ENGAGING SMES IN THE LOW-CARBON TRANSITION IN CHINA A Case Study of Jiangmen City. Huang Zhen, Program Officer - Environment, The Asia Foundation

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1 [ OCCASIONAL PA P E R N O. 1 7, O C T O B E R ] ENGAGING SMES IN THE LOW-CARBON TRANSITION IN CHINA A Case Study of Jiangmen City Huang Zhen, Program Officer - Environment, The Asia Foundation

2 [ OCCASIONAL PAPER, NO. 17, OCTOBER 2012 ] ENGAGING SMEs IN THE LOW-CARBON TRANSITION IN CHINA A Case Study of Jiangmen City Huang Zhen, Program Officer - Environment, The Asia Foundation The Asia Foundation s series of Occasional Papers presents a range of ideas and analysis on political, economic, and security challenges facing the Asia-Pacific Region. These are working papers truly works in progress meant to spark discussion and debate within the international development community about strategies and approaches that can deliver positive impact on the ground. They are part of the conversation going on daily at the Foundation, and meant to be shared widely in the hope of advancing knowledge and best practices in the field. The views expressed in this series are those of the authors.

3 The Asia Foundation is a nonprofit, nongovernmental organization committed to the development of a peaceful, prosperous, just, and open Asia-Pacific region. The Foundation supports Asian initiatives to improve governance and law; women s empowerment; economic development; the environment; and regional cooperation. Drawing on nearly 60 years of experience in Asia, the Foundation collaborates with private and public partners to support leadership and institutional development, exchanges, and policy research. Huang Zhen

4 TABLE OF CONTENTS I. SMEs IN CHINA'S LOW-CARBON TRANSITION...1 II. A CASE STUDY OF JIANGMEN CITY BACKGROUND INFORMATION ON JIANGMEN CITY BACKGROUND INFORMATION ON SURVEYED SMEs RESULTS OF THE SURVEY RESULTS FROM WORKSHOP SUMMARY OF THE JIANGMEN CASE STUDY...13 III. EXPERIENCE FROM EUROPE IN ENABLING SME PARTICIPATION IN THE LOW-CARBON TRANSITION IV. CONCLUSION

5 I. SMEs IN CHINA S LOW-CARBON TRANSITION China is the largest emitter of greenhouse gases (GHG) in the world and faces both domestic and international pressure to curb its emissions and contribution to climate change. Recognizing its role and potential for being a leader in addressing climate change, China has developed various policies and measures to address the issue. In its 12 th Five- Year Plan of National Economic and Social Development, 1 for instance, China committed itself to reducing its carbon intensity (per unit GDP energy consumption) by 16 percent and per unit GDP CO 2 by 17 percent below 2010 levels by To achieve this goal, the State Council of China has allocated carbon intensity reduction targets to all provinces, and accordingly provincial governments are required to make their own plans and strategies to meet the goals. 2 For example, the target for Guangdong Province is to reduce its per unit GDP energy consumption by 18 percent below its 2010 level by To reach these goals, the Chinese government emphasizes that economic growth should be pursued in a low-carbon way. 3 Small and medium-sized enterprises (SMEs) 4 play a very important role in China s economic development, poverty alleviation, and employment creation. According to the Ministry of Industry and Information Technology of China, 5 by the end of 2010, SMEs contributed over 50 percent of China s GDP and provided jobs for more than 80 percent of the urban labor force. However, a large number of Chinese manufacturing SMEs still follow traditional production methods that are labor-, energy-, and resource-intensive, and have caused environmental pollution and contributed to climate change in recent years. Therefore, the participation of SMEs in the manufacturing sector to address climate change mitigation is crucial if China is to meet its carbon intensity goals; these enterprises are facing pressure to meet energy conservation and carbon emission reduction targets set for them by the government. However, despite their importance, very few low-carbon related programs in China have, to date, focused on SMEs. One of the few programs, the Climate Solver project, was launched by World Wildlife Fund (WWF) China in November 2011 to encourage Chinese SMEs to participate in the low-carbon transition through environmentally- Ms Zhen HUANG is a Program Officer at The Asia Foundation s China Office, based in Beijing. 1 National People s Congress of China, 12 th Five-year Plan of National Economic and Social Development of China, announced on March 16, 2011, retrieved March 18, 2011, 2 State Council of China, Work Plan on the 12 th Five-year Energy Saving and Emission Reduction, August 31, 2011, retrieved March 15, 2012, 3 In China, terms such as low-carbon development, low-carbon economy, and low-carbon transition are used in various documents and on various occasions, but there are no official definitions or standards for these terms. Therefore, this paper will use these terms interchangeably. 4 When the case study discussed here was conducted, the official standard for defining and categorizing SMEs in China was the Interim Provisions of Small- and Medium- Sized Enterprises Standard, issued in 2003 by the National Economic and Trade Commission of China, National Development and Reform Commission of China, Ministry of Finance of China and National Bureau of Statistics of China. In June 2011, a new standard was issued by the National Development and Reform Commission of China, Ministry of Industry and Information Technology of China, Ministry of Finance of China and National Bureau of Statistics of China. However, the 2003 standard was used for the present case study. 5 Ministry of Industry and Information Technology of P.R. China, The 12 th Five-year Plan for Small- and Medium- Sized Enterprise Development, retrieved March 15, 2012, 1

