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.

A Green Twist To China’s Two Loops

THIS WEEK, CHINA’S top policy-makers will hold their annual plenum. For four days, they will solidify goals for the next Five-Year Plan (2021-25) and set the political guidelines for the country’s economic development to 2035.

The 14th five-year plan will not be formally signed-off until next March, but the plenum will settle the sub-heads under the heads the Politburo has already decided.

It will particularly give structure to the ‘dual circulation’ or ‘dual loops’ notion. This reframes the rebalancing of the economy towards higher-quality, sustainable growth as the pairing of global integration with expanded domestic supply and demand. The latter, ‘inner loop’, will take China a long way down the road of self-sufficiency, especially in high-tech goods and services, with significant import substitution. Beijing would see the ‘external loop’ as being China-led.

Ambitious green policies are likely to be a core driver of both loops, now that China has unilaterally set itself the goal of carbon neutrality by 2060. Beijing had targeted peak emissions in 2030 but had not previously set a deadline for going carbon neutral before President Xi Jinping announced it at the UN General Assembly in September.

The five-year plan is likely to lay out a formidable route map for the transition to a low carbon economy based on either the elimination of CO2 emissions or balancing them with carbon removal. Measures could include a substantial hike in the target share of non-fossil fuels in primary energy consumption by 2025, currently 15%, an annual CO2 emissions cap of under 10.5 billion tonnes (ie, no growth from current levels) and the current decarbonisation regime getting much stricter after 2030.

Xi’s public imprimatur on 2060 carbon neutrality suggests to this Bystander that policy decisions earlier this year that encouraged more coal-fired power plants have little long-term directional intent.

Optimists will regard the new goal as potentially the single most significant contribution yet to mitigating global warming. Realists will note that it would also make it more difficult for the United States to be the only large nation not transitioning to a low-carbon economy, although that could change if Joe Biden replaces Donald Trump as US president; Biden has committed to the United States being carbon neutral by 2050, ten years ahead of China’s target.

China’s planners have already identified green technologies from renewable energy to electric vehicles and recycling as among the critical next-generation industries that the state will champion in the move up the economic value chain. They also see large export markets for Chinese green technology products, especially in countries along the Belt and Road that are increasingly forming China’s economic sphere of interest.

Thus the full weight of China’s industrial planning machine will be thrown behind the 2060 goal. Ministries, provinces, cities, state-owned enterprises and industry bodies will all create new economic plans consistent with delivering it.

One early expression of this could come ahead of next year’s UN climate conference, COP26, particularly if Biden does become US president and takes his country back into the Paris climate agreement. Beijing could lead a movement for international economic coordination of a ‘green’ recovery from the Covid-19 pandemic. The rest of the world will then be faced with dealing with the deft trick of Chinese industrial policy being turned into a global public good.

What It Would Take To Build Greener, More Liveable Cities in China: A Lot

This Bystander likes a hypothesis that can spread its wings and take flight. That land-use reform and reform of local government finances are key to developing sustainable, efficient, livable, and competitive cities in China would be one such proposition.

It is not so fanciful an idea. The argument runs thus:

Low-carbon cities need compact urban form and smart spatial development. But related concerns linked to the rapid expansion of cities such as congestion, local pollution, and safety also increase when public transport becomes less competitive as a result of poor spatial growth. Rural agricultural land is over-consumed. Cities expand into areas with higher risks of disasters or higher ecological values. Contingent liabilities increase from off-budget borrowing linked to land expansion. And equity concerns arise over the compensation of rural land users on the urban periphery. Reforms in land-use planning, municipal financial frameworks, and changes in spatial development can address these concerns and promote low-carbon growth.

Its proponents, Axel Baeumler, Ede Ijjasz-Vasquez and Shomik Mehndiratta, are three of the authors of  Sustainable Low-Carbon City Development in China, a new book looking at the development of low-carbon cities in China. It is published by the World Bank and is a 500+-page miscellany of urban development projects the Bank has been involved with in China and elsewhere. We suspect it has been somewhat hurriedly assembled so that publication could happen early in China’s current five-year plan, which calls for both continued urbanization and a significant lowering of the country’s carbon intensity. Aimed at city officials, the book is a why and some starter ideas type of book. A second edition promised for a couple of years time is intended to be a more detailed how-to manual.

The first edition doesn’t break much if any new ground. Its value lies in pulling together so many disparate aspects of sustainable urban development that have to be connected for success. For example:

• Encouraging a cleaner and greener supply of electricity;
• Continuing the gains of industrial energy efficiency;
• Promoting residential energy efficiency and building district heating;
• Better land-use planning and compact city development;
• Supporting low-carbon transport–walking, cycling, and various forms of public transport;
• Reducing emissions from private vehicles;
• Tempering current rates of growth in waste generation, including water and wastewater;
• Preserving and reusing existing buildings;
• Promoting urban agriculture and forestry;
• Developing information and communication technologies, such as smart grids.

