Sustainable development requires a positive, systemic balance between the economic, social, and environmental dimensions of the development process. This is not just a policy option, but an absolute necessity
Remarks by Maurice Strong at opening session of International Finance Forum, 13 September, 2006
"The theme of this Third International Finance Forum Global Annual Meeting could not be more timely or appropriate. I congratulate its organizers and sponsors and appreciate the opportunity of addressing such an impressive group of participants as you begin your meeting.
China's extraordinary economic progress is already reshaping the world economy, shifting its center of gravity to Asia. The pace and nature of the changes well underway in opening its financial system and integrating it more fully with the international financial system, in accordance with the commitments that China has made with its entry into the World Trade Organization (WTO), will clearly have a decisive impact, both on the future of China's economy, and its leading role in reshaping the world economy. Changes and reforms already initiated have been impressive and are already producing major results. A particular example is the recovery of the stock markets. Paradoxically the world's most rapidly growing economy has had one of its worst performing share markets. Restoration of confidence in the integrity and the efficacy of the stock markets promises to make a substantial, and indeed essential, contribution to the reform of China's entire financial system. As important as these changes are, they are only first steps. The eminent practitioners and policy makers meeting here will be elaborating on these issues more authoritatively than I could, or should even attempt, in these brief introductory remarks.
China's leaders have made clear their concern that the fragility of the banking sector is one of the principal threats to China's economy and to strengthening and reshaping of its financial system. The progress to date in reforming the banking sector, which is rapidly becoming the world's largest in terms of assets, is far from complete, has encouraged international institutions and investors to seek investments in and alliances with China's banks, which should contribute significantly to helping them meet the international standards that will enable China to exercise its influence and obtain maximum benefit from participation in the international financial system. Progress made already is impressive and demonstrates China’s determination to continue on the pathway to rapid and continuing opening of its financial markets. But formidable challenges remain: the development of a market for debt securities, for commodities, and for a variety of sophisticated financial instruments will improve the efficiency of China's financial system and enable it to obtain maximum benefit from its links with the international financial system.
China has the great advantage in its emerging financial system to benefit from the rapid and profound changes that have occurred in the international financial system in recent years. It need not, and I submit, should not, structure its own financial system as a carbon copy of international models. I know that those who lead the changes in China's financial markets, many of whom are here today, are highly sophisticated and experienced. They are managing this process of transformation, which is occurring on a scale and at a speed without precedent anywhere else, intend to produce a financial system which is distinctively Chinese, closely linked and extensively integrated with the international financial system, though under conditions that clearly serve Chinese interests and needs.
Important challenge
A particularly important challenge to China, and I submit, an historic opportunity, in undertaking the changes and reforms required to open its markets further is to design them to foster the transition of China's economy to a sustainable development pathway. This accords with the commitment of your leaders to produce a people-centered, harmonious society guided by science and utilizing the best of modern technology. Managing the complex and deeply rooted interfaces between the government, its policies, regulatory regime, and its vast control of state enterprises, is an awesome undertaking, which China is managing remarkably well. The stresses and strains this produces between government, sectors, and regions in China presents a monumental challenge.
Changes in your financial systems are at the very heart of these challenges, but I am most confident and enthusiastic that in meeting them, China is in the process of establishing an entirely new development model from which others, particularly in the developing world, will have much to learn.
Finally in these brief remarks, let me focus on one particular issue, which I believe presents an important and timely opportunity for China. Environmental deterioration is now imposing heavy economic, as well social and human, costs on China. A recent report by the State Environment Protection Agency (SEPA) makes the economic costs more than 3 ½% of GDP. The human costs are much harder to quantify, but no less important. The 11th Five Year Plan provides for an ambitious, but achievable, set of goals and measures which would ensure important and much needed, procress towards meeting this challenge. Of particular importance are the measures to increase energy efficiency by 20% and reduce pollution by 10%.
Sustainable development requires a positive, systemic balance between the economic, social, and environmental dimensions of the development process. This is not just a policy option, but an absolute necessity if its remarkable economic growth is to continue and to produce benefits to the Chinese people, which they expect from it.
China's rapid growth and its dependence on fossil fuels for its energy supplies has made it one of the principal sources of greenhouse gas emissions, which give rise to global warming, a growing risk, particularly for the future of China’s vulnerable low-lying cities like Shanghai. China is expected to account for 26% of new global emissions by 2030, more than the increase in emissions by all OECD countries combined. While China has not been required to accept targets for reducing its emissions, it has been a very constructive participant in the Climate Change Convention and in implementing its Kyoto Protocol despite its repudiation by the United States. One of the provisions of this protocol establishes a Clean Development Mechanism (CDM) through which those who can effect emissions reduction at a lower cost than others can obtain an economic benefit by selling the credits earned to those who must pay a higher cost to effect a comparable reduction in their emissions. Although China has yet to establish the conditions under which these can be allocated and then traded, an informal market has already developed. I believe China is likely to become the principal source of such emission credits and one of its main beneficiaries.