6 friendly and market-favorable technical solutions. 6 The Asia Foundation s and the Center for Environmental Economics and Policy Research (CEEPR) of Guangdong Academy of Social Sciences carried out another program between September 2010 and December 2011, focusing on engaging SMEs and other stakeholders in China s low-carbon transition process. This paper presents a case study from The Asia Foundation-CEEPR project in an attempt to answer the following questions: What are the challenges to engage SMEs in the low-carbon transition process in China, and what hurdles exist What are the opportunities in the low-carbon transition, and what incentives might be put in place to promote the transition? This paper addresses these questions through an analysis of the current status of SME participation in the low-carbon transition process in one city Jiangmen, in China s Guangdong Province. China is a very large country, and because local circumstances vary greatly from place to place, the results from the case study city have limitations and may not be broadly applicable. Nevertheless, the case study can still provide insight into the situation of SME participation in other Chinese cities and help inform national climate policies. II. A CASE STUDY OF JIANGMEN CITY BACKGROUND INFORMATION ON JIANGMEN CITY Guangdong, in Southern China, is the country s largest manufacturing region due to its geographic advantage and early adoption of economic reforms. 8 With its economic successes over the past 30 years, it is home to a large number of SMEs, most of which follow traditional production methods that are labor-, energy-, and resource-intensive. 9 These SMEs are facing pressure to meet energy saving targets set for them by the national and provincial governments. The industrial sectors with the highest carbonemissions in Guangdong are, as in the rest of China: (1) power industry; (2) building materials industry, particularly cement; (3) petrochemical and chemical industries; and (4) iron and steel industries. The first and last sectors are dominated by large enterprises, especially large state-owned enterprises. For these large enterprises, incremental reductions of carbon emissions will come mainly from replacement of traditional 6 WWF China, Press release, November 24, 2011, retrieved March 15, 2012, 7 The case survey was conducted mainly by the Center for Environmental Economics and Policy Research (CEEPR) of Guangdong Academy of Social Sciences. The CEEPR team was composed of Prof. ZHAO Xikang, Prof. LIU Mengqin and Assistant Researcher SHI Baoya. The author reviewed and analyzed survey results, and participated in the workshops. 8 Geographically, Guangdong is close to Hong Kong and Macao and has several good ports, including Guangzhou, Shenzhen, Shantou, and Zhanjiang. Moreover, Guangdong was the earliest Chinese province to implement economic reforms that opened it to foreign investment. Therefore, Guangdong is the home for many export-oriented manufacturing industries in China. 9 Guangdong Provincial Government, Pearl River Delta Region Reform and Development Plan ( ), January 8, 2009, retrieved March 15, 2012, 2

