in the efficiency of public support for innovation innovative firms that serve as conduits for technology and focused on industrial decarbonization. These measures will organizational change and that challenge incumbents need need to be complemented by further regulatory, structural, to be fostered. Last, investment in green basic research and policy changes, including by shifting production to less should be multiplied. energy-intensive industries, reducing the carbon footprint of • Finally, China can also progress with improving the the most energy-intensive industries, strengthening market- efficiency of its innovation support system. Further reforms based instruments for green development and innovation, and are needed to improve the allocation of public resources, increasing the role of services in the economy. Last, industrial especially toward private companies; reduce bias toward decarbonization policies also need to be better coordinated to state-owned enterprises (SOEs); and promote start-up ensure consistency and effectiveness. enterprises that experiment with disruptive technologies. In addition, China could enhance transparency, strengthen In addition, the note argues the following: meritocracy, and improve the monitoring and evaluation of the public support system. Last, the authorities should • China has implemented a broad range of polices to continue to make efforts to keep the innovation system promote low-carbon development and green innovation. globally open, including by making the public support But the policies have so far relied mostly on regulatory and programs available to international researchers and command-and-control measures, including targets and companies and by avoiding domestic protectionism that quotas, rather than on market signals. would undermine the benefits of cross-border green • China has started to develop market instruments, including technology spillovers. a nationwide emissions trading system (ETS), but so far it has covered only the energy sector, and the timeline to expand the ETS to industry is not yet clear. • Pilot programs and demonstration projects have been widely used to spur the adoption of innovative decarbonization technologies. • China has significantly ramped up investment in research and development (R&D) in general, and in green R&D in particular, but the size of this spending relative to China’s dominant position in the global markets in industries such as steel or cement, where it represents more than half of global production, is far from sufficient. • There is room to enhance the scope and effectiveness of China’s innovation support policies to promote the adoption of technologies from abroad and to push the global technology frontier. • The experience of OECD countries with greening innovation, although still tentative, could inform China’s efforts to boost the role of green innovation and abate industrial carbon emissions. The specific lessons include the need for industrial decarbonization policies to be EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 6 1. >>> Introduction China’s rapid growth since the mid-1990s has been largely propelled by investment in industry, infrastructure, and urbanization. The share of manufacturing in China only recently declined from about a third of gross domestic product (GDP) to about 26 percent of GDP, but still remained among the highest in the world, beating the Republic of Korea (25 percent of GDP) and Germany (18 percent of GDP) (World Bank and DRC 2019). Investment in urban housing and commercial real estate and infrastructure has also been high and has supported high gross capital formation, which at 44 percent of GDP in 2020 was way above Korea (32 percent of GDP) and Germany (21 percent of GDP) (Brand et al. 2020). This compressed industrialization-cum- urbanization strategy—complemented by a massive outlay on a multimodal nationwide transport system, on power generation, and on water management—was transformative. However, such a growth model has proved to be highly energy intensive. China’s manufacturing industries, its cities populated by an increasingly affluent middle class, its electric power generating system, its agricultural economy,1 and its vast transportation network draw most of the needed energy from fossil fuels (World Bank 2022). The supply of abundant and low-priced energy has been one of the keys to growth, but China like many other countries is discovering that the dependence on fossil fuels is becoming a liability. It is the main cause of environmental degradation, and carbon emissions from the combustion of fossil fuels are burdening the atmosphere with greenhouse gases (GHGs). China is the world’s number one source of emissions, responsible for 27 percent of annual global carbon dioxide and a third of the world’s GHG emissions (World Bank 2022). Further economic progress will make it more difficult to reduce emissions. Despite the current slowdown in growth, China’s economy is projected to join the group of high-income countries and then to become the largest economy in the world in nominal terms sometime in the not-too-distant future. As a result, and despite falling energy intensity per unit of GDP, total emissions may continue to increase. Hence, additional measures will be needed to ensure that total emissions decline in line with China’s plans to peak in carbon emissions by 2030 and attain carbon neutrality by 2060 (Liu et al. 2022). 1. According to Vaclav Smil (quoted in Moses 2019), global “agriculture now extracts 10 times as much food energy from each parcel of land as it did a century ago. But the 10-fold increase in yield has been driven by a 90-fold boost in energetic inputs—caused by fossil-fueled farm machinery, and electricity for irrigation and fertilizer production. When this complexity is accounted for, the story of efficiency is turned on its head: we now put more fossil-fuel energy in for each unit of food we get out.” EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 7 Structural changes will be key to ensuring that China meets or exceeds its targets. Some of the policy directions include the need to accelerate structural changes favoring the low-emission service sector, reduce dependance on steel and cement-intensive investment in infrastructure and real estate— economic returns on which have already diminished significantly or even turned negative—and curb excessive application of nitrogenous fertilizer by farmers (van Wesenbeeck et al. 2021). Although the share of manufacturing can decline by a few percentage points during the 2020s, in line with the past trend, this would contribute only modestly to a reduction in emissions. Similarly, without a significant decline in the share of real estate in GDP, which is estimated at 26–29 percent of GDP, compared with 17 percent in the United States and 15 percent in Korea (Rogoff and Yang, 2021), meeting the 2030 and 2060 targets would be difficult. According to the International Monetary Fund (IMF), a rebalancing of investment toward consumption could reduce carbon emissions by 15 percent over the next three decades (Rhee, Berger, and Chen 2022). China will also need to double down on green innovation. China is already one of the top global investors in green innovation. However, innovation spending is lower than what would be commensurate with China’s dominant position in global industrial production, especially as regards steel and cement, which account for more than half of the world’s total production. Larger investment in green innovation would help accelerate energy transformation from fossil fuels to renewables, electrify a much larger part of the manufacturing process, and replace more of the remaining fossil fuel–based energy sources with non-carbon alternatives. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 8 2. >>> 2. China’s Industrial Emissions China’s industrial sector is responsible for a much higher share of the total emissions than that of OECD countries. Industrial emissions, defined as the sum of direct manufacturing and construction energy-related emissions and industrial process emissions, represented a third of total emissions in China relative to only 12 percent in the European Union and 9 percent in the United States (figure 2.1).2 This is explained by the dominance of steel, petrochemicals and plastics, petroleum refining, nonferrous metals, cement, and the synthesis of ammonia (Ritchie et al. 2020), which feed many downstream industries and which, more importantly, supply the materials needed by the burgeoning urban economy, underpin the development of infrastructure, and sustain the production of food grain (Niu et al 2021). >>> Figure 2.1: Carbon dioxide emissions breakdown for industry in China and selected countries, 2018 Source: World Bank 2022. Note: Carbon dioxide emissions breakdown by broad sector is for 2018; by detailed subsector within industry is for 2017. Industry is defined as the sum of manufacturing and construction energy-related emissions and industrial process emissions. 2. If indirect emissions from the use of electricity were included, the share would be higher still. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 9 Steel, cement, power, and chemicals together are a major inputs from highly carbon-emission-intensive industries such as source of national emissions. Cement, steel, and iron steel and cement. For instance, having already built the world’s represent 85 percent of total industrial emissions (World Bank largest high-speed rail (HSR) network and a highway system 2022). In 2018–19, China used more cement than the 4.5 to match,3 China appears committed to doubling the HSR billion tons made by the United States in the entire 20th century mileage and further expanding the road network. The pursuit (Smil 2022). Steel alone, which burns 20 percent of all coal of ambitious economic growth targets will also require China’s produced, was responsible for 15 percent of carbon emissions factories to continue to churn out vast amounts of intermediate in 2019 (Yang et al. 2020). The leading Chinese steelmaker and finished products for domestic consumption, infrastructure China Baowu alone released more carbon in 2020 than investment, and export, which would lead to unsustainably Pakistan did, and the Sinopec Group exceeded the emissions large emissions of GHGs. by Canada (Bloomberg News 2021). Construction activity is by far the largest user of industrial materials, followed by the Total industrial emissions have plateaued but will need manufacturing of machinery and of fabricated metal products, to be further curtailed to meet the zero carbon targets. some of which support construction activities, including Between 2012 and 2015, industrial emissions of carbon dioxide transportation and water management infrastructure. Cement (CO2) showed signs of plateauing thanks to gains in production produces more emissions per revenue dollar than any other efficiency and some reduction in excess capacity (Wang et sector (Czigler et al., 2020). al 2019). However, the downturn in emissions was reversed after 2016 because of increased stimulus-driven investment Further increases in urbanization and focus on growth in infrastructure, which raised demand for steel and cement targets might spur additional emissions. Although China’s (Carbon Brief 2022; Myllyvirta 2020).Whereas emissions from urbanization rate passed the 60 percent mark in 2020, it is steel and cement industries seem to have peaked in 2020 projected that by 2050, 75 percent or more of the population will and 2021, respectively, and emissions released by the coal- reside in cities, implying that urban population will swell by an intensive chemical sector are projected to peak in 2024 (figure additional 285 and 300 million people (Urbanet 2016). This will 2.2), further cuts will be needed to help meet the 2030 peak require additional real estate and infrastructure investments and carbon objective (Zhang and Wen 2022). >>> Figure 2.2: Estimated timing of a peak in carbon emissions for steel, cement, and chemical industries Source: Zhang and Wen 2022. Note: tce = tonne of coal equivalent. 