There is now a movement to establish a carbon trading program in China. Establishment of markets for trading of emission credits is a whole new class of assets that present extraordinary new opportunities for the financial system, of which China can be a major beneficiary. The value represented by emission credits arises from the differences in the costs of reducing or absorbing emissions of pollutants, notable CO2 (carbon dioxide) and SO2 (sulphur dioxide). Those whose costs of reducing emissions, whether voluntarily or to meet mandatory requirements, are higher than the costs of effecting similar reductions elsewhere, notably in developing countries, can meet their requirements by offsetting them against reductions effected elsewhere by purchasing the rights to offset their emissions, from a party that is able to reduce or absorb them at lower costs. These transactions are being carried out initially on a case-by-case negotiated basis. But with the rapid growth in both supply and demand of such credits, it is proving much more efficient and useful to establish markets in which such credits can be traded in the same a manner as other financial instruments and commodities. This requires a supporting system of services for developing projects which absorb or reduce emissions, confirming their values on a basis that meets international standards of credibility and integrity, and creating the specific instruments in which the trading is actually conducted. No country has a greater opportunity than China to realize the immense potential for value creation offered by the establishment of emission credits and their marketing. I have already indicated the degree to which this is already happening in the United States and Europe.
Emissions trading
Of course, emissions trading is only one of the measures that can contribute to reducing emissions of greenhouse gases on a cost-effective basis. There is now much evidence that, with proper establishment and enforcement of overall emission caps, it can produce substantial reductions in emissions and in the cost of making such reductions. The best example is the actual experience in the trading of sulfur dioxide (SO2) emissions established in response to the requirements of the United States Environmental Protection Agency to reduce acid rain. At the time, there was much discussion that reducing sulfur dioxide would be too costly to the economy. However, in fact what happened was that SO2 emissions were reduced from 17.3 million tons in 1980 to 10.3 million tons in 2004, It is estimated that the cost of the U.S. acid rain program in 2010 will be 3 billion dollars to produce an annual benefit of 122 billion dollars.
Already, China's SO2 emissions are more than double those of the United States, and an effective sulphur dioxide trading program here in China would produce substantial benefits, both in reducing SO2 emissions and producing economic benefits. Last year, in the United States, in response to the greater SO2 market maturity and the need for industrial users and financial market participants to better manage their risk, the Chicago Climate Exchange, known as CCX, the pioneer of sulphur dioxide trading in the US, launched the Chicago Climate Futures Exchange, which was the first exchange to offer futures contracts in SO2 allowances in the U.S. sulphur dioxide market.
The carbon market globally, and in China, dwarfs the US sulphur dioxide example. The immense potential of the carbon market can be appreciated by the knowledge that in the United States, the potential carbon “crop” will exceed the total value of its main agricultural products corn, wheat, and soybeans. In 2005, in fact, the carbon “crop” in the European Union had already surpassed the value of these U.S. grain crops.
The Chicago Climate Exchange (CCX) was founded in 2003 by Professor Richard Sandor, who pioneered establishment of the SO2 emissions market. With over 200 multi-sector members and many other associates, it is the only carbon market in the world handling all six greenhouse gases. I must disclose my interest as Vice Chairman of the Exchange, before telling you that it is the world leader in the field, now well on the way to being the center of a global network, it is taking the lead in designing trading programs that are compatible with differing national regulatory frameworks and objectives. It founded the European Climate Exchange that now handles 80 to 90 percent of all exchange-based trading volume in the European Union Kyoto Protocol Trading System, making it the largest exchange in the European Union trading system. It co-founded the Montreal Climate Exchange with the Montreal Exchange in Canada, to design a Canada-specific system, and has established links with the Multi-Commodities Exchange in India. It is now reaching out to others that are rapidly developing throughout the world, notably China. A great deal of work and study is already underway in preparing China to become a major player in benefiting from CDM’s and emission trading. I have had the privilege of being closely associated with the impressive work of the Ministry of Science and Technology and the United Nations in its pioneering initiative with which the Chicago Climate Exchange is cooperating closely.
China is well-positioned to take the lead in Asia. Now is the time to make this move. China's carbon trading program must, of course, meet the distinctive needs and character of China, and be controlled and run by Chinese. I am pleased to say that the Chicago Climate Exchange has offered to cooperate in developing a Chinese counterpart which would be controlled by Chinese and to customize a trading solution for Chinese requirements. Such an entity would be a key center of the network of exchanges now being developed by CCX throughout the world. This is a very practical and immediate example of how China can meet its own challenges to achieve sustainability in the 21st century while taking advantage of a unique opportunity to add new dimensions to its own financial market system.
China has a long tradition of equating challenge with opportunity, and I believe that the challenge you face in opening China's markets and linking them more fully and extensively to the international financial system presents a whole new generation of opportunities for China, for which leaders and institutions must continue to prepare. The progress you have already made makes it clear that you are well-equipped to meet these unprecedented challenges and to ensure that China receives the full benefit of the opportunities they offer for your future."