7 technologies or restructuring of production systems, because in many cases, they have already upgraded existing facilities through technical innovation. However, SMEs account for many of the enterprises in the building materials, petrochemical, and chemical industries; and they face a large challenge in terms of technical innovation, particularly in raising awareness about low-carbon development and the adoption of proper technologies. This is particularly true for SMEs in Guangdong, many of which are in labor-intensive industries that produce lower-value products in the global supply chain. 10 The case study city of Jiangmen is located in the south central region of Guangdong Province. Jiangmen was chosen as a case study because its economy relies primarily on SMEs. By the end of 2009, about 99 percent of industrial enterprises in Jiangmen were SMEs, and those SMEs provided about 86 percent of Jiangmen s industrial revenue. 11 The study, based on a questionnaire survey, interviews, and workshops, examined and analyzed the current participation of SMEs in Jiangmen in the low-carbon transition process and barriers to that participation. 2.2 BACKGROUND INFORMATION ON SURVEYED SMEs The project team designed a questionnaire via desk research and interviews of SMEs and municipal government, and selected 50 SMEs in Jiangmen to survey. 12 All of the 50 SMEs responded to the questionnaire, which contained 40 questions. The surveyed enterprises included: 15 (30 percent) from the textile and garment industry; nine (18 percent) from the building material industry; six (12 percent) from the paper-making and paper product industry; five (10 percent) from the specialty chemical product industry; four (eight percent) from the electronic information industry; two (four percent) from the transportation industry; two (four percent) from the electric power industry; and one (two percent) each from the electromechanical, commerce/trade services, automobile, real estate, chemical/pharmaceutical, and cookware industries (Figure 1). One company did not name its industry sector. Moreover, 43 (86 percent) of the surveyed enterprises have been operating in Jiangmen for more than five years, and 43 (86%) of the respondents were management-level employees. Thus, it is reasonable to expect that most of the respondents are familiar with the situation of their company and the local business environment. 10 Guangdong Small and Medium- Sized Enterprises Bureau and Guangdong Academy of Social Sciences, Guangdong Province SME Innovation Research Report, August 2008, retrieved March 26, 2012, 11 Jiangmen Statistic Yearbook (2010), Jiangmen Statistic Bureau, November 8, 2010, P.71, retrieved December 2010, 12 The 50 surveyed SMEs were participants in a local low-carbon SMEs conference, held April 2011, for Jiangmen s large energy users. The local government has focused on improving energy efficiency and reducing energy use of these large energy users. The project team took the opportunity provided by the conference to conduct a questionnaire-based survey. Before the respondents answered the questions, the team took some time to explain and clarify the questionnaire. 3

8 Figure 1: Number of surveyed enterprises, by industry sector With regard to the surveyed SMEs target markets, export is a priority. Twenty (40 percent) of the SMEs sell all or most of their products on the international market; 16 (32 percent) of them sell some of their products outside China; and 13 (26 percent) rely entirely on the domestic market (Figure 2). This is consistent with Jiangmen s and Guangdong s export-oriented economy. Figure 2: Markets of the surveyed enterprises 4

9 2.3 RESULTS OF THE SURVEY (1) SMEs understanding of and attitude toward low-carbon development The term low-carbon development has been mentioned in several important Chinese policy documents, such as the 12 th Five-year Plan of National Economic and Social Development of China and China s Policies and Actions for Addressing Climate Change (2011). What does this term actually mean to SMEs? Their understanding of and attitude toward low-carbon development affect the actions they will take. In this regard, the following findings can be extracted from our survey: Government agencies are the primary channels through which SMEs received information on low-carbon development. Seventy-six percent of respondents said they obtain low-carbon related information from various municipal and district government agencies (such as economic and technology information bureaus and environmental protection bureaus), followed by television programs (62 percent), the Internet (46 percent), and newspapers (42 percent). The extent to which SMEs understand the term low-carbon development and its implications is questionable. Only 10 percent of the respondents have received in-depth guidance on low-carbon development, while 54 percent have been advised occasionally by professional institutes or experts, 18 percent have seldom been advised, and 16 percent have never been advised. One company (2 percent) did not reply to this question. SMEs are not familiar with the low-carbon policies and relevant standards. When asked which national policies and regulations are related to low-carbon development, only 18 percent (nine) of SMEs provided answers. Among the limited answers, the Cleaner Production Promotion Law and Energy Saving Law were mentioned the most, followed by the Recycling Production Law and the Environmental Protection Law. However, the Recycling Production Law, -- actually named the Circular Economy Promotion Law, and the Environmental Protection Law which was issued several years ago, are not directly related to low-carbon development. Moreover, 62 percent (31) of SMEs said they are uncertain whether there is a sector-based low-carbon standard. Eight percent (four) did not reply to this question. Jiangmen itself has implemented local policies on low-carbon development, but our survey findings show that SMEs are mostly unaware of these policies (Figure 3). Of various local policies, the most recognized are those that provide various subsidies for energy saving equipment and technology adoption, cleaner production auditing, and energy saving research and development (R&D). These were identified by 34 percent (17) of SMEs. 5