3. China had laid 40,000 kilometers (km) of HSR track by 2021 and is aiming to have 70,000 km in place by 2035. See “China’s High-Speed Rail Hits New Milestone as It Reaches the Length of Equator,” Global Times, https://www.globaltimes.cn/page/202112/1243819.shtml; as of the end of 2021, China had built 161,000 km of express- ways and the total for all roads was 5.01 million km. The target for 2035 is 6 million km. See S. Watanabe, “China to Expand Highway Network Nearly 50% by 2035,” Nikkei Asia, https://asia.nikkei.com/Economy/China-to-expand-highway-network-nearly-50-by-2035. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 10 3. >>> 3. Technological Solutions to Reducing Industrial Emissions Transitioning to greener manufacturing technologies and ensuring an adequate supply of non-fossil-based energy in just a decade or so will be a major undertaking. Each transition from wood to coal to oil from the mid-19th through the third quarter of the 20th century took between 50 and 75 years, paced by many complementary innovations and spillovers (Smil 2021). The green transition will need to be completed in one-third of the time and will require trillions of dollars in new investment and hundreds of new, often not-yet-existing technologies (Krishnan et al. 2022; World Bank 2022). Currently, low-cost carbon-reduction technologies for the most energy-intensive industries are either unavailable or are not yet commercially viable. In the absence of economically attractive low-cost carbon-reduction technologies within industrial processes, solutions are mostly focused on end-of-pipe pollution absorption (such as carbon capture, utilization, and storage [CCUS] and flue gas desulfurization), low-carbon energy input, and energy efficiency. In the medium term, as new decarbonizing technologies are gradually phased in, improvements in energy efficiency can help to flatten GHG emissions. The role of energy efficiency in industry is sometimes overlooked because it involves many technologies (several hundreds), usually combined and entailing relatively small investments compared to the investment required to build entire industrial plants. This effort includes overall integration and optimization of multiple processes of energy production and energy use and reuse. Chinese industry, for instance, has made significant strides in this area, with heavy industry taking the lead (de Gouvello, Taylor, and Song 2021). Changing technology will also take time because industrial assets have long life cycles. Industrial plants and power generation facilities brought on stream during the past decade or currently under construction have life cycles of up to 30 or more years. This cycle locks in technologies developed at a time when fossil fuel costs were (are) low or moderate and subsidized (such as the widely used blast furnace–basic oxygen furnace [BF-BOF] steelmaking technology) EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 11 and firms were not incentivized to control carbon emissions for clinker (responsible for cement’s process emissions) and (Timperley, 2021; Urpelainen and George 2021). The legacy improving efficiency with the help of digital technologies would plant and equipment plus additions of earlier vintages, which help reduce emissions in cement production (Czigler et al. continue augmenting the stock of production facilities, will 2020; Vivid Economics 2022). It could also be useful to apply constitute the bulk of China’s manufacturing capacity up to technologies that allow the recycling of heat, including through two decades if not longer. Sunk costs and the desire to avoid the development of microfluidics, synthetic biology, and new social tensions arising from plant closures and layoffs could catalysts (Lovins 2021). undermine incentives for developing new technologies. New technologies that are surfacing promise to make Experience suggests that industrial technologies mature green hydrogen and other low-carbon fuels less costly gradually and that the turnover of stock is slow. The and to increase their industrial use.4 The United States, average age of Chinese manufacturing equipment is around 10 the European Union, Japan, Australia, India, and others have years (or less) because of the high rates of investment over hydrogen in their sights with more US$300 billion worth of the past two decades (Gross 2021). Although incorporating projects in the pipeline. Their longer-term goal is to increase the new and more energy-frugal, digitally enhanced equipment contribution of green hydrogen. The share of green hydrogen— is feasible, especially in light manufacturing, it can be costly, and production—is expected to increase slowly but steadily disrupt heavy industries, and require retraining of personnel. through the 2020s because facilities under construction are Moreover, the returns might accrue over many years and a long of the precommercial type with limited electrolyzer capacities payback period is unattractive for industries that are inherently (50 megawatts) (Hydrogen Council and McKinsey & Company conservative, operate on low margins, and are subject to 2021). As per-kilogram (kg) costs decline and larger plants cyclical fluctuations. In recent years, fluctuations in the prices of are built with capacities of 100 megawatts or more, production iron ore and other factors have pushed the margins of Chinese would increase more rapidly in the 2030s in parallel with the steel mills into the low single-digit range. Greening could begin construction of dedicated pipelines and terminals, which are to affect the additions to the stock in the coming years but only likely to take between 7 and 12 years to construct (PwC 2022). if industrial decarbonizing technologies mature rapidly, are cost- effective, and prove their commercial worth; the government The substitution of hydrogen for fossil fuels could reduce may also increase considerably both pressure and support for emissions from steel production, which accounts for around switching technologies. 8 percent of global GHG emissions. But the real gains would accrue only if a kilogram of green hydrogen could be produced Decarbonizing the leading industrial emitters will be time for $2 per kg or less to compete with fossil fuels, a large decline consuming and expensive. The steel, petrochemical, and from the current prices of $3–$6.50, as argued in the European cement industries tend to be capital intensive with long-lived Commission’s (2020) hydrogen strategy. It is only when the plant and equipment; they have low and cyclical profit margins, downward trend in costs is clearly established, and supply is and international competitiveness depends on access to low- assured, that industry will begin investing in technologies based priced material inputs and energy—hence, the importance of on green hydrogen. Currently, no steelmaker is using hydrogen energy subsidies (Gross 2021). Furthermore, the processing of on a commercial scale, although there are pilot projects that some products like steel and clinker requires high-temperature experiment with hydrogen, including one in Sweden that will be heat, which is most easily obtained from combusting fossil fuels the first ever to produce coal-free steel in scale (Reuters 2021). that are not easy to replace (de Pee et al. 2021). There are additional projects in the pipeline in Spain, Germany, and Japan (Gross 2021). Several industrial technologies could potentially flatten the curve of carbon emissions by the end of this decade. Hydrogen could also be used in transport, heating, These technologies include deploying CCUS and using and power generation, but its adoption faces several hydrogen, natural gas, and biomass to supply the needed heat challenges. Aside from the need for the cost of hydrogen in steel production (Lin et al. 2021). Substituting other materials production to decline, at least four hurdles that could delay 4. Hydrogen is used in the making of ammonia and methanol and in refining fuels, but very little thus far (3 percent) by the steel industry (KPMG 2020). Currently, three-quarters of hydrogen comes from natural gas and most of the remainder from coal. Green hydrogen comprises less than 2 percent of the total. A shift away from black, gray, and even blue hydrogen is clearly necessary if it is to serve as a greener fuel (IEA 2019). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 12 widespread adoption of green hydrogen, possibly by decades, is needed to pave the way for the use of hydrogen by other would need to be overcome (box 3.1). For example, moving to industries, fuel cell–powered buses, heavy-duty long-haul hydrogen would require the creation of specialized hydrogen vehicles, and cars. Demand from these sources would facilitate transport and storage infrastructure that would cover all the the scaling up of the green hydrogen production system and sectors (WEF 2021). Industry-specific policy support will not be distribution infrastructure. sufficient to drive these innovations; an economywide approach BOX 3.1: CHALLENGES TO ADOPTION OF GREEN HYDROGEN There are at least four hurdles that could delay widespread adoption of green hydrogen. First, plant and equipment of complex manufacturing processes would have to be redesigned to accommodate a technology based on hydrogen. The technology is relatively immature, it is evolving, and there is much knowledge to be acquired before the full productivity gains are realized. Facilities designed to use hydrogen will be built in existing industrial clusters and the phasing out of older fossil fuel–based equipment (stranded assets) will need to be coordinated to minimize disruption. A hydrogen- fueled industrial system will demand a different suite of skills (including welders with specialized skills because the integrity of welds for hydrogen transport requires the use of argon), forcing industry to shoulder much of the additional costs of training its workforce. Second, there is no dedicated transport infrastructure, even though some of the existing gas pipelines can serve with some modification to transport hydrogen (in pure form or mixed with methane), which has lower density than methane albeit a higher flow velocity. At high temperatures, hydrogen can subject many grades of steel to decarburization and can necessitate the use of austenitic steel alloys rich in nickel and chromium.a At moderate temperatures there is some risk of steel pipe embrittlement and fracturing that will need attention (Gerboni 2016). Hydrogen’s flammability, the ease with which it escapes containment, and the small dose of energy needed to ignite an explosion will entail stringent safety measures (Findlay 2020). Third, there are energy losses incurred in producing hydrogen using electrolyzers (approximately one-third). Liquefaction or the conversion of hydrogen into ammonia for the purposes of transportation incurs additional losses and more is lost in the transport of the gas via pipelines or through other channels. When hydrogen is used in fuel cells, more energy is sacrificed. For firms to absorb all these losses, innovation will be needed to bring down the costs of production and transmission. Finally, to produce green hydrogen, a facility needs both electricity from renewable sources and highly purified water. Most water is brackish or salty and unfit for use by the current generation of electrolyzers. An example from the United Kingdom illustrates how much power and water would be needed to replace methane with hydrogen for household use (Castle and Hendry 2021). The consumption of natural gas by households in the United Kingdom amounts to 80 billion cubic meters (m3) annually, which equals 240 billion m3 of hydrogen. To produce 11.1 m3 of hydrogen by electrolysis requires 4 gallons (15.1 kilograms) of purified water and 40 kilowatt-hours of electricity (Kleanthaus 2022). Thus, to meet the entire requirements of the household sector would consume 85 billion gallons of water (80 times the current usage of fresh water) and 850 terawatt-hours of power from renewable sources—seven times what is now produced. Although technologies permitting the use of purified (using reverse osmosis) seawater are being tested (Fadelli 2020), they increase the consumption of energy and are very far from commercialization. Likewise, the development of electrodes that would withstand corrosion when used to electrolyze chloride-rich seawater is ongoing under laboratory conditions (de Jesus 2019; Mohammed-Ibrahim and Moussab 2020). In other words, existing commercially viable technologies do not suffice. Source: World Bank compilation. a. Electrolysis to produce hydrogen and its transport will require scarce metals, skills, and inert gases. https://www.h2bulletin.com/platinum-hydrogen-economy-wpic. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 13 Other GHG-abating technologies such as CCUS are be persuaded that the investment in physical, human, and promising but also face barriers. According to the International intangible capital will have an acceptable payoff over the longer Energy Agency (IEA), industrial decarbonization cannot meet term and that they do not run the risk of losing out to competitors the desired objectives without the capture and sequestration of even as they debug the new technologies, ascend the learning carbon released by power plants and heavy industries and the curve, and absorb the costs of decarbonizing. For example, the production of hydrogen. The IEA argues that “the past decade steel industry, which confronts global excess capacity, must saw high-profile project cancellations and government funding carefully weigh the high initial fixed costs of converting to low- programs that failed to deliver. On average, capture capacity carbon fuels against the returns accruing over the lifetime of of less than 3 million tons of CO2 (MtCO2) has been added the newly installed equipment (de Pee et al. 2018). Similarly, worldwide each year since 2010, with annual capture capacity construction firms may be reluctant to adopt new materials such [of 51 operating facilities] now reaching over 40 MtCO2. This as low-carbon cements (clinkered alternative cements and non- needs to increase to 1.6 billion tons (GtCO2) in 2030” (McCulloch clinkered alternative cements) and cements with various mineral 2021) for the global economy to remain on the path to net-zero admixtures for fear that down the road they will incur liabilities emissions by 2050. The spike in new projects announced in that result from structural flaws in buildings and infrastructure 2021 is a promising development. However, the tempo would (Rissman et al. 2020). In fact, the key challenge for greening need to be sustained to achieve a nearly 40-fold increase in the construction process is not the technology per se, but the eight years (Andrews-Speed 2021). Moreover, the energy and effort of coordinating all stakeholders (developers, contractors, water intensity of the capture and compressing processes must architects, material suppliers, and others) to agree to adopt be reduced alongside transport costs, and concerns regarding new, low-carbon technologies and apply them across the whole the storage of CO2 allayed as leakage will be a concern for supply chain. The willingness of businesses to innovate and many communities (Gonzales, Krupnick, and Dunlap 2020). to venture into uncharted technological waters is also strongly influenced by perceptions regarding long-term development The adoption of digital technologies could be less strategy and its impact on demand for their products, the challenging, but their potential is not yet fully clear. global trading environment, and the government’s pricing and Digital technology presents industry with an array of devices regulatory policies. There is no simple technological fix that will to monitor and finely calibrate production processes as well enable China—or any other country—to decarbonize in time, as to collect a trove of real-time information that can be used although technology will be a part of the solution. A multifaceted to further improve efficiency and shave emissions. These approach will be essential. include the use of (a) 3D mapping of the environment and of how people interact with it; (b) the indoor positioning system, which can assist with the efficient location of equipment; (c) big data and artificial intelligence–enabled intelligent cooling systems that adjust and deliver cooling as needed; and (d) innovations to facilitate the flexible use of robots and other equipment in a manufacturing facility, motion capture systems, and immersive reality (Peron et al. 2020). Digital technology is not likely to be a game-changer, but it can play a role in decarbonizing industry alongside other measures. Adoption of decarbonizing technologies by capital- intensive industries will likely require coordination among various stakeholders. This is because such industries operate on narrow margins, manufacture homogeneous products, and face fierce global competition. Firms will thus need to EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 14 4. >>> 4. Policies to Green Industry: The OECD Experience OECD countries adopted multiple policies to stimulate industrial greening. They aim to reduce the energy intensity of industry, promote green industrial policy, and meet the objectives of climate neutrality. They include a mix of regulatory, legislative, and financial policies (Veugelers and Tagliapietra 2020). Five general types of interventions are used to promote decarbonization. These are measures to (a) strengthen market incentives by putting a price on carbon emissions; (b) introduce regulations combined with standard setting; (c) promote environmental, social, and governance (ESG) policies, including through public procurement, networking of firms, labeling, control of emissions across the supply chain, and data disclosure; (d) expand policies and market incentives that support green research, innovation, precommercialization, and wider diffusion; and (e) support education and training as well as investment in infrastructure that accelerates adoption. Each country has deployed some or all of the following measures alongside enabling fiscal and economic policies, with no single instrument dominating others:5 • • • • • • Carbon pricing/cap and trade Emission and energy standards backed by monitoring and enforcement to ensure compliance Data disclosure on emissions by firms Labeling and certification of low-carbon products and materials Government procurement policies favoring low-carbon products Recycling incentives • Skill development to facilitate adoption of green technologies • Investment in complementary infrastructures Various countries have adopted different mixes of legislative, regulatory, and financial policies. Table 4.1 provides a brief summary of the policy responses in some of the most heavily emitting countries. They have mostly focused on support for energy efficiency improvements and incentives for a shift to less carbon-intensive energy sources for industrial process. Targeted 5. However, the overall price signal is tempered by provisions that grant extensive preferential treatment to energy-intensive users through means that include energy tax exemptions, lower tax rates for larger energy users, and freely allocated allowances for carbon emissions. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 15 programs—including mission-oriented moonshots—were and regulations, and (b) those that support long-term emission also launched to speed up certain technology development reductions, such as support for research and development or specific industries. Such policies and programs are divided (R&D) and technology advances (Ahman, Nilsson, and into two categories: (a) those that have a more direct impact Johansson 2017). on emission reductions, such as carbon pricing, standards, >>> Table 4.1. Industrial decarbonization policies in selected heavy-emitting countries/regions Policies with an intended direct effect Policies with an intended long-term effect Regulated target for emissions by industry together Funding for demonstration of CCUS and bioenergy with the power via the EU ETS; EU project with some relevance for industry (the new Energy efficiency directive mandating member states entrants reserve—NER 300—program) to reduce industrial emissions in industry The ENERGY STAR Program for industry to adopt The ARPA-E program focusing on energy with energy efficiency technologies; relevance to industry; Targeted programs to reduce non-CO2 industrial gas United States Support for the research, development, emissions; demonstration and deployment of CCUS Voluntary program for the aluminum industry; technologies BAT regulations and tax credits for CCUS Implementation of Voluntary Action Plans by industry The “low carbon technology roadmap” relevant to Japan for promoting energy efficiency; steel, which includes research support on CCS and Subsidies for increasing the adoption of BATs electrification of industry “Mission on Energy Efficiency,” which includes the Research support on biorefineries and biowaste in India PAT Scheme for industrial energy efficiency; industry and biofuels Financial policy for energy efficiency improvement Sectoral plan for industry including energy conservation programs; Extensive research support on bioeconomy; Brazil Policies promoting shift to natural gas in industry and Policies for increasing charcoal use in steel industry to charcoal in the iron and steel industry Source: Ahman, Nilsson, and Johansson 2017. Note: ARPA-E = Advanced Research Projects Agency-Energy; BAT = best available technology; CCS = carbon capture and storage; CCUS = carbon capture, utilization, and storage; CO2 = carbon dioxide; EU ETS = European Union Emissions Trading System; PAT = Perform, Achieve, Trade. However, decarbonization policies vary in efficiency. decarbonization policies that include additional measures such D’Arcangelo et al. (2022) provide an assessment of the as green standards and ESG policies to achieve sufficient efficiency of decarbonization policies in OECD countries in impact. They also posit that the efficiency of decarbonization terms of, among others, abatement costs, administrative policies depends on a selected country’s political, environmental, costs, and political economy considerations (table 4.2). They and social circumstances and thus that the optimal mix of conclude that “no single policy instrument is superior to the decarbonization policies will be different across the selected set others along all these key criteria” and argue for comprehensive of countries. