Tackling Twin Crises: The Paulson Institute’s Work Bridges US-China Divide

Former Treasury Secretary Henry M. Paulson, Jr. founded the Paulson Institute in 2011 with the goal of sparking creativity and innovation to advance sustainable growth and a cleaner environment around the world. In the years since, the Institute has placed particular focus on the US-China relationship. Jerry Yu, the Paulson Institute’s Chief China Representative and Managing Director explains Paulson’s vision, remarking, “He focused on the US-China relationship out of a belief that these global challenges can only be effectively managed if the US and China are working in complementary ways.” Today, the Institute’s work has become more vital than ever, as it endeavors to bridge an ever-widening gap between the US and China. Yu accepts the inherent challenges of this mission, “The US-China relationship is in a very different place to ten years ago, and the reality is that US-China relations will be difficult and competitive in almost every aspect for the foreseeable future.” However, even with this stark concession, Yu says the Institute remains committed to focusing on areas of mutual interest, “The fact is that without some level of cooperation between our two countries, the most pressing challenges facing the globe – pandemics, sustainable economic growth, climate change, biodiversity loss – will be impossible to meet.” He continues, “Our work on issues of consequence of US-China relations and beyond will have lasting significance for the health and prosperity of generations to come.”

As strains in the US-China relationship show no sign of easing, one of the few areas identified as mutually beneficial to both nations is sustainability. Yu explains that while this is a large area, they are focused on actionable steps, “All grand plans must start with concrete steps, and this is why it’s important to put the ‘do’ in ‘think and do’ tank.”

Twin Crises

The Paulson Institute started its China operations in 2013. Yu credits an “elite group of high-caliber and dedicated professionals from business, government, nature conservation, and policy” as the driving force behind a successful start. Yu hopes that the Institute’s work demonstrates how cooperation can benefit both American and Chinese citizens.

In China, much of the Institute’s work has been focused on twin environmental crises: the biodiversity crisis and climate change. In a recent op-ed in the New York Times, Paulson Institute founder Henry Paulson summarized these two pressing issues in blunt terms, “The first is climate change. Its causes and potentially catastrophic consequences are well known. The second crisis has received much less attention and is less understood but still requires urgent attention by global policymakers. It is the collapse of biodiversity, the sum of all things living on the planet.”

Yu echoes Paulson’s sentiments, “Take the global decline of biodiversity,” he says, “given our dependence on nature for the fundamental basics of life – clean air to breathe, clean water to drink, and a habitable climate – it poses enormous risks to the prosperity and well-being of both countries [the US and China] and indeed the world.” To reduce the local and global causes and impacts of biodiversity loss, Yu explains that their Conservation Team works across three main priority areas in China: coastal wetlands, national parks, and responsible trade and investment. He continues, “Our activities range from site-based pilots to demonstrate innovative ways to value and conserve nature, to capacity building, national-level policy advocacy, and building a common understanding at the global level.”

On the subject of climate change, Yu says the Institute’s Green Finance Center plays a key role, “Our Green Finance Center has facilitated a series of conversations about the evolving role of carbon pricing and worked with financial markets and international financial institutions to champion approaches to finance low-carbon growth.” He points to the Institute’s Mayors Exchange Program, which aims to enhance capacity building in the fields of sustainable urban development and governance with mayors and senior officials in China and the US.

The Paulson Prize

As part of its work tackling the twin environmental crises the Institute works to shines a light on transformative climate and nature solutions through the Paulson Prize for Sustainability. The Paulson Prize was launched in 2013, just one year after the Institute started its China operations, and since 2017, has been developed in partnership with Tsinghua University. Since its inception, the Paulson Prize has recognized projects in China that provide innovative, scalable, and market-based solutions that offer the most sustainable best practices in China and the rest of the world.

With the conclusion of the first phase of the UN Convention on Biodiversity (COP 15) last October and the recent meeting of the UN Convention on Climate Change (COP 26), Yu says it’s clear the world is taking steps towards building a sustainable future, “It is clear that for us to succeed, millions of innovations will be needed. That is why the Paulson Prize is more important than ever, and why we set up the ‘Nature Stewardship’ and ‘Green Innovation’ categories to promote innovative and transformative solutions that address the dual crises of biodiversity loss and climate change.” Yu is referring to the two categories of Paulson Prizes; The Nature Stewardship category addresses the biodiversity crisis, recognizing and encouraging solutions that address the risks of biodiversity loss by more appropriately valuing the natural environment, in the same way as we value human, built and financial capital, and to inspire people to live in harmony with nature. The Green Innovation category recognizes innovations in climate change, shining a light on solutions that improve the built environment to meet the significant challenges of urbanization and climate change, building a net zero future of sustainability and green growth.

Over the past eight years, the Paulson Institute has received hundreds of applications from across China for the Paulson Prize, including multi-national companies, Chinese enterprise, and NGOs. Yu has only the highest praise for the recipients of the Prize, saying, “The winners have been truly remarkable.” He continues, “They represent some of the most creative thinking and breakthroughs to address the global sustainability crisis, widely ranging from waste to energy solutions, recycling and reuse of power batteries in the emerging EV market, improving the energy efficiency of building cooling systems and greening data centers, to wetland protection and restoration, and innovative ecological compensation mechanisms.”

