FILE PHOTO: Shunchang Forest Ecological Operation Center

Since the 18th National Congress of the Communist Party of China, under the guidance of Xi Jinping thought on ecological civilization, the Party and society at large have practiced the belief that “lucid waters and lush mountains are invaluable assets.” The theory requires us to realize the value of ecological products, to explore ways to “turn green mountains into gold mountains.” 

As early as April 2016, the General Office of the State Council issued Opinions on Improving the Compensation Mechanism for Ecological Protection, highlighting the importance of “realizing the value of ecological products.” In April 2018, Xi re-emphasized its significance at a seminar on boosting the development of the Yangtze Economic Belt, and proposed the establishment of ecological product pilot zones in qualifying regions. In April 2021, Opinions of the General Office of the CPC Central Committee and the General Office of the State Council on Establishing and Improving the Mechanism for Realizing the Value of Ecological Products was issued, providing top-tier design specifications for the mechanism. 

Pilot bank 

Fujian province is home to the first national pilot zone for ecological conservation and is actively exploring mechanisms for realizing the value of ecological products. This article will use the Shunchang Forest Ecological Operation Center in Shunchang County, Nanping City, Fujian as an example. Making use of its state forest reserve, the county established China’s first ecological bank in December 2018 and has been building an innovation base practicing the “Two Mountains Theory.”

The Forest Ecological Bank is a platform for resource development and operations management inspired by the commercial banking model. It involves the following steps: integrating scattered forest resources, placing them under professional operation by state forest reserves, and ensuring that forestry workers receive long-term, sustainable profits while maximizing both economic and ecological benefits. As of the end of 2021, Shunchang Forest Ecological Operation Center had incorporated 815,000 mu (about 5.4 million square meters) into the bank. 2,510 forestry worker households in the county benefited from the bank, as their aggregate income reached 594 million yuan. The bank was selected as one of the ten model cases of “realizing the value of ecological products” by the Ministry of Natural Resources in June 2020. In November 2021, Shunchang County’s green innovation projects “forest ecological bank” and “carbon sink plus” won the Paulson Prize for Sustainability under the category of Nature Stewardship.

The bank is operated based on current rural labor force conditions and people’s willingness to work, and has utilized innovative practices such as buy-outs and joint stock ownership of forest land resources. The models facilitate cooperative management between the bank, forestry workers, and village collectives. 

However, as an innovative tool in green finance, the Forest Ecological Bank was challenged by inadequate funding during its early development. Currently, financial subsidies represent the majority of the Forest Ecological Bank’s funding. Buying forest land and sharing the bonus to forestry workers requires large sums of capital. In particular, forestry resources are rarely realized and invested directly into the fund, making cash flow shortages more prominent. Therefore, the variety of funding sources and capital reserves for an ecological bank directly determines whether or not the bank can sustain sound operation. 

Financing methods

Based on foreign and domestic practices, two methods can be applied to ensure ecological banks remain self-sufficient, while expanding sources of funding and easing financial strain. The first is to marketize the ecological compensation mechanism, and the second is to innovate financial products. Presently, the ecological value of forestry products has not been fully recognized by the market, who remain reluctant to pay the bill. Therefore, a completely marketized ecological compensation mechanism remains the more appropriate option. There are two types of ecological compensation systems: benefit-promoting eco-compensation and loss-restraining eco-compensation. 

Benefit-promoting eco-compensation can be applied through forestry carbon trading, through which forest ecological banks can access the marketized ecological compensation mechanism. This helps channel capital funds into the ecological bank, providing additional funding sources to ensure stable cash flow. It can also help main market players see the ecological value of forestry products.

As early as in 2016, the state-owned forestry center in Shunchang County became a pilot project. In its initial period of operation, 155,000 tons of carbon emission reduction had been completely sold on the Haixia Equity Exchange. This represented the first batch the forestry carbon sink projects in Fujian Province that were permitted to go online. Online trading worth 69,000 tons of bamboo forest has also been released. In 2021, the pilot completed the international forestry carbon sink project under the Verified Carbon Standard, which certifies that Nanping City’s forestry carbon exchange has entered the international carbon market. In addition, the pilot project initiated the “one-yuan carbon sink” and “charity carbon sink” programs to further explore the “carbon sink plus” model. “Online tree planting,” carbon neutrality by enterprises, and public welfare actions were also initiated to encourage businesses and the public to contribute to forest ecologies. The funds raised will be used for rural rejuvenation, value realization of ecological products, and promoting Shunchang County to go zero-carbon. 