10 Figure 3: Percentage of SMEs reporting familiarity with local low-carbon related policies SMEs attitudes toward low-carbon development are mixed. On the one hand, 48 percent (24) of the SMEs showed great interest in transitioning to a low-carbon way of development; 30 percent (15) said they may join in the transition; 22 percent (11) were uncertain whether they would join; and none said they would not join. On the other hand, when asked about their actual participation in transitioning to a low-carbon way of development, 48 percent (24) of them had joined the process and 20 percent (10) had not; 26 percent (13) were not sure; and 6 percent (three companies) did not reply. 13 Among the 46 percent of the SMEs who have not yet participated or were not sure, 50 percent say they will join soon; 18 percent said they will wait to see the policy trend and/or results from other SMEs participation; and 32 percent did not answer. In summary, the survey responses indicate that most SMEs in Jiangmen are familiar with the term low-carbon development, few have a solid understanding of what the term really means in practice. Twenty six percent of SMEs are uncertain whether actions they have taken were related to low-carbon development or not. In addition, even though there are various local policy incentives encouraging the private sector to transfer to lowcarbon development (including monetary, technological, and land-use incentives), SMEs have paid most attention to monetary incentives such as subsidies provided for energy saving equipment and technology adoption, cleaner production auditing, and energy saving research and development (R&D). This may provide insight into motivation (or lack thereof) for low-carbon development. among SMEs. The potential costs of investment in new technologies could be one reason that 22 percent of the SMEs surveyed have not yet decided whether they will join the low-carbon transition. (2) Low-carbon actions taken by SMEs Although only 48 percent of the SMEs surveyed said they are knowingly taking lowcarbon related actions, responses to the question, Which of the following actions are you 13 Among the 26% not sure SMEs, some could be conducting activities related to low-carbon development without realizing it. 6

11 taking? 14 indicates that more than 70 percent of them are implementing low-carbon development (Figure 4). Figure 4: Low-carbon actions taken by SMEs Figure 4 shows that the low-carbon action undertaken most widely by SMEs is cleaner production. The reason for this could be government promotion of such efforts. Since the Cleaner Production Promotion Law of China was enacted in 2002, the Chinese government has been enforcing various measures to promote cleaner production in China. For example, the Ministry of Environmental Protection of China has established a Cleaner Production Center, which is conducting research on cleaner production and auditing the cleaner production measures taken by some enterprises. 15 Moreover, the national government has enacted auditing regulations that the Cleaner Production Center and other organizations must follow when performing audits of cleaner production measures. 16 These measures have encouraged industries to conduct cleaner production, which can contribute to carbon emission reduction (low-carbon) This question aims to identify specific low-carbon relevant actions that SMEs have taken. Production cycle with upand down-stream enterprises means that up-and down- stream enterprises work together to reduce the discharge of pollutants throughout the entire supply chain. Low-carbon company cultural means that the company integrates the low-carbon concept into its daily management activities. Although there may be significant overlap between Energy saving technology adoption and Cleaner production, the questionnaire left the former as a stand-alone option in order to identify the number of SMEs that had taken that specific action. 15 Detailed information regarding the center can be found at 16 The National Development and Reform Commission of China issued the Interim Measures on Cleaner Production Auditing in According to the Ministry of Industry and Information Technology (MIIT) of China, between 2003 and 2010, the implementation of cleaner production has reduced energy use by 56 million tons of standard coal. MIIT, 12 th Fiveyear Plan of Industry Cleaner Production Promotion, March 2, 2012, retrieved March 28, 2012, 7

