Addressing the effectiveness of industrial energy efficiency incentives in overcoming investment barriers in China

During the 11th Five Year Plan (FYP), China adopted a series of incentive policies, offering financial rewards to industrial enterprises to help them improve their energy efficiency. According to China's National Development & Reform Commission, from 2006-2010, the Central Government of China allocated a total of 133 billion Chinese Yuan (CNY) (€16 billion) in the form of subsidies and rewards for promoting energy conservation and pollution reduction. These incentives certainly played an important role in helping China meet its 11th FYP energy intensity goal, but key questions remain unanswered as to whether the incentive policies were cost-effective and whether industrial enterprises would still invest in energy efficiency improvements without the incentive policies. With these questions in mind, the paper first reviews overall energy consumption in industry as background for understanding recent policies implemented by the Chinese government. Then, the barriers for industrial energy efficiency are outlined with a focus on the financial barriers for both self-financed and third-party financed projects. Additional information is provided on how barriers differ in small and medium enterprises versus large enterprises, examining the avenues enterprises have for accessing needed capital to make energy efficiency investments. The paper provides an overview of the incentive policies offered by the government – both the energy saving rewards offered to large enterprises and the more recent rewards and tax incentives for energy service companies. Lastly, some simple case studies illustrate how incentives typically offered in China alter an industrial project's upfront investment cost and payback period, and thus how they impact energy efficiency investment decisions. This analysis can help determine new ways for public expenditure in the 12^th FYP to leverage increased private investment in energy efficiency.