By Vinod Thomas and Marvin Taylor-Dormond
BEIJING, July 28 (Xinhuanet) -- One of the toughest challenges facing world development is how to promote economic growth and reduce emission of greenhouse gases (GHGs) in the atmosphere, and confronting climate change.
This problem is particularly acute for fast growing economies such as China, which are already burdened with vast GHG emissions.
While action is needed on multiple fronts, one way to drive growth and mitigate emissions simultaneously is to improve energy efficiency - an approach promising a win-win outcome.
Not surprisingly, China has made improvements in energy efficiency a top national priority. The International Finance Corporation (IFC), a part of the World Bank Group, initiated investments through China Utility-Based Energy Efficiency (CHUEE) program in 2006. Evaluative findings from this program provide lessons for China and other countries.
The program was designed to address a two-fold gap; one concerning the adequacy of financing for energy efficiency, and the other relating to knowledge about the possibilities of achieving greater energy efficiency. The program sought to provide over $200 million in bank guarantees for energy efficiency loans and about $8 million in technical assistance to help banks give more than $500 million in loans to energy efficiency projects, and enable energy management companies to improve operations.
The 98 energy efficiency projects facilitated by the CHUEE program helped reduce GHG emissions by 14 million CO2 tons per year - an amount equivalent to the annual CO2 emission of Bolivia but just around 0.2 percent of China's annual emissions.
Much of this success is attributable to China's setting up of a supportive policy framework and specifically the introduction of regulations that gave incentives to companies to make these investments.
How effective is a program such as CHUEE in generating additional energy efficiency? On one hand, the fact that just 9 percent of companies would not have invested in energy efficiency without CHUEE indicates a rather modest contribution of the program. But on the other, the net social benefits from the sharp reduction of carbon emissions and energy savings were high, generating an economic rate of return of 38 percent. These social returns included private returns estimated at 20 percent, reflecting the win-win nature of these types of investments.
At the same time, savings from greater energy efficiency could lead to increased energy consumption that in turn could mean a smaller emission reduction rather than otherwise.
To mitigate such a risk, structural changes must be introduced in order to increase the share of renewable energy and natural gas in total energy use. In this sense efforts for greater efficiency involving existing sources need to be part of a game plan to tap less polluting sources.
Finally, several things need to be done to achieve a greater impact from energy efficiency programs.
First, there needs to be a sharper focus on certain sectors, such as small and medium enterprises, that suffer from a lack of viable financing solutions for energy efficiency.
Second, resources ought to be channeled directly toward activities, including housing and commercial buildings that offer the highest potential for reducing GHG emissions and are currently under-served by the market.
Third, subsidies could be targeted toward areas of evident market failure, where social benefits would be highest but where existing private returns are not high enough to change people's behavior.
All three avenues offer prospects for greater effectiveness in achieving energy efficiency.
Programs such as CHUEE seek a much-needed balance between growth and environmental sustainability. The lessons learned from this experience of China should help replicate as well as improve the design of programs in energy efficiency.
Vinod Thomas is the director-general, Evaluation of the World Bank Group. Marvin Taylor-Dormond is the director of the Independent Evaluation Group of IFC.
Special Report: Global Climate Change