China Lays Out Ambitious Vault To Net-Zero Carbon Economy

CHINA’S PATH TO ‘peak carbon’ by 2030 and becoming a net-zero carbon economy by 2060 is dubbed 1+N — one overarching blueprint and n number of implementing policies. On October 24, we got the ‘1’ in the form of a guidance document jointly released by the Party’s Central Committee and the State Council.

All future policy decisions on economic planning, macroeconomic adjustment and industrial policies will have to be compatible with the blueprint, which contains objectives and timelines for broad areas of the economy, including heavy industry, energy, transport, construction and finance.

The headline objective is raising non-fossil fuels share of energy consumption to at least 80% by 2060, a fivefold increase from 2020’s level, with a timeline for non-fossil fuels to hit a 20% share by 2025 and 25% by 2030. Both interim targets have been previously announced, but not the 2060 one.

Even before the current electricity shortages, coal accounted for approaching 60% of energy consumption, so scaling that back will be a dramatic change, and one being undertaken slowly.

Over the past five years, non-fossil fuels have been increasing their share of energy consumption by barely half a percentage point a year. That will need to be accelerated to triple that rate if the goal of creating a ‘green, low-carbon and circular economic system’ is to be met.

That is not only a question of increasing non-fossil fuel energy generation. It also means structural changes to industry and consumption to make the economy less energy-intensive. To have any hope of achieving its goals, Beijing will have to oversee the world’s largest reduction in carbon intensity.

As well as the coal, oil, and gas industries, chemical and petrochemical producers and steel makers can expect close attention from authorities regarding their energy efficiency.

The risks to economic growth inherent in a full-blown green transition are recognised. He Lifeng, head of the National Development and Reform Commission (NDRC), the top economic planning agency, says carbon reduction must be balanced with ensuring the security of industrial output and supply chains and, in what appears to be a nod to recent power outages, disruption to ‘people’s everyday lives’.

A leading group was established under the NDRC in May to guide and coordinate the transition. Yet, much of the implementation will depend on provincial and municipal authorities, and provinces will get some latitude over timing depending on the industrial structures.

However, local officials are on notice that their performance will be judged on their success in meeting their carbon reduction targets. Those who fall short can expect the same criticisms that came the way of officials who failed to meet economic growth targets when they were the benchmark. Officials will, no doubt, get as creative over emissions reductions accounting as they were with growth.

The guidance promises financial carrots as well as administrative sticks. Beijing is considering creating a national fund to promote the transition to a low carbon economy. That would likely support the development of carbon sinks, carbon capture and storage, and other carbon removal mechanisms.

An expansion of the national carbon trading market is all but inevitable. Supportive central banking (e.g., incorporating green credit into macroprudential assessment) and development of the green finance sector are also mentioned in the guidance.

So, too, is the encouragement of private investment in low-carbon industries. Banks and other financial institutions will be guided to provide long-term, low-cost funds for green and low-carbon projects. Policy banks will play a core role in underpinning long-term stable financing to support the green transition, which will not fail for lack of a plan.

This Bystander expects further details to emerge during the COP26 climate summit in Glasgow that starts at the end of this week.

Power Cuts Highlight China’s Decarbonisation Challenge

REPEATED POWER BLACKOUTS are a sign of misfiring economic management that does not reflect well on governments. Electricity shortages have hit many regions of China over the past month, affecting manufacturing, traffic and street lighting, and homes, often without warning. Sixteen out of 31 provinces have begun rationing electricity, and the northeast faces the prospect of power cuts running through the winter.

The power shortages are the consequence of a combination of contradictory policies: moves to improve energy efficiency and cut consumption in support of carbon reduction goals, and fitful reform of the largely coal-fired power generation sector where long-standing subsidies and price controls cannot withstand the rise in global coal prices, leaving power plants short on fuel.

Provinces’ implementation of obligatory emission-reduction targets imposed on them by central government has been haphazard, varying from draconian to lax. In addition, the 3% reduction target for energy intensity for 2021 has also got ahead of the planning process.

The 14th five-year plan (2021-25) mandates targets for improving energy intensity (energy consumption per unit of GDP) and reducing CO2 emissions per unit of GDP. There is also a binding minimum target for the domestic energy supply from all sources of 4.6 billion tonnes of standard coal equivalent (versus 4.86 billion in 2019), but no caps on carbon emissions and coal consumption, and only an aspirational goal to increase the share of non-fossil-fuels in total energy consumption.