12 The survey also shows that more than 60 percent of SMEs have adopted energy saving technologies, although they don t necessarily realize that these can contribute to lowcarbon development. The first reason for this change could be that local government has adopted energy saving measures and policies. For example, the Jiangmen government is closely monitoring the energy savings of key industrial energy users during the years of the 12th Five-year Plan ( ) through measures such as assignment of companyspecific energy-saving targets and assessments, energy auditing, and energy consumption reporting by individual companies to the government. 18 The second reason for this could be energy shortages. According to the Jiangmen Municipal Economic and Technology Information Bureau s data, the city was not able to provide enough electricity to meet industrial production demand in 2011 and industries had to make their own plans to fill the energy gap. 19 Thus, companies had to either reduce their electricity consumption, shift their consumption to times when electricity was expected to be available, or find alternative energy sources. To further understand what specific measures/activities SMEs have been taking, the questionnaire provided a second list of measures and asked the SMEs, Which of the following measures/activities has your company undertaken? This question and its possible responses are similar to, and overlap somewhat with, the previous question. However, this question offered more specific response options without tying them to lowcarbon development, since SMEs may have taken these measures for reasons unrelated to carbon emissions reduction. The results are shown in Figure 5. Figure 5: Low-carbon related activities/measures undertaken by SMEs 18 Jiangmen Municipal Economic and Technology Information Bureau, Notice on Enhancing Key Energy Users Energy-saving in the 12th Five-year Period, August 12, 2011, retrieved March 15, 2012, In the document, the key energy users are defined as the enterprises with an annual energy consumption of more than 3000 tons of standard coal. 19 Jiangmen s Municipal Economic and Technology Information Bureau publicizes the city s electricity demand and supply data every month on its website: According to the 2011 data, there was a trend of electricity shortages for industrial production. 8

13 The survey shows that the main activities related to low-carbon development, which SMEs have conducted, are: energy savings and emissions reduction (66 percent); ISO 14000/14001 certification (28 percent); use of new energy or clean energy (18 percent); Social Accountability 8000 (SA 8000) certification (14 percent); and development of green products (12 percent). The reasons for the high rate of energy savings and emissions reduction activities, as well as the use of new energy/clean energy, could be primarily due to government encouragement and business s own needs, as discussed above. The relatively high rate of ISO 14000/14001 certification, SA 8000 certification, and development of green products could be related to Jiangmen s export-oriented economy. The certificates on business environmental management (ISO 14000/14001), corporate social responsibility (SA 8000), and green products can potentially enable enterprises in Jiangmen to gain a competitive advantage in the international market. However, SMEs seldom adopt low-carbon related measures apart from the above five. None reported use of carbon capture and storage (CCS); and rates for carbon footprint labeling, participation in the clean development mechanism (CDM) and carbon auditing are very low. The reasons for this could be that these measures require professional expertise beyond that of the local SMEs, and that they are relatively more expensive. Furthermore, the government does not have official standards to guide SMEs in these areas. Not surprisingly, it appears that the SMEs adopt those measures that are least complex and most obviously in their short-term economic interest. (3) Hurdles to, and potential incentives or opportunities for, engaging SMEs in the low-carbon transition process The survey explores the following questions to identify the barriers and hurdles to, and potential incentives or opportunities for, engaging SMEs in the low-carbon transition process. Motivations for SMEs to join in the low-carbon transition process (Figure 6). Most of the SMEs surveyed cited actively undertaking CSR (corporate social responsibility) as motivation for their business to take low-carbon actions. Other motivations included government requirements, business opportunities, and customer demand. A few SMEs also mentioned energy saving as a motivation (by selecting Others and specifying it as energy saving ). 9

