Across power, industry and transport, State-Owned Enterprises emit in the aggregate over 6.2 gigatons of carbon dioxide equivalent annually, which is more than any other country except China. Credit: Bigstock.

By Philippe Benoit and Alex Clark
WASHINGTON, Sep 24 2020 (IPS)

President Xi Jinping announced on Tuesday China’s aim to become carbon neutral before 2060. Achieving this goal will require the support and engagement of China’s state-owned enterprises (SOEs), as they currently generate more than half of the country’s energy sector emissions. SOEs are major drivers of greenhouse gas emissions globally, particularly in emerging economies. 

Across power, industry and transport, these companies emit in the aggregate over 6.2 gigatons of carbon dioxide equivalent annually, which is more than any other country except China.

SOEs are also major providers of low-carbon alternatives (over half of the world’s zero-carbon utility-scale power generation capacity is state-owned).  SOEs’ major role in driving emissions means that there will be no climate success without them.

Government officials and climate stakeholders currently meeting in New York (virtually) at the United Nations and for Climate Week need to give greater attention to engaging these SOEs on climate.

In this article, we present several tools that governments can use to prompt their SOEs to take climate action. We also describe the independent capacity of these enterprises to lead on low-carbon action, as well as their ability to resist government pressure to advance the climate effort.

Finally, we discuss one of the most important hurdles to effective engagement by most SOEs: what has often been too modest climate ambition from their government shareholder.

An oft-overlooked feature of SOEs is that the same governments that signed the Paris Agreement hold direct ownership over these enterprises (particularly in large, emerging economies such as China, India, Indonesia, Mexico, Russia and Saudi Arabia).

Arguably, the most important determinant of how much an SOE engages in the low-carbon transition is the extent to which its government shareholder prioritizes climate goals. Even the most powerful SOEs respond to the preferences and directions of their country’s ultimate leadership

Ownership provides a government with several distinctive tools to “push” SOE climate action that are more direct than the legislative and regulatory instruments largely used to influence private sector behavior. A government can, as shareholder, issue directives to its SOE though the company’s board of directors.

It can also appoint and remove senior executives (both through the board and often even directly). Selecting appropriate executive leadership with the commitment and managerial capacity to implement low-carbon programs can be decisive in driving effective SOE action on climate.

Governments also provide direction to SOEs through more informal exchanges between public officials and the company’s CEO and board members.  Lastly, governments can work to incentivize low-carbon action by middle managers (frequently the critical decision-makers in larger SOEs) by directing the company to adopt climate-friendly personnel and evaluation policies.

Governments can also deploy financial and bureaucratic resources to “pull” SOEs towards low-carbon action. For example, they can direct public funding to low-carbon investments (and away from high-carbon ones). State-owned commercial and development banks are often mobilized to deliver this climate-targeted financing, typically on preferential terms designed to accelerate uptake.

Governments also catalyze low-carbon investments by providing critical complementary infrastructure, such as the construction (often by another state-owned company) of a transmission line to an SOE’s remote renewable generation site. In addition, government funding for research and development can reduce costs for low-carbon projects, making them more attractive to SOEs (as well as the private sector).  Governments have even created new specialized SOEs to deploy specific low-carbon technologies. 

Government policies which pressure markets broadly, referred to herein as “press” tools, will also influence SOEs.

These include carbon taxes and emissions trading systems (ETS), which continue to dominate the policy discourse on emissions reduction strategies.  Although the two instruments are considered among the most effective for reducing emissions,  their impact on SOEs is likely to be more muted than on private sector companies, in part because SOEs often face multiple mandates beyond financial returns and profits.

For example, power sector SOEs are often required by their government shareholders to prioritize reliable electricity supply at low cost, as well as support other economic, social and political goals, such as employment, access expansion or using specific state-owned suppliers.

These factors lessen the responsiveness of SOEs to market-based instruments that make low-carbon alternatives more attractive in financial terms. Because costs and profitability do remain important considerations for SOEs even in the face of non-financial mandates, market-based instruments can still be useful climate tools to influence their operational and investment choices (such as the national ETS being considered for China).