The 14th Five-Year Plan for Energy, likely to be published around or after the COP26 summit in Scotland in November, will provide provincial and municipal governments with a more detailed road map. However, that will cover the years through to 2025 and not show the full path to the 2060 net carbon neutrality target date. However, until they have that road map, Chinese and foreign firms operating in China will delay drawing up the emissions reduction strategies that are likely to be required.

The current energy intensity target has also run headlong into China’s infrastructure-investment pandemic stimulus and export- and industry-driven recovery. Factories have put filling orders now, with the consequent surge in demand for power, ahead of improving their energy efficiency.

Last year, primary energy consumption rose 2.1%, coal consumption 0.6% and carbon emissions 0.3%, whereas energy consumption and emissions declined in almost every other economy. The trends have accelerated into 2021.

Beijing is now having to arrange emergency coal supplies for fuel-short provinces and marshall the distribution grid for inter-provincial power-sharing.

The power situation illustrates the costs Beijing will have to shoulder politically and economically if President Xi Jinping’s decarbonisation goals are to be met, and more generally in structurally changing the economy for the next phase of economic development.

Achieving both will mean slower growth, which will have political as well as economic management dimensions. All but the wealthiest provinces are still industrialising, reliant on energy-intensive infrastructure and industries for growth and jobs, and remain fossil-fuel dependent. Xi has also set a goal of doubling the economy over the next quarter-century, implying 4% annual growth.

Yet even with modest growth rates reducing energy demand, technological advances in energy efficiency and the fledgling national carbon trading market taking wing, it will still require rigorous enforcement of central government policies to change the country’s energy mix to lessen its dependence on fossil fuels. As the efforts to impose energy intensity standards are now showing, provincial and local officials will readily foot drag or worse in implementing Beijing’s policies when it is in their interests to do so.

As with many aspects of rebalancing, the tight networking of local officials and local industries provides inherent resistance to policy direction from the centre. This is exacerbated by many of the major players in energy, including the oil companies, major power generators, the two grid companies and industrial consumers such as steel and cement manufacturers, are state-owned enterprises with size and political influence, especially at the local level.

China is far from alone in having to deal with the conflicting tensions between climate mitigation measures and jobs and economic growth. Beijing has prioritised the former of late, but continuing to do will require sufficient political will at high enough levels of the leadership. That will continue to exist until it does not because the political calculations have changed.

Carbon Trading In China Is A Slow Burn

CHINA, THE WORLD’S biggest polluter, is taking the slow road to market-based initiatives to tackle climate change.

As far back as June 2011, Wang Shu of the National Development Reform Commission (NRDC)’s Climate Change office said, “The initial plan is to establish carbon emissions trading schemes in some pilot regions, and try to establish a unified national system in 2015.”  By 2015, the deadline for a national carbon market had been pushed back to 2017, though pilot markets had started running in seven cities from 2013.

On December 19, the NRDC finally announced a nationwide carbon emission trading system. That sort of met the delayed deadline. But only sort of.  It will cover only the power generation industry — such as the coal-fired power-generation plant in Shuozhou seen above — and not the total of eight heavy industries originally proposed.

Also, implementation details are still to be worked out. The start of trading is probably at least a year away.

Nonetheless, the announcement marks a milestone on the way to establishing a what will be by some distance the world’s largest national carbon market. With more than 1,700 power-generating firms with aggregate carbon-dioxide emissions of 3.3 billion tonnes — about one-third of China’s greenhouse gas emission — the new market will surpass the EU’s Emissions Trading System (EU-ETS) in size to become the world’s largest.

By comparison, the seven pilot markets traded emission quotas covering 200 million tonnes of carbon dioxide (with a traded value of 4.6 billion yuan, or $700 million).

Both the EU and China’s are cap-and-trade markets. In these, governments set a cap on allowable emissions and then issue companies with emissions credits adding up to that cap. The market incentive is for companies to cut their emissions so they can sell unused allocations to corporate polluters who are exceeding their share of the cap; and for the heaviest polluters to reduce their emissions to cut their costs. In a perfect world, carbon pricing drives innovation in low-carbon technologies and promotes a shift to a clean energy economy.

Environmental economists have a rule of thumb that a price of at least $35 for a tonne of carbon is needed to make companies change their behaviour. In the EU-ETS, carbon is trading at around $7 a tonne and has done for several years.

That is likely to be the initial price when China’s national market starts. The challenge will be to steer the market, so it gets the price to above $35 a tonne.

Plenty of details still have to be worked out.  National systems for reporting data, registration and trading will have to be set up. Once trading starts, there is also likely to be a phase of free trading so companies can get used to market. That could last as long as a year.