14 Figure 6: Motivations of SMEs participating in low-carbon development Stakeholder influence on SME participation in the low-carbon transition process (Figure 7). From a list of potential stakeholders, the surveyed SMEs were asked to choose three relevant stakeholders that significantly influenced their participation in low-carbon development. The most influential stakeholders are government (68 percent), business customers (54 percent), business managers/leaders (48 percent), and other employees (38 percent). On the other hand, media, nongovernmental organizations (NGOs), and community were each identified by only 2 percent of respondents (one company). Figure 7: Stakeholder influence on SME participation in the low-carbon transition process Impacts of the low-carbon transition on SMEs (Figure 8). The survey showed that SMEs believe that the low-carbon transition will have a positive impact on them. More than 70 percent of SMEs said that the transition would help them reduce their costs and promote technology innovation, and half of them believe that the transition will benefit their business image and enhance their products competitiveness. Only four percent (two) of the SMEs said that the transition 10

15 would have a negative impact on their business: one each from the textile and garment industry and the specialty chemical product industry. Figure 8: Impacts of low-carbon transition on SMEs Hurdles to SME participation in the low-carbon transition (Figure 9). According to the survey results, the main hurdles preventing SMEs from taking low-carbon actions are lack of technology (62 percent), lack of capital for investing in innovations (56 percent), lack of competent personnel (42 percent), lack of relevant knowledge (42 percent), and lack of incentives (36 percent). These challenges could be categorized into three groups: ability (technology, knowledge and talent); investment (capital); and policy (incentives). Figure 9: Hurdles to SME participation in the low-carbon transition 11

16 Possible measures to promote SME participation in low-carbon development (Figure 10). The main measures that may encourage SMEs to participate in the low-carbon transition process are issuing relevant regulations and policies (54 percent), establishing a low-carbon technology promotion center (50 percent), enacting mandatory technical standards (36 percent), publishing best lowcarbon practices (32 percent) and eliminating outdated industrial capacity (32 percent). These measures could be grouped as policy-related measures ( issuing relevant regulations and policies and enacting mandatory technical standards ) and technology-related measures ( establishing a low-carbon technology pool, publishing best low-carbon practices and eliminating outdated industrial capacity ). Figure 10: Possible measures to promote SME participation in low-carbon transition In summary, the survey results indicate that government plays an important role in engaging SMEs in the low-carbon transition process, as SME low-carbon development actions are heavily influenced by government-imposed standards, incentives, and regulations. Another influential factor is capacity for innovation, including both R&D capacity, and capital capacity. In addition, customer demands and preferences are also crucial, especially for export-oriented SMEs. 2.4 RESULTS FROM WORKSHOPS To further discuss the status of SME participation in the low-carbon transition process and collect feedback from SMEs on SME participation, the project team conducted several communication workshops, including in-factory workshops and inter-sme workshops. In addition to information-gathering, the workshops aimed to raise awareness among SMEs of the importance of their role in developing a sustainable, low-carbon economy in their city. Two workshops were held, one in a paper product company and one in a garment company (both of which were also respondents to the questionnaire). The project team also took the opportunity provided by the workshops to interview the managers of the two host companies. The inter-sme workshop involved enterprises from the textile and garment industry, building material industry, paper-making and paper 12

17 product industry, electronic information industry, electromechanical industry, electric power industry, heating generating and supplying industry, specialty chemical product manufacturing industry, nonferrous metal industry, and others. The main findings from these workshops were as follows: Some SMEs have adopted low-carbon measures: For example, the two interviewed companies had both adopted some energy saving technologies, such as a heat pump air conditioner with domestic hot water supply, which uses waste heat to warm domestic water. The paper product company had even conducted carbon auditing to analyze the carbon emissions from its production process and made a plan to reduce its carbon emissions. Customer requirements and marketing channels are important factors affecting SMEs decisions related to low-carbon development: This is particularly true for the export-oriented industries. The paper product company that was interviewed sells most of its products to European and American countries. Therefore, it pays close attention to sustainability certification. Moreover, it set up a Green Harmony Committee in 2010 responsible for the company s sustainable and lowcarbon development. According to the inter-sme workshop, however, this kind of internal strategy is not common among SMEs. Increased access to information is important: SMEs expressed that they are interested in getting information on topics such as low-carbon policies (especially incentive mechanisms), low-carbon technology, and best practices. The SMEs pointed out several barriers hampering their participation in lowcarbon development: (1) it will take some time to profit from low-carbon innovations, and there may be some risk associated with adopting innovation in production processes; (2) most of the low-carbon measures require cooperation among various units in a company, which increases management cost and effort; (3) in general, awareness among SMEs of low-carbon development is still low; (4) current policy incentives are insufficient for encouraging SMEs to transfer to a low-carbon production model; and (5) when transferring to low-carbon development, the SMEs want to follow a complete and matured standard, but there is no such standard yet. 2.5 SUMMARY OF THE JIANGMEN CASE STUDY The Jiangmen case study shows a mixed picture of SME participation in China s lowcarbon transition process. On the one hand, while SMEs have some awareness of lowcarbon development, they may not understand it and its implications very well, nor recognize the benefits their business could gain from the transition. This lack of understanding could hinder them from actively transferring to a low-carbon production model. On the other hand, some SMEs that may not understand the term low-carbon development have nonetheless adopted measures that contribute to low-carbon development, such as energy efficient technology and clean energy. The motivation for such SMEs to take these actions may not be to contribute to low-carbon development per se, but rather to cut costs or deal with energy shortages. 13