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 16 >>> Table 4.2. Assessment of the efficiency of selected key climate policies Assessment criteria Short-term Long-tern Realocation Political Ability to Fiscal impact: minimisation minimisation Administrative and economy Policy instrument deal with revenues and of abatement of abatement costs distributional and public uncertainty expenditures costs costs concerns acceptability Greenhouse Moderate to Highest High High Moderate Low Rev. raising gases tax high Emission Rev. raising Emission- trading Low to (when pricing Highest High High Moderate Moderate schemes moderate auctioning instruments (ETS) permits) Non-tradable performance Moderate Moderate Low Low Low High Neutral standards Subsidies to moderate to High Moderate High High High Expenditure abatement High Fairly high (often higher Fairly high Standards Feebates (e.g. Neutral (can than non- Low to Low to (higher than and feebates on Moderate High be revenue or tradable moderate moderate performance regulations vehicles) expenditure) performance standards) standards) Technology Low Low Low Low High High Neutral standards Source: D’Arcangelo et al. 2022. Note: The cell colors indicate how favorable the assessment criteria are for a given policy instrument (green: highly favorable; orange: medium favorable or mixed outcome; red: unfavorable; white: not applicable). Targeted support for technical change also has been in new low-carbon technologies and support demonstration and deployed. In addition to a shift to low-carbon energy sources deployment. For example, as part of a Clean Energy Forum and the “end-of-pipe” solutions, countries adopted policies established in September 2022, a dozen countries committed to develop and invest in less emission-intensive production $94 billion for clean energy demonstration projects (US processes and technologies that are not available or are Department of Energy 2022). not commercially viable yet. Policies to support technical innovations for industrial decarbonization include public funding Carbon pricing can be complemented with strong for R&D, incentives for collaboration among businesses such as technology support. The Netherlands, along with several other the First Movers Coalition of 55 firms that emerged at COP25 EU countries, is such an example. The Dutch government has (WEF 2019), and support for market development in a broader introduced a set of policy instruments aiming to reduce industry sense. Programs were also launched to incentivize investments emissions by 14.3 Mteq CO2 by 2030. Such instruments are EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 17 composed of two main pillars: (a) setting up a carbon pricing long-term research can give rise to new markets (Mazzucato mechanism through a carbon levy on industrial emissions 2015). A recent example is that, through the Infrastructure (launched in 2021), the EU ETS (EU Emissions Trading Investment and Jobs Act (2021), the United States plans to System), an energy tax on natural gas, and a sustainable energy provide $500 million for industrial emissions demonstration surcharge on natural gas6 and (b) supporting the development projects that test and validate emissions-reducing technologies and deployment of both emerging and radically new low-carbon in sectors like cement, iron, and steel. Other provisions in the technologies through several subsidy programs and corporate law create specific programs to design, pilot, and demonstrate tax incentives. A main such instrument is the Sustainable approaches to put carbon captured from industrial facilities Energy Transition Incentive Scheme (SDE++), which subsidizes back into the ground permanently (A. Anderson et al. 2021). adoption of low-carbon technologies. However, the technology Governments in developed countries have also used subsidies support favors more mature or more commercially ready and loan guarantees to promote innovation in wind turbines technologies than those at an earlier stage of development (B. and solar photovoltaic panels and have supported their Anderson et al. 2021). commercialization. This can go hand in hand with venture financing and seed funding from private providers (box 4.1). Both public and private resources should be mobilized Enduring public-private partnerships, spanning the entire cycle to provide targeted support for specific technologies of development from idea to prototyping to commercialization, that cover the full life cycle from the R&D stage to have also contributed to technological change and diffusion as commercialization. Public support for basic, exploratory has the involvement of trade associations. BOX 4.1: DECARBONIZING WITH VENTURE CAPITAL Experience with venture financing for clean-tech innovation over the past two decades was not promising, with the capital plowed into start-ups generating meager returns. Public sector investments did serve to attract venture capital (VC) into green industries but failed to improve outcomes. It seems that “cleantech companies developing new materials, hardware, chemicals, or processes were poorly suited for VC investment because they required significant capital, had long development timelines, were uncompetitive in commodity markets, and were unable to attract corporate acquirers. As a result, they were more likely to fail, and even those that did not fail returned limited capital to investors (Gaddy, Sivaram, and O’Sullivan 2016, 2). Gaddy, Sivaram, and O’Sullivan believe that larger corporations with deeper pockets and longer time horizons are better suited to develop and commercialize clean tech than VCs are. Moreover, joint research by a consortium supported by public funding is more likely to succeed. Van den Heuvel and Popp (2022), who also describe the failure of VC, add that the government’s demand-side policies, among others, are more likely to spur investment in decarbonizing technologies. Source: World Bank compilation. Direct public support for green industrial R&D can be in the United Kingdom, the former UK Government Energy delivered through multiple instruments. R&D spending Technology Support Unit and its successor organizations generates high social returns but, because of knowledge (AEA Technology, Carbon Trust) have been providing support externalities, it does not attract sufficient investment from private for energy efficiency activities for a long time, including 50 firms (Grubb et al. 2021). Policies to mitigate this market failure percent grants for R&D and financial support for best practice include financial incentives, tax credits,7 research grants, and implementation (Vallack et al. 2011). Support policies can government funding of public or private research.8 For example, help take an idea from a laboratory through the pilot phase to 6. However, the overall price signal is tempered by provisions that grant extensive preferential treatment to energy-intensive users through means that include energy tax exemptions, lower tax rates for larger energy users, and freely allocated allowances for carbon emissions. 7. According to Hall (2019), tax credits have been widely employed with some success in the United States and European Union. 8. Other initiatives: The Clean Steel Partnership, launched in June 2021, will bring a range of breakthrough technologies for clean steel production up to large-scale demon- stration by 2030. The partnership estimates R&D investment needs up to 2030 to be around €2.6 billion. The partnership will be funded under both Horizon Europe and the Research Fund for Coal and Steel, with the European Union contributing €700 million toward this mechanism. The European Commission’s Innovation Fund, financed by the auction revenues of the EU Emissions Trading System, is expected to play an important role in supporting the demonstration of first-of-a-kind low-CO2 plants,. Source: European Commission, “EU Climate Targets: How to Decarbonise the Steel Industry,” EU Science Hub, June 15, 2022, https://joint-research-centre. ec.europa.eu/jrc-news/eu-climate-targets-how-decarbonise-steel-industry-2022-06-15_en. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 18 commercialization and utilization on scale (figure 4.1). Programs capabilities and help firms overcome technological hurdles, supporting entrepreneurial start-ups could introduce innovative likely to also be useful. Innovation in tax policies, such as products or processes.9 Germany’s Fraunhofer-Gesellschaft10 tax credit and intellectual property (IP) boxes, are additional are government-run labs that work closely with industry to build beneficial options (box 4.2). >>> Figure 4.1: Life cycle of innovations with piloting key to the adoption of innovation by energy- intensive industries Mature, commercialized Mature at small technology scale production Mature at pilot RD&D scale Technology Maturity Mature at RD&D laboratory scale Start large scale production RD&D Start small scale production RD&D Start pilot scale Start laboratory scale Next generation idea Manufacturing Scale Basic Materials and Engineering and Systems Refinement Validation and Process Research Manufacturing and Optimization Certification Development Source: Rissman et al. 2020. Note: RD&D = research, development, and demonstration. 9. ARPA-E is an agency engaged in such activity. More details about it can be found at the publication National Academies of Sciences, An Assessment of ARPA-E (Wash- ington, DC: The National Academies Press, 2017). 10. More details about it can be found from the following: Fraunhofer, “New Study Reveals Key Strategies for Decarbonizing Industry, January 13, 2022, https://www.isifraun- hofer.de/en/presse/2022/presseinfo-01-langfristszenarien-industrie.html; Fraunhofer, “Decarbonize the Industry: What Is Missing for a Successful Implementation of the EU Hydrogen Strategy,” December 9, 2021, https://www.isi.fraunhofer.de/en/presse/2021/presseinfo-27-wasserstoff-studie-dekarbonisierung-eu.html. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 19 BOX 4.2: TAX CREDITS AND INTELLECTUAL PROPERTY BOXES TO PROMOTE GREEN R&D Research and development (R&D) tax credits are among the most widely used instruments to reduce the cost of conducting R&D. In 2017, 42 countries, including 32 in the Organisation for Economic Co-operation and Development, were offering some form of tax relief. Although the preference is to subsidize only the incremental amount of R&D undertaken by a firm, the problem with estimating this increment has caused France and the United States to abandon such subsidy and replace it with a level credit or a super deduction assuming that there are taxes to be paid, a loss carried forward, or both to reduce future taxes. Although this is advantageous for start-ups, the firms are still saddled with costs incurred by their initial investments. The Netherlands circumvented this problem by cutting the social charges on science and engineering employment for R&D, which immediately eases the firm’s cost burden and avoids the carry- forward problem. On balance, tax credits lead to increases in R&D spending and patenting; however, when the sample includes both large and smaller firms, it appears that the research conducted is generally on existing lines and of an incremental nature rather than explorative research that attempts to break new ground. Many European countries have also introduced intellectual property (IP) boxes of various kinds that reduce the taxes imposed on revenues generated by a firm’s IP—for example, patents, designs, and trademarks. This reward for innovative activity, while popular, does not appear to have increased R&D investment or patentable innovations after controlling for country characteristics and time trends. Source: Hall 2019. The rollout of both mature and new technologies can be Public procurement can also play a useful role. With accelerated through subsidy programs and graduated government procurement in OECD countries averaging 12 corporate taxes. For example, in the Netherlands, the percent of GDP, the preference for low-carbon products is “Sustainable Energy Transition Incentive Scheme (SDE++) incentivizing companies to adopt green production technologies. subsidizes the additional costs associated with adopting a low- Examples of such programs include the Buy Clean California carbon technology. The instrument is allocated to applicants Act, Japan’s Act on Promoting Green Purchasing, and India’s in increasing order of subsidy requirement per ton of CO2 Ujala program (see box 4.3 for more details). reduction in a tender open to an extensive list of technologies and is funded through a surcharge on electricity and gas use … with generous exemptions for key sectors and lower rates for energy-intensive users” (B. Anderson et al. 2021). The downside is that although small firms help fund the scheme, they are rarely at the receiving end. Furthermore, the scheme favors relatively mature technologies over more radical ones. The Dutch experience of technology support indicates the need of a further balanced approach for both emerging and more mature technologies (B. Anderson et al. 2021). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 20 BOX 4.3: GOVERNMENT PROCUREMENT SUPPORTING DECARBONIZATION The Buy Clean California Act (BCCA) requires “the Department of General Services (DGS), in consultation with the California Air Resources Board, to establish and publish the maximum acceptable Global Warming Potential (GWP) limit for four eligible materials. The BCCA targets carbon emissions associated with the production of structural steel (hot-rolled sections, hollow structural sections, and plate), concrete reinforcing steel, flat glass, and mineral wool board insulation. When used in public works projects, these eligible materials must have a GWP that does not exceed the limit set by DGS.”a The Japan Act on Green Procurement prioritizes the purchase of eco-friendly goods and services by all levels of government while observing budgetary guidelines and urges businesses and citizens to do the same.b Local incorporated administrative agencies are to endeavor to implement measures aimed at a shift of demand to eco-friendly goods, and so forth, regarding the administration and undertakings of the Local Incorporated Administrative Agencies. In the case of purchasing or leasing goods, or receiving the provision of services, business operators and citizens are to endeavor to select eco-friendly goods and the like, to the extent possible (Japan, Ministry of the Environment 2016). India’s Ujala program was launched in January 2015 to provide LED lighting and energy-efficient fans to replace existing units. With tens of millions of units distributed by 2021, the estimated energy savings is 47.98 billion kilowatt-hours per year, with avoided peak demand of 9,747 megawatts and reduction in greenhouse gas emissions of 39 million tons of carbon dioxide per year, and estimated annual monetary savings of Re 19,156 in consumer electricity bills.c a. See California Department of General Services, “Buy Clean California Act,” https://www.dgs.ca.gov/PD/Resources/Page-Content/Procurement-Division-Resourc- es-List-Folder/Buy-Clean-California-Act. b. Japan, Ministry of the Environment, “Act on Promoting Green Procurement,” https://www.env.go.jp/policy/hozen/green/attach/gpp%20pamphlet_eng.pdf; c. Ujala, “Unnat Jyoti by Affordable Led for All,” https://eeslindia.org/en/ourujala. Although the evidence for the effectiveness and impact of various additional regulatory measures. Many of these decarbonizing policies is only starting to emerge, there are actions needed to be buttressed by monitoring mechanisms several findings from the OECD experience that could help China to meter progress and sanctions to discourage inaction, the strengthen its policies and its green innovation support system. adoption of minimal cosmetic improvements, and free-riding (OECD 2022). Such a comprehensive policy approach may First, industrial decarbonization policies need to be be necessary to induce the most carbon-intensive industries supported by a better coordinated policy package that to undertake energy-saving investments and experiment with also takes full advantage of market signals. Early evidence new approaches to production. suggests that industrial decarbonization has progressed farthest in OECD countries that adopted a comprehensive Second, regulatory changes are not sufficient to spur green policy approach with a firm adherence to net-zero emission innovation on their own. Direct public support, including fiscal goals, which combines direct support for innovation with incentives for R&D, direct grants, public research, and support changes in the regulatory, structural, tax, and economic for early-stage deployment subsidies/pilot projects, is also agenda, including carbon pricing, energy standards, removal needed (Urpelainen and Hebbale 2022). Given that many green of subsidies for fossil fuels, emission data disclosures, and technologies have a higher risk profile, require longer gestation EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 21 periods, and strong and consistent policy signals, to innovate absolute and the relative amounts of public green R&D need across the whole production cycle than nongreen technologies, to grow exponentially with a parallel increase in the efficiency support for access to longer-term, more “patient,” and less risk- of utilization, to have a chance to make a tangible contribution averse capital will come at a premium. Additional instruments to the fight against climate change. R&D on green innovation may include support for proofs of concept, green innovation needs to be put on a “war footing” with a full mobilization of vouchers, and implementation-based collaboration, such as resources and the reorienting of current spending (Pilat 2022). the United Kingdom’s Industrial Decarbonization Challenge The 8 percent of government-financed research (on average) Fund (IEA 2022a). Demonstration projects, now in widespread that OECD countries currently devote to green innovation is use in China, can provide the much-needed opportunity for way below the socially optimal level. Because social returns to new, not-yet-market-proven ideas to be tested and, once their basic research tend to be a multiple of private returns to R&D, commercial potential is established, scaled up. However, as a doubling of spending on green R&D would be easily justified. rightly noted by Pilat (2022, 12), “innovation and technology are Increased spending would also help spur economic growth in not miracle cures or a silver bullet to address climate change” the short term: an IMF report estimates that every dollar spent and they can produce results only if they are part of a much on low-carbon activities can generate more than a dollar of broader framework. additional GDP (Batini et al. 2021). Third, to be effective, public support for green innovation Finally, industrial decarbonization needs to be supported needs to be underpinned by strong governance. The policy by broader economic reforms. These include structural needs to support transparent and independent decision-making reforms to support open and competitive markets, improve the assisted by multiyear budgeting and peer reviews. Agencies business environment, and strengthen institutional capacity. that employ competitive procedures to select projects, calibrate Policies should support investment in the skills needed to their payments according to progress, and hew to transparent assimilate decarbonizing technologies, increase flexibility of phase-out schedules have achieved better results. Germany’s the labor markets, and provide stronger safety nets for labor Fraunhofer-Gesellschaft, the United Kingdom’s Catapult affected by decarbonization policies. Consumers of the products Network, and the Netherlands’ subsidy programs for mature manufactured by heavy industry can also use their influence and new technologies are useful examples to follow (Mazzucato to speed up the process of decarbonization as can financial and Perez 2014; OECD 2021). institutions that are invested in these sectors. Such pressure is already mounting in the European Union and the United States Fourth, public policy needs to mitigate the implicit bias (CCCI and E3 2021). in favor of large companies. Because bigger companies can undertake large R&D projects and experiment with new technologies, the return on policies targeting them may be modest. Many new ideas developed by smaller, less-established firms may not translate into viable innovative outputs. However, young innovative entrepreneurial firms that serve as conduits for technology and organizational change and that challenge incumbents need to be fostered. The paucity of such firms has hampered the introduction of carbon-abating technologies in, for instance, Europe and Japan. Policy needs to encourage churning and creative destruction by facilitating entry (such as via easier access to finance), exit, and growth. Fifth, increased investment in green basic research and higher efficiency of innovation support is needed. The EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 22 5. >>> 5. China’s Experience in Industrial Decarbonization and Green Innovation China has reduced industrial emissions by substantially increasing energy efficiency. Over past years, industrial diversification in China has diminished the share of energy-intensive steel and cement production while raising the share of high-value machinery and chemicals . Mandatory energy efficiency improvement programs have also led to the shuttering of high- energy-consuming manufacturing facilities and upgrading of the equipment in the remaining plants. As a result, during the 11th, 12th, and 13th Five-Year Plan (FYP) periods (2006–10, 2011–15, and 2016–20, respectively), the energy consumption per unit of industrial value added for enterprises of a certain size11 was reduced by 26 percent, 28 percent, and 16 percent, respectively. Between 2005 and 2020, relative industrial carbon emissions fell by 49 percent to 2.4 tons per 10,000 yuan (Zhao and Zhao 2022). China has also made progress in developing green manufacturing systems. Some key sectors have seen significant technological advances, such as the green design and manufacturing technologies for the domestic appliance sector, in additive manufacturing and techniques for the reuse of composite materials. China has also developed a green manufacturing evaluation and accreditation system for technology commercialization. Many of the green manufacturing technologies have been commercialized (Liu et al. 2022). During the 13th FYP (2016–20), China developed 468 energy-saving and green development sectoral standards, constructed 2,121 manufacturing plants using green technologies, established 171 green eco-industrial parks and 189 green supply chain firms, and commercialized around 20,000 green products.12 Innovation has supported the growing use of low-carbon energy and technology. A significant decline in the costs of renewable energy by more than 90 percent over the past decade, largely driven by learning-by-doing, contributed to the growing use of clean energy including in 11. Enterprises of size above certain levels is a term used in China’s Statistical Yearbook, which refers to firms with an annual income above ¥20 million. 