Only then will the market be able to be expanded beyond electricity generators. There are some 7,000 companies in industries from cement making to paper production that are likely eventually to be brought under the carbon market regime.

A successful cap-and-trade scheme relies on a strict but feasible cap that decreases emissions over time. China at least has a starting point in that regard. In its voluntary targets submitted to the UN’s climate talks in Paris in 2015, Beijing said it aimed to cut carbon dioxide emissions per unit of GDP by 60-65% from the 2005’s level by 2030, the year in which it is expected to hit peak emissions.

China To Trial Carbon Trading Market For Three To Five Years

China plans to run its pilot carbon trading market for three to five years before extending it nationally. That sliver of information comes from Su Wei, the government’s chief climate negotiator, speaking at the international climate talks in Durban, South Africa to devise a successor to the Kyoto accord. As we noted ahead of those talks, two provinces, Guangdong and Hubei, and five cities, Shenzhen, Tianjin, Beijing, Chongqing and Shanghai, will comprise the initial market, which is likely to start trading in 2013. But details still remain nearly as sketchy as they were in Beijing’s recent white paper on climate change.

Meanwhile, at the same meeting, officials have indicated that Beijing could set absolute caps on its carbon emissions by as soon as 2020. This would be a significant shift from China’s position that emission reduction targets should be set in terms of energy intensity (the amount of energy used to create a unit of GDP).  There is a danger of reading too much into conference comments this early, but they could imply that Beijing is preparing to take the initiative in breaking the deadlock with the U.S. over which country moves first in cutting fossil fuel emissions, and in making an early play for the capital and technology that will be needed for developing nations to develop low-carbon economies.

Shenzhen Joins Pilot For China’s Carbon Trading Market

Shenzhen has been added to the list of provinces and municipalities that will pilot China’s proposed carbon trading market. That takes the initial set to seven. The participation of Beijing, Chongqing, Shanghai, Tianjin, Hubei and Guangdong has been known since the summer. An official with the National Development and Reform Commission confirmed the go-ahead with the pilot scheme to Xinhua, but otherwise details remain sketchy. Central government has still to set overall carbon discharge reduction targets, which are a prerequisite for establishing the national carbon trading market that has been pencilled in for a 2015 launch.

By then, China’s goal is to have cut carbon dioxide emissions per unit of GDP by 17% from 2010 levels, according to a white paper on climate change issued this week ahead of the UN’s forthcoming climate change talks in Durban in South Africa. A reduction of that magnitude will be a tough ask given the pace of the economy’s growth. The pilot carbon-trading scheme is expected to start in 2013.

A Green China Is A Nuclear China

The one-day U.N. summit in New York on climate change produced more hot air than substantive progress towards a meaningful deal at December’s Copenhagen summit. President Hu Jintao made a lot of the right noises to be heard as internationally cooperative but his offer to curb carbon emissions by a “notable” but unspecified margin by 2020 from 2005’s levels, while the first time China has said it will cut emissions, is an empty promise in as much as the expected rapid growth of the economy will mean that an overall reduction in emissions is unlikely even if China is able to meet its promise to cut carbon dioxide emissions per unit of GDP. In practice, the main thrust of this will mean that China will increase its reliance on nuclear power, expected to account for 15% of energy consumption by 2020.

Tianjin Takes A Lead In Carbon Cap and Trade

Tianjin looks set to become the first of China’s designated carbon trading exchanges to be up and running in an organized way, according to a Financial Times report.  The Tianjin Climate Exchange, a joint venture between the Chicago Climate Exchange, PetroChina and Tianjin’s municipal government, expects to start trading within the year.

The China Beijing Environmental Exchange and the Shanghai Environment Energy Exchange are its likely rivals. China doesn’t yet have a regulatory framework for carbon exchanges or even standardized futures contracts. (Beijing’s carbon exchange is partnering with Blue Next, a spot market; while Shanghai is experimenting with credits for local companies.) Nor does China have a national cap on emissions (a Copenhagen climate conference surprise to come?), so participation in any market would have to be voluntary, as it is for the Chicago Climate Exchange.

Cap and trade legislation may be out of favor in the U.S. (or at least politically stalled in a Washington that seems unable to get its head out of its own political sands), but China has a strong incentive to get carbon markets established. It is the world’s largest producer of carbon emissions and if it doesn’t establish its carbon markets quickly it may lose the ability to control global pricing.

Poor Rich Country

There are lies, damn lies and statistics, as the old saw has it. Then there is the World Bank’s shrinking of its estimate of the size of China’s economy.

