NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, July 21, 2008

China recently overtook the United States as the world’s biggest carbon polluter, but in a nation known for its dirty technology, a surprising business trend is emerging: green entrepreneurs.

As China booms, the country has relied heavily on coal and other fossil fuels to push its economy into a whole different league. Rising energy demand has led to an increase in coal consumption, skyrocketing 75 percent between 2000 and 2005 and reaching 2.6 billion tons in 2006, according to the Energy Information Administration.

The country has become notorious for smog and pollution recently, partly because of the spotlight shining on Beijing as the world gears up for the 2008 Olympics next month.

Increased energy consumption has pulled nearly 400 million Chinese citizens out of dire poverty, according to World Bank estimates, but also has led to widespread health problems and a resulting loss in GDP — as much as 5.8 percent.

While China’s thirst for fossil fuels has risen sharply in the past decade, so have investments in clean technology in the country. Venture capital investments in green industry increased by 147 percent from $170 million in 2005 to $420 million in 2006 and totaled $10 billion last year, according to investment consortium Cleantech Group.

This growing demand for clean technology, and concern over the environmental effects of pollution, has prepared the way for a growing number of small, sustainable businesses. However, despite burgeoning investments in green technology, many of these entrepreneurs are having difficulty accessing funding for their projects.

Lending practices in the country represent one challenge for small- and medium-sized enterprises, said Ye Weijia, director of New Ventures China, a program sponsored by the World Resources Institute to promote sustainable growth.

“The banking system is very discriminative to SMEs (small and medium enterprises),” Weijia said at an event held by the Woodrow Wilson Center, a non-partisan research institute. “In developing countries, if the market interest rate is 8 percent for bank loans ?? when they lend to SMEs, the interest rate becomes 11 percent.”

Banks often charge SMEs higher interest rates because investing in small business frequently implies greater risk.

The Chinese government recently implemented policies to encourage environmental improvements, which have helped rally green businesses. These include new building codes and an energy conservation law, which has real repercussions for provincial government leaders who fail to get their areas up to snuff in the timelines specified by the law.

However, policy support does not necessarily translate into business success, which means lenders still discriminate based on size, Weijia said.

“Policy support vs. market economy is still a very important fact,” Weijia said. “Because if a business is supported by policy instead of the market, today you have the policy support, but what about tomorrow?”

There has been some movement on the part of Chinese government officials to encourage loans for green business, but the impacts for small businesses have yet to be seen, said Jennifer Turner, director of the China Environment Forum at the Wilson Center.

“The Chinese administrator of environmental protection said they’re working with banks on green lending practices,” Turner told United Press International. “But I haven’t heard about any concrete programs for actual lending to green companies.”

A growing number of international organizations, though, are trying to fill in the gap and supply funding or business assistance to help green Chinese industry. New Ventures has worked with a number of small companies to help make their green dreams a reality.

Other groups also have pitched in, although their efforts aren’t necessarily aimed at the little guys. The Natural Resources Defense Council, an environmental action group, has a program that provides consultation and assistance in green buildings, clean power and sustainable transportation. The World Environment Center, a non-profit organization, has a program to help eight of China’s top suppliers for U.S. automaker General Motors improve its energy efficiency.

“Working with them, we saved over 2,000 tons of CO2 emissions and over 65 million gallons of water,” said Gwen Davidow, director of corporate programs at the World Environment Center. “Net savings economically were $250,000.”

While the project doesn’t directly promote small, sustainable entrepreneurs, it could have an effect on them indirectly, as these larger suppliers look for cleaner options farther down the supply chain, Davidow said.

Promoting green business will be essential if the Chinese government wants to maintain economic growth while protecting its environment, said Terry Yosie, World Environment Center president.

Recently the government has begun to respond to both international pressure and protests staged by its own citizens calling for the country to clean up its act. Officials have closed a number of facilities that rank high on the polluting list, but there’s nothing to replace them, leading to expected shortages, particularly for electricity.

“One of the reasons that’s going to happen is that the Chinese government has been shutting down coal plants that are particularly dirty,” Yosie said. “So in solving one problem, you may be creating another.”