If coordinating all those isn’t challenge enough for city officials–and just think of how many ministries, administrations, agencies, departments and offices they cut across–there is also the perennial question of the country’s scale. China is set to add an estimated 350 million residents to its cities over the next 20 years–and that after three decades of unprecedented urbanization, modernization, and economic development. Some 13 million people move from the countryside to the city each year, putting sustained pressure on all forms of public services: energy, water, transport and waste.

At the same time, China has set itself ambitious goals to reduce the carbon and energy intensity of the economy and to transition to low-carbon growth. The current five-year plan, which runs to 2015, sets a target of creating of 45 million jobs in urban areas. It also contains, for the first time, an explicit target to reduce the carbon intensity per unit of China’s GDP. A 17% cut is the goal by the end of 2015, as a milestone on the road to a  40%–45% reduction by 2020.

China’s cities will have to lead the way if these goals are to achieved. They have a sufficiently high degree of autonomy, and, as the authors note, they are “politically, financially, and administratively organized to act quickly and to realize national policy goals”. The true secret to why China’s so-called state capitalism has delivered three decades of double digit economic growth is that its city officials’ career advancement (promotion to a more powerful level of connections) depends on delivering local economic growth. Collectively on a city basis they are given a fairly free hand by central government to create raw GDP growth regardless of the environmental and social cost (up to the point it threatens the Party’s legitimacy to rule). As a market-based incentive it is pretty red in tooth and claw. But it has worked.

If China is to achieve its twin goals of larger but greener cities, it will have to change the incentives dangled before city officials. That, in turn, means dismantling the underlying mechanism that now allows them to work so effectively–the link between land use, finance, and urban sprawl.

Local governments are overdependent on land development for revenue, and particularly on sales of collectively owned rural land to property developers. As a result many Chinese cities have more than doubled their built-up area in no more than 10 years. Changing how cities finance themselves needs to be rethought fundamentally. That means tax reform, better direct access to debt and capital markets for cities, and new ways to facilitate fiscal transfers from higher levels of government.

Bits of that, such as greater municipal bond issuance, are starting to happen. But a lot of stars will have to fall into alignment for it all to come together so the sum of the parts is greater than the whole. A lot of vested interests are challenged. They will have ample opportunity to frustrate the process. Not only will it require new sets of both administrative and market-based incentives to encourage the development of low-carbon cities, with the market-based ones becoming increasingly more important, it will also require an administrative culture that facilitates cooperation across what are now largely independent fiefdoms.

It will also require one more thing. Residents who want to live in more liveable, energy-efficient cities like, and are prepared to be active in creating them.

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.

China Needs To Restructure Economy To Cut Greenhouse Gas Emissions

China and the five other leading East Asian economies have grown 10 fold over the past three decades and tripled their energy consumption in doing so. They are expected to double it again in the next two decades as industrialization and urbanization continues apace.

That growth has come at an environmental price, but, the World Bank now says, these economies could stabilize their greenhouse gas emissions over the next 15 years without compromising growth.  It will require “major investments in energy efficiency and a concerted switch to renewable sources of power”, according to the newly published Winds of Change: East Asia’s Sustainable Energy Future.

China accounts for 80% of East Asia’s energy consumption and 85% of its CO2 emissions.  In its case, it  will need to reduce it energy intensity by 4.3% a year over the next two decades, the World Bank says. Over the past decade it has achieved 3.4% a year. Beijing’s target is a reduction of  4.2% per year.

This is a daunting goal, as the World Bank notes, “given that China is at a developmental stage in which energy-intensive industries, driven by demand from domestic and export production, dominate the economy”. While China is developing nuclear power generation and low carbon technologies such as hydropower, wind, and biomass to wean it from its coal dependence, it will be structural economic change toward a less energy-intensive economy that will be the single largest contributing factor in cutting China’s greenhouse gas emissions.

China Commits To Its First Firm Carbon Target

If the U.N.’s Copenhagen Climate Summit does only one thing, it will have been to get China to commit to its first firm target to curb greenhouse gas emissions. Unfortunately, the goal that Prime Minister Wen Jiabao will take to Copenhagen doesn’t amount to much — to achieve by 2020 a 40%-50% cut in the 2005 levels of the amount of carbon dioxide emitted for each unit of GDP produced.

Carbon intensity goals are open-ended in as much as the volume of greenhouse gas emissions is a function of growth and energy efficiency. Beijing plans to have more of both, so its total emissions will likely rise. Also the goal is in line with what is already happening in China after a five-year drive to become more energy efficient.  It is already almost half way to hitting it.

That is not to say that any target isn’t welcome; it certainly is to the organizers of the flagging Copenhagen conference, who in the past 48 hours have now got the world’s two biggest polluting nations, the U.S. and China, to agree to at least nominal targets. China’s announcement is also a shot in the arm for carbon trading markets, another area where Beijing thinks it can steal a march over Washington.