Yu cites the 2021 winner in the Green Innovation category, Nanjing TICA Climate Solutions’ “Global Cooling”: HVAC System and Investment Patten to Boost Energy Efficiency. This scalable market solution took home the top prize as it addressed one of the most critical climate challenges that the world is facing today – cooling. Yu gives context to this crucial issue, “The statistics behind building cooling are astonishing and concerning – take China for example, 95% of its buildings are high-energy consumption buildings and half of that energy consumption comes from the cooling system. According to a joint report of UNEP and IEA, low cooling efficiency may lead to the emission of 460 gigatons of carbon dioxide equivalent (GtCO2e) over the next four decades.” The winning project addressed two of the largest challenges the cooling industry faces: low energy efficiency and long investment payback time. Yu says this project stood out, “for its high-efficiency HVAC solution that achieves an improvement in energy efficiency by 80% compared with the Chinese average, and an improvement of 60% compared with that of the US, and market-leading efforts to promote the use of Energy Management Contracts to provide scalable solutions to the industry.” Considering the urgent and large-scale global demand for high-efficiency HVAC systems, Yu is confident the technology will have wide-reaching implications, predicting, “We believe that the replication of the TICA model will have a positive impact on climate change mitigation and the achievement of the carbon peak and carbon neutrality targets.” Projects like this one, that offer substantial, impactful and scalable solutions are what the Institute looks for in their selection process. The 2022 Paulson Prize is now open for submissions until June 30, 2022. (For more information about the Prize visit the Paulson Institute’s website.)

Carbon Currency

With China’s goal to achieve carbon neutrality by 2060 nearing, the pressure to cut emissions will only continue mount. As part of those efforts, in July 2021, China finally launched their national carbon trading scheme. China’s carbon exchange, which is now the largest in the world, provides companies with financial incentives to reduce their emissions by allotting credits to those who pollute below their allowances, and conversely, penalizes companies who go beyond their allotted limit by requiring them to purchase additional credits. The carbon exchange represents a huge step towards realizing China’s climate pledges, and Yu welcomes the progress, “China is going to be at the heart of the climate business boom.” He predicts, “The launch of China’s carbon exchange will create new opportunities. When it launched with just one industry (power), it covered around 45% of China’s carbon emissions and became the largest in the world. It also brought 14% of global emissions under trading. When the seven other polluting industries (including construction, transportation, and chemicals) are added to the exchange, it will account for almost 40% of global emissions.”

Although China’ carbon exchange is still in its formative period, Yu is confident the appeal will be too great for companies to pass up. He says, “This market will draw thousands of global companies seeking to buy carbon offsets to help them meet their climate commitments.” And the result? Yu foresees China emerging as a leader in the carbon trading business, but more importantly, he says “Carbon could become a new currency, with China creating the terms, the standards, and the pricing.”

Business Benefits

The extreme risks climate change and biodiversity loss pose to the global economy, public health, and national security are well documented. And reflecting the Institute’s fundamental mission to both “think and do” Yu likewise urges businesses to take action. He observes, “The simple aim must be for all companies to ensure that their strategies and operations are consistent with the goals of the Paris Agreement on climate change and the forthcoming Global Biodiversity Framework, due to be agreed on in Kunming in 2022. This will require systemic change.”

Green financing is one key area where business can participate. According to the UN, the world will need to mobilize some $90 trillion USD over the next 15 years to stave off the worst effects of climate change. As the Paulson Institute’s 2020 report “Financing Nature: Closing the Biodiversity Financing Gap” outlined, that global financing gap is expected to exceed more than $700 billion USD annually over the next ten years. Yu says governments cannot fill that gap alone, “The vast majority of the funding must come from the private sector,” but, he clarifies, “It is clear that this will only happen if governments create the right framework of incentives to ensure investment in tackling climate change and biodiversity loss is profitable.” China’s carbon neutrality pledge has sent a clear signal to the business community that the nation is committed to a sustainable future. Yu references a recent study by Goldman Sachs which estimates a $16 trillion USD opportunity in environmental goods and services in the Chinese market. With China doubling down on sustainability, Yu says now is the time to act, “For the companies that do not want to get left behind, they will need to make the investments necessary to put them on a more sustainable path. Companies that are providing environmental goods and services, for example, are poised to benefit from this transition. So, too, will tech and financial institutions that are making climate-focused investments.”

Yu stipulates that in order to achieve net-zero greenhouse gas emissions by 2050 more will need to be done, “It’s not just going to involve, renewables and clean energy, nor simply for business to set up science-based targets in their strategy.” What the Institute desires, is significant changes in industrial processes. Yu gives an example, “How we make things and manufacturing things like cement and steel. This is about internalizing the ‘externalities’ of environmental impacts that have, for too long, been ignored.” Indeed, Yu says, “Huge opportunities lie ahead for businesses that strive for breakthroughs in new thinking and technological innovations that help us to value nature and decarbonize our economies.”