These instruments, however, are unlikely to result in the same degree of meaningful decarbonization by SOEs foreseen for the private sector unless they are accompanied by some of the other measures described in this article.

Of course, an SOE might also simply decide to pursue low-carbon goals to serve its own corporate objectives, even in the absence of explicit government pressure. SOEs are often major corporations with substantial assets, financial resources, commercial know-how and technical capacity, enabling them to develop and implement robust low-carbon programs.

Motivating an SOE to act on climate in furtherance of its own corporate interests can be a highly effective way to advance low-carbon company action. A powerful SOE, however, is also able to exercise economic and political clout to resist government initiatives, including low-carbon ones.

Undertaking a strategic planning exercise to identify the corporate-level benefits of low-carbon action can help motivate an SOE to pursue climate goals (just as these benefits are increasingly influencing private sector companies).

Arguably, the most important determinant of how much an SOE engages in the low-carbon transition is the extent to which its government shareholder prioritizes climate goals. Even the most powerful SOEs respond to the preferences and directions of their country’s ultimate leadership.

To date, unfortunately, governments have exhibited only a modest commitment to these goals, especially relative to the perceived short-term economic and political gains generated by incumbent high-carbon assets.

The result has been tepid policies, programs and overall government signals on climate that have failed to produce the low-carbon actions needed from SOEs (and the private sector) to meet the temperature goals of the Paris Agreement.

Although there is some room for optimism given recent governmental pronouncements targeting carbon neutrality, a deeper understanding and appreciation among national stakeholders of how the low-carbon transition will best serve economic growth, poverty alleviation and social improvement objectives is needed to strengthen domestic resolve on climate and the government’s interest in using SOEs to this end.

For deep global emissions reductions to be achievable, SOEs must play a leading role in China and other countries where these enterprises are major actors in energy production and consumption.

Government ownership presents an under-explored avenue to engage these companies in advancing the climate effort.  A combination of “push”, “pull” and “press” measures will be needed.  In addition, a self-motivated SOE will further help to advance climate action.

As we move on from Climate Week into the lead-up to COP26 next year, governments and the climate community need to focus on developing initiatives that promote SOE engagement in low-carbon action.

Philippe Benoit is Adjunct Senior Research Scholar for Columbia University’s Center on Global Energy Policy.  He was previously the Head of the Energy Environment Division at the International Energy Agency and Energy Sector Manager for Latin America at the World Bank.

Alex Clark is a Ph.D. Researcher at the Smith School of Enterprise and the Environment at the University of Oxford, and former director of the GeoAsset Project under the Oxford Sustainable Finance Programme.

The views expressed are the authors’.

When it comes to climate, state-owned enterprises are and will remain major actors in energy and other sectors that are central to the low-carbon effort. Credit: IPS.

By Philippe Benoit
WASHINGTON, Sep 16 2020 (IPS)

Later this month, government officials and climate stakeholders will once again converge on New York City (this time virtually) for Climate Week and the United Nations meetings.  And while there will be much discussion about the important role that actors such as private businesses, civil society and cities will need to play in the climate change effort, there will once again be relatively little discussion about one key cohort: government-owned companies. 

Although these companies are not prominent in many of the OECD countries that to date have dominated the climate change dialogue, they are major drivers of greenhouse gas emissions, particularly in emerging economies and other developing countries. To meet the global warming goals of the Paris Agreement, these government-owned companies must receive greater attention in climate discussions.

Globally, government-owned companies (also referred to as state-owned enterprises or “SOEs”) annually emit over 6.2 gigatons of carbon dioxide-equivalent in energy sector greenhouse gases.  This is more than all the emissions of the United States, or of the combined total of the  European Union and Japan.  In China, the world’s highest emitting country, its state companies are responsible for over half of national energy emissions.