18 The main factors that affect SME behavior related to low-carbon development include government policy (e.g. regulations, incentives, and standards), customer requirements, transition costs and benefits, and innovation capacity. Among these factors, government and transition costs and benefits have the greatest effect. III. EXPERIENCE FROM EUROPE IN ENABLING SME PARTICIPATION IN THE LOW-CARBON TRANSITION It is a worthwhile endeavor to look at other countries experiences in enabling industrial sectors to participate in the low-carbon transition, as these may provide insight into actions that China could take. This paper focuses on the European experience, relying primarily on one WWF report, Enabling Transition. 20 The WWF paper summarizes climate innovations both in policy and technology from China, India, Tanzania, Kenya, Uganda, Ghana, the European Union (EU), and two EU member countries the Netherlands and Sweden. Within the EU, there are three important policies related to low-carbon development in the industrial sector: Europe 2020: A European strategy for smart, sustainable and inclusive growth (Strategy Europe 2020), Sustainable Consumption and Production and Sustainable Industrial Policy Action Plan, and European Strategic Energy Technology Plan. These policies contain measures to improve clean-tech research and innovation, to enable a shift toward a low-carbon economy, and to support the transition of manufacturing sectors to greater energy and resource efficiency. 21 Examples of the measures include seven European Industrial Initiatives (EIIs) focused on industrial energy research and innovation in wind energy, solar energy, bio-energy, carbon capture and storage, electricity grids, and nuclear fission. However, WWF identifies several challenges that the EU faces. For example, the EU innovation system is suffering from shortcomings that negatively influence the market rewards, and incentives for private investment in innovation, 22 such as the fragmentation of the venture capital market. Accordingly, the EU policy is focusing on removing the negative influences on market rewards and creating incentives for private investment in innovation through synchronising the standardisation process better with research results and market needs, strengthening the knowledge triangle between business, education and research needs, 23 and other measures. WWF points out that the overall EU low-carbon policy is not a coherent framework. Moreover, the reports states that the EU s lowcarbon innovation policy primarily considers technology innovation, with relatively little attention to non-technological innovations, and it emphasizes the supply-side, with little attention to the creation of demand. Thus, the report argues that the current policy may not truly decouple Europe s growth from resource and energy use. WWF concludes that 20 The report is one product of WWF s Climate Solver Programme and is available at retrieved November 24, Ibid, page Ibid, page Ibid, page

