The role of banks in energy saving and cutting emissions is well established in developed economies, but is only just starting to take shape in China.

The nation's development plan for 2006-10 sets a target of reducing energy consumption per unit of GDP by 20 percent by 2010, or 4 percent each year, and China also aims to cut emissions of major pollutants by 10 percent in that period.

These are moves in the right direction, but the nation must get its commercial banks involved if it is to achieve the target, according to experts.

"The (Chinese) government is doing exactly the right thing by setting the target," said Rachel Kyte, director of the Environment and Social Development Department at the International Finance Corporation (IFC), a member of the World Bank Group.

Incentives for green innovation will not occur without a clear commitment from the State on a target that holds everyone accountable, she said, at a recent forum on green financing.

With the target set, the next step would be to engage the banks to facilitate the process, analysts said.

They said banks would make a big difference in meeting energy use and emissions targets.

Last year, China's energy consumption per unit of GDP fell by 1.33 percent - the first time since 2003 it did not increase - but was still short of the average 4 percent annual target.

"An important reason for the failure (to meet the target) is that although many enterprises want to do it, they lack financing," said Calvin Xu, program manager of the China Utility-based Energy Efficiency Finance Program under the IFC.

And that's where banks can step in.

The Industrial Bank, a major commercial lender based in Fujian Province, is a frontrunner in financing green projects and an example of how banks can balance their commercial and social interests to benefit the country's environmental drive.

The Fujian bank, established in 1988, has extended loans worth 435 million yuan for energy efficiency projects since it started the business a year ago, said Li Renjie, president of the bank. Those projects are targeting CO2 emission cuts of 2 million tons.

"We are going to increase these loans to 10 billion yuan by 2010," said Zhu Liyong, head of the bank's corporate banking department. By then, the loans will help save 10 million energy equivalent tons of coal and cut 22 million tons of CO2 emissions, Zhu said.

That would help ease China's energy demand, which may amount to 2.7 billion tons of coal equivalent this year - almost double the amount in 2000, according to Dai Yande, deputy director of the Energy Research Institute of the National Development and Reform Commission.

Dai warned that the country's fast growth of energy use is unsustainable.

The Industrial Bank drive could achieve even more than Zhu's estimate.

"The bank's estimate of CO2 emissions is rather conservative," said Xu, who believes it could reach 40 million tons, about 8 percent of China's CO2 emissions in 2006.

China's energy use and emission reduction targets would be more easily met if more banks got involved in green programs, he said.

"We expect the (Industrial Bank) program to have a significant development impact on promoting energy efficiency when other banks understand the opportunities that come from this line of business," said the IFC's Kyte.

The IFC is currently looking for more Chinese banks to repeat the Industrial Bank model. "We will announce new partners for the energy efficiency program by January," said Xu.

The IFC will guarantee any losses incurred to encourage banks to extend loans to green projects. The IFC's experience in Eastern Europe and Russia shows that bad loans are a slim possibility, Xu said.

But policy risks exist for commercial banks that want to expand their green credit programs, analysts said.

China is reining in credit to reduce liquidity, which has triggered many problems - from excessive investment to ballooning asset prices. The banking regulators have discouraged banks to lend to companies in sectors that are heavy consumers of energy and resources and that pollute the environment.

But as a new round of fiscal belt-tightening is expected following the Central Economic Work Conference, prospects remain uncertain - at least in the short term - for energy efficiency-oriented green lending.

"My understanding is that this tightening aims to encourage structural adjustment of commercial bank loans and will encourage environment-friendly projects," said Tang Bin, secretary of the Industrial Bank board.

(China Daily December 18, 2007)