According to the Working Guidance for Carbon Dioxide Peaking and Carbon Neutrality in Full and Faithful Implementation of the New Development Philosophy, published by the General Office of the CPC Central Committee and the General Office of the State Council, it is necessary to enhance research in integrating forest carbon sink trading into the national carbon emission permit trading market.

To develop a loss-limiting eco-compensation system, we can look to the US’s Wetland Mitigation Bank for reference. Based on the Clean Water Act of 1972, passed by the American federal government, the US government proposed the goal of “zero discharge” of pollutants into the nation’s waters, and stipulated that no construction activity should cause any reduction of wetlands or compromise their functions. Under strict government control, developers were required to purchase carbon credits to compensate for wetlands impacted by their projects. By facilitating strict orderly development of wetland resources, the Act ensured the preservation of ecological functions of wetlands while allowing private investors and participating industries to prosper. This has proven to be an effective model for realizing the value of ecological products. 

Based on this model, a set of mechanisms can be designed to attract more investors across society, and to better coordinate forestry development and protection of ecological resources, while easing the financial burden on forest ecological banks. For example, developers should be required to compensate for their ecological impact by purchasing afforestation services or forestry carbon sinks provided by the banks. 

Innovation

The innovation of financial products can be divided into the innovation of existing products and the creation of new products. Existing products mainly refers to mortgage loans, a widely applied method used by forest ecological banks. Drawing from the experience of Zixi Rural Commercial Bank, mortgage loans are divided into many types to introduce funds to related actors in a more targeted manner. Different potential risks are also regulated for different financial products based on their types. In accordance with the features of the local bamboo industry, the eco-bank came up with loans for forestry households and enterprises upstream, receivable account loans for the midstream, and transport loans and order loans downstream. Based on different funding demands in each section of the industrial chain, an ecological bank can identify the current industrial landscape, make adjustments, and exercise control accordingly by issuing mortgages and loans. 

Innovation in mortgage and loan products can give ecological banks a more comprehensive understanding of conditions within an industry. Furthermore, more mortgage and loan products also mean less operational risks in forest-related industries. 

The above mentioned “new products” include insurance, financial leases, and bonds, among other green financial products or services. The bank in Shunchang sees insurance as an important component of the forestry financial risk prevention and control mechanism, but further research with respect to the specific classifications of insurance needs to be done. For instance, the bank can consider working with insurance institutions to issue products that cover forestry resources within the carbon sink project’s life cycle. This can help prevent the capital risk brought by forest fires, pests, wind damage, and freezing. 

It is also necessary to ensure that financial leases support the industry’s green technologies, so that industrial equipment can be upgraded, and technological inputs can ultimately generate growth. Forestry bonds can be issued by green enterprises within the industry and underwritten by forestry ecological banks. In this way, we can channel social funds into the green industry and help turn green mountains into “gold mountains.” By developing the green industry, we can also reduce the capital risks which ecological banks face. Of course, the successful innovation of financial products depends on an unblocked, transparent channel for public participation.

Realization of the value of ecological products provides strong momentum for growing the green economy, and producing quality ecological products will become the new driver of national growth. Ecological banks, like Shunchang Forest Ecological Operation Center, have made headway in exploring paths to realize some of the ecological value of natural resources. Their efforts can help unblock three sectors in ecological product trading: gathering resources, improving quality and efficiency of capital, and effectively channeling industrial capital. 

However, when put into practice, these banks still rely heavily on government subsidies, and may face financial issues that will restrict their sound development. It is advisable to build a complete financing mechanism for ecological banks through institutional design and a highly marketized eco-compensation mechanism. It is also important to pay attention to innovation in new financial products, while engaging society and the business community under the government’s guidance. In this way, we can widen channels to convert natural resources into capital, in a bid to enhance eco-banks’ ability to fuel themselves in a more sustainable way, and ultimately help build a beautiful China. 

Zhu Xiaoqin is the director at the Center for Environmental and Energy Law at Xiamen University.

Edited by WENG RONG