12. Data is from the website of National Development and Reform Commission of China, November 4, 2022, https://www.ndrc.gov.cn/xxgk/jd/jd/202111/t20211104_1302999_ ext.html. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 23 the industrial sector (China Photovoltaic Industrial Association quarter of such spending globally in 2019 (World Bank 2022). 2018). Renewable energy production capacity has reached Publications and patenting rates have also soared (Lai 2019), 930 million kilowatts at the end of 2020, accounting for around and the submissions to the Chinese patent office far exceed 42 percent of the total installed capacity and supplying 28 those received by the offices of Japan, the United States, percent of the power generated in 2021 (Göss 2022). Technical and the World Intellectual Property Organization (figure 5.1), developments have also led to energy efficiency improvements, although the quality of patents remains lower than in advanced particularly in heavily emitting industries. For example, more countries, including because most Chinese patents are in than 92 percent of iron and steel manufacturers have adopted low-carbon information and communication technology and in the Coke Dry Quenching technologies in 2019 as compared building technologies (Boeing and Mueller 2019; Glachant and with an application rate of less than 30 percent in 2005;13 and Touboul 2019). However, green patents from Chinese sources between 2005 and 2019, 80 percent of cement plants had account for 5 percent of total patents registered, significantly adopted the low-temperature residual heating technologies, less than the percentages of green patents from Germany, which were developed in Japan in the 1980s (Shi 2021). Japan, and the United States (Glachant and Touboul, 2019). The latter three countries generate three-fourths of the clean China has built significant green innovation capacity over energy patents. Also, fewer of the Chinese patents have the past decade. China has poured resources into R&D aimed been registered in two or more of the leading patent offices at decarbonizing its economy and accounted for almost a (Dechezlepretre et al. 2020). >>> Figure 5.1: Development of domestic green patenting in China and selected countries (2008–18) 2008 2018 CHINA 73,807 The number of patents published in China surged by 317 percent over 10 years In Japan, the number of patents published fell by 44 percent USA 24,817 25,451 EPO AND 17,693 GERMANY 17,241 16,226 JAPAN 13,157 14,345 KOREA, REP 7,010 12,118 Source: Heubl 2020. Note: EPO = European Patent Office. 13. This process brings down the temperature of red-hot coke as it emerges from the coke oven, readying it for transportation, and then reuses the heat recovered for power generation or steam creation. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 24 China is actively exploring emerging frontier A broad range of policies have been implemented in China decarbonization technologies. It is prioritizing hydrogen to promote low-carbon development, but they so far rely technology and fuel cells. In 2021, it produced a quarter of heavily on regulatory and command-and-control (C&C) the world’s hydrogen (25 million tons), mostly from coal (60 measures, including targets and quotas. Since the 11th percent). Sinopec, a Chinese state-owned oil company, has FYP, the central government has established national targets started a project to produce green hydrogen from renewable for energy conservation. These targets trickle down from the resources, solar and wind, with a capacity of 20,000 tons (IEA top to the lowest administrative levels, including townships 2022b). According to China Hydrogen Alliance (2022), demand and individual enterprises; target fulfillment is an important for hydrogen (black, blue, and green) is projected to rise to 37.15 criterion in evaluating the performance of both local government metric tons (Mt) by 2030 (about 5 percent of China’s energy officials and state-owned enterprise managers. The targets are supply) and to 96.90 Mt by 2050 (10 percent of energy supply). implemented primarily with C&C policies, ranging from mandated Production of green hydrogen could be between 100,000 and technology upgrading to forced plant closures. To ensure that the 200,000 tons by 2025 (IEA 2020; Nakano 2022). China is also national targets and policies are followed by local governments piloting the use of CCUS. By the end of 2021, there were in and enterprises, authorities carried out special top-down energy- total around 40 CCUS demonstration projects completed or saving inspections for major national industries. During the 13th under construction, with a capture capacity of 3 million tons per FYP period, inspections were conducted at more than 23,000 year (Cai, Li, and Zhang 2021). In recent years, electrification high-energy-consuming enterprises, covering industries such as of the light industrial manufacturing process is also reducing steel, cement, flat glass, and electrolytic aluminum, to promote emissions as more of the power is sourced from renewable their compliance with laws and regulations governing energy use sources. China is also investing in digital technologies for (Zhong and Peng 2022). clean and efficient energy use. The 14th FYP (2021–25) is prioritizing innovation in technologies for new energy vehicles China is exploring market instruments for low-carbon and associated components, including batteries, hydrogen, developments and green innovation. Although C&C policies bioenergy, energy storage, and CCUS (IEA 2022c). have been effective in providing clarity on who is responsible for specific climate change actions, concerns about rising costs Despite the progress, substantial opportunities remain and weak incentives for firms to implement CO2 reductions to make further gains, particularly in heavy industries. have led policy-makers to also harness market-based Although China has achieved cutting-edge energy efficiency in instruments to encourage emissions reductions (Davidson et al. some industries, it lags developed countries in many others. 2021). Specifically, in July 2021, China launched a nationwide For example, only about 30 percent of the country’s cement emissions trading system, but currently it only covers trading production lines had reached leading international efficiency among 2,225 power plants. Policies are also in place to create levels in 2019 (Chen et al. 2020). The energy consumption per market incentives for green investments. In addition, the iron unit of value added for the manufacturing industry was 10.2 and steel sector is expected to be brought under the ETS at tons of standard coal per thousand yuan in 2019, which was some point, together with other sectors such as cement and more than twice the value in the United States in 2016 (Zhang chemicals. The expansion of ETS could be an effective tool for 2021). Energy intensity in China’s iron and steel decreased decarbonization, complemented with cap and trade as well as from 3.2 tons tCO2/tce in 2000 to 1.6 tCO2/tce in 2019 but measurement, reporting, and verification (MRV).14 continues to substantially lag world leaders (for example, 0.47 tCO2/tce in the United States). China continues to rely on BF– It has also built a large green finance market. China started BOF technology for 90 percent of its production, compared establishing the green finance system in 2016 to support green with 72 percent for the global average (and 30 percent in the investments, with detailed policies being gradually released on United States, 44 percent in India, and 76 percent in Japan) green credit, green bond, environmental information disclosure, (Lin et al. 2021). and certification. Currently, China has the world’s second- largest green bond market with a three-year compound growth EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 25 rate approaching 38 percent (Chen and Zhang 2022). The innovation. They enable local experimentation and replication People’s Bank of China (PBoC) has introduced a variety of of innovative technologies. In addition, specific demonstration credit incentives and macroprudential measures related to projects have been widely deployed to support the development green finance. For instance, the PBoC encourages the use and scale-up of technologies such as the CCUS. Since 2017, of a relending facility, part of a refinancing facility to provide these initiatives have been complemented by the creation of short-term liquidity to banks, to support small enterprises, green financial reform pilot zones. The zones are trialing green agriculture firms, and green projects. Further, during 2016- insurance, green finance information systems, a green credit 17, green bond and green credit loans were written into the platform, a green finance trading platform for solid waste, and a Macro-prudential Assessment system. In 2018, the PBoC green investment fund (Green Finance Institute 2020). included qualified green loans and green bonds as eligible collaterals for central bank lending. The government is also taking measures to promote R&D and the commercialization of key technologies. Resources ESG policies are also being adopted. By the end of 2020, the are allocated to a slew of projects whose purpose is to conduct central government had introduced labeling standards for 18 basic research and to advance decarbonization technologies, green products and the certification criteria for green products, build “demonstration zones,” and accelerate dissemination including green construction materials, according to data from of carbon-frugal techniques. China has become the world’s the Ministry of Environment and Ecology of China (2021). Around second-largest public spender in energy R&D (about US$8.4 30 percent of A-share companies disclosed ESG reports in 2021 billion in 2020) after the United States, surpassing other (Bank of China Research Institute 2022). Low-carbon technology established technology hubs such as Japan and Europe (figure companies are also eligible for reduced income taxes. 5.3).15 China also set up state-run investment funds, so-called Government Guidance Funds, which provide R&D funding Pilot programs and demonstration projects have support for low-carbon technologies.16 In addition, MOST been widely used to spur adoption of decarbonization regularly releases the list of energy-saving and low-carbon technologies. The national program of Pilot City for Low- technologies for promotion of commercialization, which could Carbon Development, the Pilot Innovative City Development be used as officially recommended priority areas for both public Program, and the Pilot Industrial Parks Program seem to and private investments. have contributed to carbon emission abatements and green >>> Figure 5.2: Global top public spenders in energy R&D in 2020 United States China Fossil Japan France European Union Germany Nuclear United Kingdom Canada Korea, Rep Norway Renewables, efficiency, and cross-cutting carbon technologies US$, billion (2020) Source: IEA 2022c. Note: Due to data availability limitations, carbon capture, utilization, and storage spending are counted under “Fossil.” R&D = research and development. 14. More information about MRV can be found at : OECD (Organisation for Economic Co-operation and Development), “Measurement, Reporting, and Verification (MRV) of Greenhouse Gas (GHG) Mitigation,” https://www.oecd.org/env/cc/measurementreportingandverificationofghgmitigation.htm. 15. China’s R&D budgets on fossil fuels include the cleaner and more efficient use of coal, and oil and gas resource exploration and development. The trends since 2015 suggest an increasing focus on low-carbon technologies. 