The importance of state-owned enterprises to the climate effort is not only about emissions, it is also about the low-carbon alternatives they provide.  Governments own over half of the world’s zero-carbon utility-scale electricity generation

SOEs are often controversial, generally viewed as inefficient by the development community that has sought to reform or even eliminate them — but when it comes to climate, these companies are and will remain major actors in energy and other sectors that are central to the low-carbon effort.

SOEs are important players in the power sector that is responsible for 40% of global energy emissions.  These companies are particularly weighty in many of the developing world’s power systems, notably in coal generation  that is key to reducing emissions.

Whether it is the larger emerging economies of Brazil, China, India, Indonesia, Mexico or South Africa or many smaller poorer developing companies (or even some advanced economies, such as France), government-owned companies are the lead players in electricity.

Oil and gas companies generate 15% of total energy GHG emissions through their own production and other operations, and provide the petroleum products burnt by others.   While many of the best-known companies are private sector ones, such as ExxonMobil, Shell and BP, most of the world’s oil reserves are owned by national oil companies and their governments,  and the world’s most profitable company in 2018 was state-owned Saudi Aramco.

Governments also own some of the largest coal mining companies in the world.  These oil, gas and coal producers present a particular challenge for the low-carbon transition because their corporate purpose is intertwined with fossil fuel production.

SOEs are also very present in heavy industry (such as steel, cement and chemicals) which uses large amounts of fossil fuels and produces correspondingly high amounts of emissions.  Many of the world’s urban transit systems are also major consumers of energy: from Latin America to Asia, and even in New York City and other major U.S. cities, the buses and other transport that people ride and which produce emissions are owned by government entities (often cities and regional organizations).

The importance of SOEs to the climate effort is not only about emissions, it is also about the low-carbon alternatives they provide.  Governments own over half of the world’s zero-carbon utility-scale electricity generation.

Similarly, state-owned cement and steel companies in India and elsewhere are developing energy efficiency and other low-carbon technologies to reduce their emissions, and many urban transit systems are reducing their carbon footprints by acquiring electric buses and making energy efficiency investments.

Moreover, the state plays a major role in funding both high- and low-carbon projects.  While much media attention is given to announcements by leading private international banks, state-owned banks are amongst the world’s largest financial institutions.

In many emerging economies and developing countries throughout Asia, Latin America and Africa, state-owned development and commercial banks are major sources of funding for energy projects, including smaller-scale low-carbon investments by the private sector.

One specific and often overlooked class of state-owned banks that plays an important role in the energy transition is multilateral financial institutions, such as the World Bank, the Asian Development Bank and the Inter-American Development Bank.  These organizations are not generally viewed as SOEs, but they are — it is merely that they are owned by several national governments simultaneously.

And, finally, SOEs play a critical role in adaptation and resilience.  Many of the world’s electricity transmission and distribution systems are owned and operated by government entities.  State Grid Corporation of China is the largest with over 1 billion customers.

Even as countries have moved to liberalize their power markets to promote private sector participation in generation, the electricity grid often remains under state control (e.g., in the form of an independent system operator).

The government also plays a central ownership role in many natural gas and other energy networks.  When hurricanes hit or rivers flood roads and towns or high winds knock down transmission lines, it is often up to government entities to get the energy system running again.  As the prospect for extreme weather events increases, SOEs will face a growing challenge to deliver resilient energy systems.

From emissions to low-carbon alternatives, from power to oil and gas and coal, from heavy industry to transport, from financing to resilience, state-owned enterprises are critical actors in the climate change effort.  They are also in many ways a class unto themselves, albeit a diverse one.

Their government ownership distinguishes them from the private sector actors that have generally been targeted in the conceptualization of climate policy tools (such as carbon taxes and other liberalized market-oriented instruments).  Given the importance of state-owned enterprises in driving emissions, more thought and attention need to be paid to developing SOE-tailored tools to effectively engage them in climate action.

Philippe Benoit is Managing Director for Global Infrastructure Advisory Services 2050 and has written extensively on the issue of state-owned enterprises and climate.  He was previously the Head of the Energy Environment Division at the International Energy Agency and Energy Sector Manager for Latin America at the World Bank.