19 the EU policy should take a more ambitious and more fundamentally transformative approach to innovation in the Community. 24 Within EU-member states, WWF takes two countries as examples: the Netherlands and Sweden. In the Netherlands, the private sector is active in low-carbon technology R&D, and the country has an excellent knowledge base 25 in the clean-tech area. However, according to WWF, that knowledge base has not been adequately transformed into actual innovations delivered on a commercial scale. 26 The reasons for this situation are: individual technologies are not supported consistently over the product life cycle; 27 innovation in knowledge centers is not well connected to commercial companies; 28 the capital for clean energy technology, especially in the seed phase, is not adequate; and a strong home market for clean-tech in the Netherlands is underdeveloped. As such, WWF makes some recommendations for the Netherlands, including: government financial support for clean-tech R&D should be increased and made consistent to encourage academics and industry to collaborate in demonstrating technology under real-life conditions; the government should pay more attention to economic stimulus packages, such as stimulating high investment in green solutions; the government should invest more capital in clean-tech, especially in the seed phase; and the government should enact policies to strengthen domestic demand for clean energy technology applications. In Sweden, WWF surveyed a number of Sweden-based climate entrepreneurs about their ideas and recommendations for promoting low-carbon innovations. The survey found that the government policies requested most often by SMEs in order to facilitate the lowcarbon transition are: policies on promoting low-carbon technology innovations, such as strengthened energy-efficiency standards; more stringent requirements for innovative technologies and clean energy solutions in public procurement; other measures such as tax breaks for investing in small clean-tech businesses; a simplified application process for public funds; and reduced requirements by investors for SME s to provide cofinancing. The report provides some specific recommendations for policymakers in Sweden, such as national strategies for the low-carbon transition with quantifiable and measurable annual targets; relevant legislation and regulation consistent with the new low-carbon transition needs; involvement of both the supply and demand sides of lowcarbon innovation through public procurement and public construction investments with climate innovation quotas; and system-wide low-carbon related measures instead of fragmented or marginal ones. The WWF report indicates that promoting low-carbon innovation in the private sector is a focus of low-carbon policy in the EU and its member countries. In many cases, the policies aim to harness the power of market forces to drive innovation. 24 Ibid, page Ibid, page Ibid, page Ibid, page Ibid, page

20 IV. CONCLUSION The survey results show that most SMEs in Jiangmen have already noticed the lowcarbon transition in the city and generally have a positive attitude toward the transition. Some SMEs have even taken actions to join in the transition. However, several issues and factors affect SMEs participation, including: SMEs may not really understand what low-carbon means nor recognize the benefits that the low-carbon transition would bring to their business. SMEs have not received enough professional guidance for transferring to a lowcarbon development. The motivations of those SMEs already participating in low-carbon development include economic benefits (e.g. tax breaks and specific subsidies), mandatory requirements from the government, customer concerns, business opportunities, cost reductions, and provision of a stable energy supply. Hurdles to SME participation include lack of technology, lack of capital, lack of competent personnel, lack of relevant knowledge, and lack of sufficient financial incentives. Based on the study and EU experiences, the following are some initial recommendations for policymakers in China. As the government plays an important role in integrating SMEs into the lowcarbon transition process, more attention should be paid to reviewing and revising current low-carbon related policies with a special focus on SMEs needs. According to the case study, mandatory technical standards and economic incentives are welcomed by the SMEs. In addition, when making policy, SMEs opinions should be heard because their actual participation is crucial for successful policy implementation. Innovation is very important for the transition. China should adopt strategies similar to those used in the EU to promote low-carbon innovation. For example, SMEs in China are facing the similar challenge of lack of capital as encountered in the Netherlands. ThereforeWWF s recommendation that more government investment in R&D could be useful, especially in the seed phase, and should be considered by China. In addition to capital investment, the government could also provide other mechanisms to inspire innovation, such as establishing a lowcarbon technology promotion center, publishing low-carbon best practices, and eliminating outdated industrial capacity. China could also learn from the EU s experience in leveraging the power of the market to inspire innovation. When developing low-carbon related policies, effort should be made to identify ways in which SMEs may profit from lowcarbon innovations. For example, China may also need to address negative financial incentives and create incentives for private investment in innovation. Efforts should also be made to raise awareness among SMEs of low-carbon development, and to provide comprehensive and professional guidance to SMEs. Since many Chinese SMEs are in the upstream portion of the supply chain, buyers could play a role in influencing SMEs behavior. Measures should be taken to 16

21 raise customers awareness of low-carbon development and to develop a system whereby information about the carbon intensity of upstream producers is made available to downstream buyers. As this paper is based on a case study of one city and China is a large and diverse country, the above findings and recommendations are limited and incomplete. This study is only a beginning in terms of exploring the role of SMEs in China s low-carbon transition. The author hopes that more organizations, including SMEs, will join in the work to promote a low-carbon China. 17