The new number shows gross domestic product at $5.3 trillion in 2005 or 40% lower than previously estimated. It is based on purchasing power, and is intended to provide much needed up-to-date comparative growth data between economies. It still shows China as the second biggest economy after the U.S. (GP of $12 trillion) but with a GDP per capita at $4,091 of only 9.8% of America’s. China’s share of world GDP falls to 10% compared to 15% under the traditional measure, which does currency conversions at prevailing market rates.

The Bank’s president Robert Zoellick, who has been in China this week, says that the bank is drawing no policy conclusions from the revisions. But they could effect everything from China’s voting rights at the International Monetary Fund to how much aid and investment it gets from international institutions because it is poorer than thought — and especially when it comes to the adaption funds discussed at the recent UN conference on climate change in Bali by which rich countries would provide developing countries with finance and technology to help with the practical and social costs of reducing carbon emissions.

Bali Result: China 1 – 0 U.S.

Those scoring the undercard match between the U.S. and China at the U.N. conference on climate change in Bali would have given it to China on points.

Beijing scored for being seen to be a constructive participant whereas Washington was seen as obstructive. China’s media has been playing up U.N. Secretary-General Ban Ki-moon’s comments about how China has sent a positive signal to the world over climate change. As such Beijing emerged as a leading spokesman for developing countries, especially the fast emerging economies such as itself, Brazil, India and South Korea.

Beijing also saw off U.S. attempts, mainly for domestic consumption it should be noted, to portray the view that climate change is now really China’s fault, and thus China should be pressed into accepting binding numerical targets. The Bush administration, despite its volte face on climate change earlier this year, has no great appetite for binding targets for itself, but it certainly doesn’t want to have them imposed on it but not on China. Plus, the technology, voluntary targets and energy efficiency approach it is pushing promises future business for American companies that sell green and clean technologies, so it wants China and other developing nations to have a reason — and a deadline — to buy them.

This is all geopolitical power jockeying and doesn’t change any of the underlying facts: Per capita emissions in the U.S. in 2004 were about five times higher than China and 16 times higher than India’s. However, China may by now have overtaken the U.S. as the world’s largest total emitter because of its population size, rapid growth and reliance on coal to generate electricity.

And Beijing, too, has a domestic political agenda to be seen as green that goes beyond the environmental need to make the air breathable and the water drinkable. The leadership doesn’t want to cede a power vacuum around the issue into which a future possible rival could step.

Warming To Climate Change

The success of the U.N’s two-week long climate conference in Bali will turn a lot on what China signs on for. The meeting is intended to get all countries working on how the world will mitigate the effects of global warming once the decade-old Kyoto agreement expires in 2012.

Kyoto was a fractious affair, with rich countries, notably the U.S., and poor ones, including China and India, shunning it because it had hard targets for cutting greenhouse gas emissions from 1990’s levels that they saw as hurting economic growth. But since then the political skeptics on climate change have become a dwindling minority in the face of hard science to the contrary and business discovering the beauty of appearing green.

It is not so much that the world’s demand for energy shows is abating. The International Energy Agency forecasts that demand will have increased by half as much again by 2030 with two thirds of the increase coming from developing nations and China accounting for a third of it. But there is a new focus, in China as much as anywhere else, on the environmental impact of consuming as much energy as the world does in the way that it does.

A lot of the groundwork for what may be achieved in Bali was done at the Asia-Pacific Economic Cooperation forum (APEC) summit in Sydney in early September–a gathering that included all the main players save for the European Union. That coalesced regional support for what could be called the pro-growth camp backed by the Bush administration, which has itself done a U-turn on climate change.

This approach puts technology, voluntary targets and energy efficiency at the heart of any global agreement on climate change in a way that would contain the growth of greenhouse gas admissions but still not curtail economic growth. APEC leaders agreed to work towards a 25% reduction by 2030 in energy intensity, the amount of energy used to produce a dollar of gross domestic product. Developing countries prefer this measure to absolute cuts in carbon outputs because it puts the onus for action on the big polluters like the U.S. and China.

Yet China signed on for that deal, the first time it has agreed to quantifiable targets–albeit non-binding ones. The Sydney agreement, though, is at odds with the absolute–cut targets agreed by the leaders of the eight richest countries at the G8 summit early in the year, and those are, for the most part, the core supporters of Kyoto.

China doesn’t want Kyoto-2 to wither on the vine. There is likely to be aid money for clean technologies and to adapt to the social and economic impacts of mitigating climate change. And there is a domestic political imperative driving the need to make China’s water and air cleaner. Where Beijing decides to throw its lot will greatly shape what emerges in two weeks time from the Bali meeting.