16. As of 2019, there were nearly 1,700 government guidance funds, managing over ¥ 4.1 trillion ($US650 billion) and aiming to invest over ¥ 10.1 trillion (US$1.6 trillion) over time. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 26 Chinese companies, either state owned, private, or with also steadily increased total R&D spending. Iron and steel mixed ownership, spend more on energy R&D than in attracted over $US12 billion in R&D investments in 2020, about any other country, according to IEA (2022c) estimates of US$11 billion in chemicals, and nearly US$1 billion in cement. R&D spending by globally listed companies. Most of the Expectations for the 14th FYP suggest that Chinese enterprises corporate R&D budgets are allocated to the development of may accelerate energy innovation activities relevant to cement cleaner or more efficient fossil fuel technologies. In the hard-to- and steel production, such as through the private-led launch of decarbonize heavy industry sector, Chinese companies have demonstration projects for CCUS applications (figure 5.4). >>> Figure 5.3: Estimated R&D spending by globally listed companies headquartered in China with activity in heavy industry Source: IEA 2022c. Note: “Other industry” includes industrial furnaces and ovens, metalworking machinery, flow control equipment, industrial trucks, plastics and rubber, recycling, and woodworking. R&D = research and development. Going forward, industrial decarbonization is one of the The authorities selected heavy industries as priorities for key priorities for planned climate actions. Most recently, the industrial decarbonization. Selected heavy industries are Action Plan for Carbon Peak by 2030, released in November identified in the overarching action plan, including iron and 2021, identified industrial decarbonization and green innovation steel, petrochemicals, nonferrous metals, and construction capacity building as 2 of the 10 key actions. The 14th FYP materials manufacturing. Detailed action plans developed for (2021–25) for Green Industrial Development, released in these industries will include clear roadmaps and timelines, but December 2021, sets the target that the carbon emissions per they have not been released yet. In addition, in October 2021, unit of industrial value added will be reduced by 18 percent by the 14th Five-Year National Clean Manufacturing Scheme was 2025. It also outlines the key areas for industrial decarbonization, released, and NDRC followed with an action plan to improve including further developing green manufacturing, continuing energy efficiency and reduce the carbon emissions of the major energy-efficiency improvements, continuing industrial structural emitters. These industries are required to have more than 30 upgrading, developing a circular economy, and adopting digital percent of their production capacity reach certain threshold technologies in industrial manufacturing. MOST is working on energy consumption levels by 2025. They include iron and the Carbon Peak and Carbon Neutral Technological Innovation steel, electrolytic aluminum, cement, flat glass, oil refining, Action Plan, which is expected to be accompanied by a ethylene, synthetic ammonia, and calcium carbide.17 The target technology roadmap and a list of R&D projects for “key carbon and baseline levels of energy consumption for several key neutral technologies.” industries are listed in table 5.1. 17. See National Development and Reform Commission [in Chinese], https://www.ndrc.gov.cn/xwdt/tzgg/202110/t20211021_1300584.html?code=&state=123. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 27 >>> Table 5.1: Target energy consumption levels versus the baseline levels for certain key industries Energy consumption Baseline Target Industry Process Unit of the indicator indicator level level Energy consumption Blast furnace process Kg standard coal/ton 435 361 per unit product Iron and steel Energy consumption Converter process Kg standard coal/ton −10 −30 per unit product Liquid aluminum ac Electrolytic aluminum Electrolytic aluminum KW-hours/ton 13,350 13,000 consumption Energy consumption Cement Clinker Kg standard coal/ton 117 100 of comparable clinker Energy consumption Kg standard coal/ Plate glass >800 tons/day 12 8 per unit product weight case Source: NDRC of China, 2021. Note: kg = kilogram; kw = kilowatt. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 28 6. >>> 6. Challenges to Industrial Decarbonization Policies and Green Innovation in China China’s policies for industrial decarbonization and green innovation are comprehensive. China has built a significant green innovation capacity, supported the exploration of emerging frontier decarbonization technologies, and built a large green finance market. It also introduced a wide range of pilot and demonstration programs and implemented a broad range of polices to promote low-carbon development. However, policies for decarbonization and innovation leave scope for improvement. The current policies seem to suffer from incomplete coordination and a policy mix that is not well aligned. Several weaknesses include (a) green innovation policies supporting low-carbon development are scattered among different government agencies, which hinders coordination and leads to duplication;18 (b) support for R&D and basic research dominates support for commercialization of technological innovations; (c) scope remaining for strengthening market-based instruments for green development and innovation; and (d) government procurement policies that favor low carbon could be further improved and better targeted (Davidson et al. 2021). The preference for C&C and the drive for quantitative outcomes have tended to sideline the use of market signals. Innovation that promotes decarbonization is more likely to respond to a pairing of regulation and market forces. The state has a large role, but markets and prices must play their part as well. The OECD experience shows that regulations and standards do work, but they need to be reinforced by price signals and pressures exerted by market forces.19 China should enrich the mix of incentives with more market-based inducements. This may go against the grain of current initiatives driven by the desire to get quick results, but innovation of the kind that China needs may not respond to top-down directives. 18. China’s MOST, along with other 8 agencies released the Technical Innovation Action Plan to Achieve Carbon Targets in August 2022, which includes some institutional set-up to facilitate coordinated support for green innovation in low-carbon development. 19. A bottom-up approach that solicited ideas from firms was shown to be more effective than a top-down one in supplying technologies sought by the US Air Force, according to Howell et al. 2021. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 29 Recent shifts in policy that enhance the role of state World Bank report presents evidence on productivity gains by planning over public and private corporate decision- services (Nayyar, Hallward-Driemeier, and Davies 2021). The making could dampen innovation and industrial initiatives World Economic Forum has announced that digital trade is to improve efficiency and expedite decarbonization booming as costs fall, and it “has the power to transform our (Brandt and Rawski 2019). A more statist, less market-oriented world for the better in the long run” (Stephenson and Sotelo, approach, which is privileging state-owned enterprises (SOEs) 2020). This is echoed more cautiously by the United Nations over private firms and through a process of amalgamation, Conference on Trade and Development, the World Trade enlarging the size of key SOEs, could act as a brake on the Organization, OECD, McKinsey, and others. greening of leading industries. Greater market concentration and the dominance of SOEs in industries such as steel and However, there is a potential downside to a growth model petrochemicals are likely to inhibit innovation and dampen that leans heavily on services. Advanced economies are still the growth of productivity,20 both because state firms have struggling to translate the promise of digital services into actual proved to be markedly less dynamic and because high sustained growth performance. On balance, the productivity of levels of concentration could deter new entry and the sort of most services trails that of manufacturing (Jorgenson, Ho, and competition that is urgently needed to spur change. Samuels 2015). To minimize the growth penalty, China needs to develop policies to encourage private entrepreneurial China’s strategy to increase economic self-reliance may initiative and new entry, to invest in managerial skills and make it harder to meet carbon targets. A China that attempts intangibles (Haskel and Westlake 2022), and to efficiently to be more self-reliant and autonomous (zizhu), that cuts back harness digital technologies—to reap the full productivity on imports and seeks to insulate the domestic market from the benefits of high-value services. rest of the world to lessen the risk from potential bottlenecks and “chokeholds” while sustaining moderately high rates of Over the longer term, China’s efforts at decarbonizing growth, would find it difficult to diminish the contribution of industry will also have to come to grips with the risk of heavy and chemical industries, at least over the medium term carbon leakage. As China scales back the production of (Brandt and Rawski 2019). Even building a greener economy energy-intensive manufactures, some of the capacity could will require large inputs of metals, cement, glass, chemicals, transfer to other countries lacking China’s technological and other materials, as will the internalizing of more of the capabilities and green energy. Such leakage would detract manufacturing value chain. Although technology can chip from efforts to contain global GHG emissions. Starting in away at the emissions from these industries, capital-intensive the late 1980s and through much of the 2010s, carbon was industries are slow to change because the technological lock- outsourced from the United States and European countries to in effect is stronger, and China now houses the world’s largest China and other Southeast Asian economies, but principally concentration of such industries (Gross 2021). A peaking of to China, which now accounts for 30 percent of global emissions before 2030 and carbon neutrality by 2060 demand manufacturing. Although evidence of carbon leakage in recent a change in China’s development strategy. years is mixed and is probably quite low, going forward, leakage from China could be a bigger concern (Jakob, 2021; A Chinese economy that is more open and more service Nielsen et al.,2021; Misch and Wingender, 2021). For China’s oriented would be better able to control carbon emissions net-zero targets to be meaningful from a global perspective, even as incomes rise, and more people move to cities. A the avoidance of carbon leakage would need to be factored transition to a services-led growth path has been debated in into national objectives. China for some time. The advantage of services-led growth is that even in the face of labor displacing machine learning, Finally, there is scope to further improve China’s it will create more jobs than the investment and industry– overall public support system for innovation, green and led model. For the past decade, the potential of digitally otherwise. World Bank and DRC (2019) and Medvedev, augmented services has been widely touted, and a recent Piatkowski, and Yusuf (2020) argue that while China has 20. Increased industrial concentration in the United States since 2000 has resulted in lower investment and gains in productivity, according to Covarrubias, Gutiérrez, and Philippon 2019. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 30 become the most innovative country among its global income peers and one of the global leaders in selected areas of innovation even among advanced countries, the quality of its patents is lower than among developed countries, there are large productivity gaps between market leaders and remaining enterprises and the public support system tends to prioritize SOEs over the private sector. Both reports call on China to reform the national innovation support system to focus on the quality rather than the quantity of public innovation spending, enhance institutional capacity and coordination and facilitate technology diffusion. In addition, there is scope to further strengthen IPR enforcement, invest in basic research and keep the domestic innovation system open for international cooperation. Finally, the reports recommend for China to create a level playing field for all companies, including for private and foreign-owned companies, increase transparency and the effectiveness of public innovation support policies and increase involvement of the private sector in designing and implementing the innovation policy agenda. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 31 7. >>> 7. Conclusions and Policy Recommendations China has achieved notable progress in decarbonizing its industry, as reflected in the apparent plateauing of absolute emissions and falling emission intensity. The decline has been supported by structural changes in the industry toward less energy-intensive production, continuous energy-efficiency improvement programs, development of green manufacturing systems, and, at the margin, expansion of circular economy solutions, including greater use of renewable heat for heavy industry. Innovation has played an important role in reducing emissions. Over the past decade, China has become one of the global leaders in green innovation, with a growing share of global green patents, increasing investment in green R&D, and a rising number of industrial decarbonization demonstration projects. Recently adopted national and provincial carbon action plans aim to further increase the role of green innovation in industrial decarbonization. A few Chinese companies are now among the global leaders in spending on energy R&D. A broad range of policies has been implemented to promote low-carbon development and green innovation, but targets and quotes predominated. China has implemented large number of pilot programs and demonstration projects, taken targeted measures to reduce emission of the key heavy industries and to promote R&D and commercialization investments for key technologies, and increased spending on low-carbon technology development. However, the bulk of policies were based on regulatory and C&C measures, including targets and quotas. China has started to develop market instruments, including a nationwide emissions trading system, although so far it has covered only the energy sector and the timeline to expand the ETS to industry is not established yet. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 32 There is no guarantee that the ongoing decarbonization start-ups and SMEs. trends will be sufficient to help China meet its 2030 • Young green-innovation start-ups need to be fostered peak carbon objective and meet the NDC targets. Further to serve as conduits for technology and organizational regulatory, structural, and policy changes will be needed to change and to challenge incumbents. accelerate the ongoing decarbonization trends, including • Public regulatory changes should be complemented with by shifting production to less energy-intensive industries, price signals. These can be delivered via carbon pricing reducing the carbon footprint of the most energy-intensive and other mechanisms, which internalize the external industries, strengthening market-based instruments for green effects of pollution. development and innovation, and increasing the role of services • Increased investment in green basic research and higher in the economy. Industrial decarbonization policies also need to efficiency of innovation support is fundamental. be better coordinated to ensure consistency and effectiveness. • Finally, industrial decarbonization needs to be supported by broader economic reforms. These include structural It will also be necessary to double down on the size reforms to support open and competitive markets, improve and the quality of investment in innovation focused on the business environment, and enhance skills needed to industrial decarbonization. China has significantly ramped assimilate decarbonizing technologies. up investment in R&D in general, and in green R&D in particular, but the size of this spending relative to China’s Industrial decarbonization-oriented green finance can dominant position in the global markets in industries such as also be expanded and deepened. China represents a steel or cement, where it represents more than half of global large part of the global green bond market. The PBOC is a production, is insufficient. The country’s focus on technology leader in deploying multiple instruments to promote green experimentation and implementation in these industries finance primarily for transportation and renewable energy. should be commensurately stronger. Given its industrial heft, It is time now for the authorities to use green regulatory but also its global carbon footprint, China is well positioned tools to accelerate industrial decarbonization. China’s green to ramp up the overall R&D investment and become a global taxonomy, particularly the concept of “transition finance,” could leader in decarbonization. provide a useful start. In addition, it would be useful to take the concept of “stranded assets” beyond the fossil fuel sector The experience of OECD countries that provide support to also include carbon-intensive industry. Finally, international promoting industrial decarbonization, while still tentative, sustainability reporting standards could also support China’s could inform China’s policies. Specific lessons from the domestic regulatory developments, including their future OECD experience include the following: alignment with International Sustainability Board standards. • Industrial decarbonization policies should be supported Finally, China can make further progress with its by a well-coordinated policy package that also takes full innovation support system reform agenda. First, it advantage of market signals. would be useful to multiply spending on basic research • Public support should go beyond regulatory changes to support green innovation and to move from quantity to and include fiscal incentives for R&D, direct grants, quality of research and patenting. Second, further reforms public research, and support for early-stage deployment are needed to improve the allocation of public resources, subsidies and pilot projects. especially toward private companies, to reduce bias toward • Green innovation needs to be underpinned by strong SOEs, and to promote start-up enterprises that experiment governance, including transparent and independent with disruptive technologies. Third, more measures should decision-making assisted by multiyear budgeting and be taken to enhance transparency, strengthen meritocracy, peer reviews. and improve the monitoring and evaluation of the public • Public policies should mitigate implicit bias that favors support system by, for example, enhancing the capacity of large companies to the detriment of innovative green the existing institutions responsible for policy evaluation, EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 33 both at the national and provincial levels. Finally, it will be of cross-border green technology spillovers. Table 7.1 important to keep the innovation system globally open, highlights the specific key recommendations, based on including by making the Chinese public support programs previous reviews of China’s overall innovation system, available to international researchers and companies with specific adjustments for policies needed to promote and by avoiding domestic protectionism that would court innovation focused on industrial decarbonization. retaliation from global partners and undermine the benefits >>> Table 7.1: Selected policy recommendations to promote innovation in decarbonizing industry General recommendations Specific recommendations • Increase the share of public R&D support devoted to basic research on green innovation, especially in priority areas established through technology foresight and technology Increase spending on roadmaps, including through greater support for universities and national basic research basic research to support programs, such as the National Natural Science Foundation of China. green innovation and move • Increase transparency and strengthen evaluation of research, making greater use of from quantity to quality of objective peer reviewing. research and patenting. • Reward high-quality, rather than high-output, research. • Redirect public support to high-quality domestic and international patents. • Develop a nationwide and/or provincial system for helping companies, especially SMEs, deploy energy-efficient technologies, including through green innovation vouchers. • Expand programs that support the development of firm-level skills, such as management Put greater emphasis on skills, to drive absorption and diffusion of green technologies. facilitating the diffusion of • Introduce a support program to include awareness and best practice campaigns among technology. firms, detailed benchmarking information for firms, and technology use, particularly in lagging regions. • Use public procurement to create markets for innovative green products and technologies, especially for SMEs. • Expand support for international cooperation in research and patents on green innovation, including by engaging international researchers and companies in government-funded Promote a more open and green innovation projects globally integrated green • Expand support for interfirm and business–science international cooperation in research innovation system. and patents, including with developing countries • Invest in international knowledge sharing of the best practices in green innovation, including the lessons learned from China’s experience • Consider upgrading an existing institution to consolidate financing, capacity, and knowledge resources for green R&D and commercialization. Upgrade support for early- • Enhance support of ecosystems and expand the network of incubators organized around existing stage green innovation, science and technology parks, with links to existing businesses and professional networks. especially for start-ups. • Ensure the availability of seed capital for green technologies that have long gestation periods beyond the investment horizon of venture capital (5 years). • Increase the reliance of policy making on rigorous evaluations of innovation policies, including instrument mix, design, efficiency, and effectiveness. Expand the use of • Enhance the capacity of the existing institutions responsible for policy evaluation, both at monitoring and evaluation. the national and provincial levels. • Engage the private sector in the design of policy and in instrument evaluations and in the feedback discussions to enhance their impact. Source: Based on World Bank and DRC, 2019, and Medvedev, Piatkowski, and Yusuf, 2020. 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