China’s rapid industrialization has lifted hundreds of millions of people out of poverty and transformed the country into the world’s factory floor. It’s also made China the biggest emitter of carbon dioxide, the main greenhouse gas driving climate change. President Xi Jinping has pledged to fix that and have China become “carbon neutral” by 2060 -- an especially challenging target given its emissions are still rising. While the country has been pouring money into renewable energy, a widespread power crunch late in 2021 prompted it to redirect support to polluting fossil fuels, illustrating the difficulty of balancing long-term climate goals and short-term energy security.
1. What is carbon neutral?
It means cutting as much of your carbon dioxide emissions as possible and then offsetting what you can’t eliminate. For a country, this could mean switching to renewable energy such as solar power instead of coal and investing in projects that absorb carbon dioxide, such as reforestation. Carbon neutral, or net zero, has become a goal of companies and countries alike to address public concerns about the impact emissions have on the climate.
2. Why did China make the pledge?
For starters, it has to after joining the Paris Agreement -- the international effort to limit global warming to below 2 degrees Celsius (3.6 degrees Fahrenheit) compared with pre-industrial levels, and preferably under 1.5 degrees Celsius. China also increasingly wants to demonstrate global leadership and is proud of its expertise -- from the development of renewable energy to forest conservation. As China’s relationship with the West has deteriorated on issues from trade to human rights, climate is one of the few remaining areas where the two sides try to cooperate. At the United Nations General Assembly in September, Xi announced China will stop building coal-fired power plants in other countries. There’s also a domestic political element, as the Communist Party has sought to be seen as responsive to public concerns about environmental issues such as air pollution and flooding to preserve social stability.
3. What’s the timeline?
Even though China is the world’s second-largest economy, it’s still classified as a developing nation and hasn’t reached its emissions peak. That’s forecast to come by 2030. The 2060 target is 10 years after the U.S. deadline. But if China pulls it off, it would be the fastest decline from peak among major economies -- just 30 years compared to a target of 70 for Europe and 40 for the U.S. Some countries, including the U.S. and the U.K, have been pushing China to be even more ambitious, but China has pushed back, pointing out that developed countries, which are responsible for the bulk of the greenhouse gases that have accumulated in the atmosphere, are struggling to meet their own climate targets.
4. What needs to be done?
China said in October that it’s aiming for 80% of its energy to come from non-fossil fuel sources by 2060. A key step came when China opened the world’s largest carbon trading market in July, creating a framework for how emissions are priced and regulated in the country. It’s already pushing the expansion of electric vehicles and automation while investing in nuclear power, which doesn’t emit greenhouse gases. There is more spending on research into technologies such as storage batteries and using hydrogen as a fuel. The government will have to develop more wind and solar power projects so that coal-fired plants play a smaller role in generating electricity. China’s special envoy for climate change Xie Zhenhua said the plan to have emissions peak by 2030 covers carbon dioxide only, while the 2060 goal includes all greenhouse gases.
5. What does the power crunch mean for the plan?
It’s not clear yet. Shortages that rippled through China’s manufacturing centers for steel, aluminum and cement starting in September, threatening economic growth, have prompted a rethink as well as extraordinary interventions in the market. That includes reviving old mines to produce more coal, which China still relies on for more than two-thirds of its electricity. While the government has pushed renewable power, Premier Li Keqiang said in October that China’s path to a greener economy needs to be underpinned by a stable supply of energy, and that the country has to assess how the power crunch was handled before moving forward. He also said China needs to continue building up capacity in fossil fuels and to prioritize economic development, while Xi himself told oil workers “China has to secure its energy supply in its own hands.”
6. What’s the likely economic impact?
It depends on how smoothly the transition is managed. An attempt to become carbon-neutral will be a huge demand-driver in China’s economy: HSBC Holdings Plc estimates 200 trillion yuan ($31 trillion) -- around 200% of China’s current gross domestic product -- will need to be invested mainly in power-generation and industrial sectors to reach carbon neutrality by 2060, an average of 5 trillion yuan a year. On the other hand, some sectors such as coal, which employs some 3.5 million workers, will have to shrink, causing economic dislocation. China’s manufacturing sector, which accounts for about a quarter of GDP, will have to either reduce production or shift to much more energy-efficient methods. And as the 2021 power shortages indicate, that adjustment can reduce China’s growth. Conventional economic measures also ignore some benefits from cleaner air, improved road safety and prevention of potential climate damage, which the World Bank estimates could amount to 3.5% of GDP by 2030.
7. Who are the biggest winners and losers?
Electric-vehicle makers are one of the high-profile beneficiaries of China’s plan, thanks to government subsidies. Beijing has set a target of having new-energy vehicles account for 20% of sales by 2025 compared with 6% in 2020. Other winners could include makers of photovoltaic systems, recycling firms and producers of new materials and non-ferrous metals for electric vehicle assembly. On the other hand, China’s 2,200 electricity utilities powered by fossil fuels, a group that accounts for almost half of the carbon China spews into the atmosphere and 14% of the world’s total, will be among the biggest losers. Reducing their dependence on fossil fuels will require a move to cleaner sources such as wind and solar and spending on mitigation measures or carbon offsets. Regional Chinese economies that rely heavily on fossil fuel production, such as Shanxi and Inner Mongolia provinces, will also be affected.
8. What role is the central bank playing?
The People’s Bank of China is trying to encourage banks to channel money toward “green” projects -- by allowing them to issue “green” bonds, which they use to fund “green” loans. However, its definitions of which projects count as “green” have been controversial: it removed so-called “clean-coal” projects from its definitions of green bonds this year following widespread criticism. Financial regulators also plan to adjust the rules on capital adequacy so that banks will hold more green assets. As of October, China’s outstanding green loans stood at 14 trillion yuan, an amount set to expand at a rapid pace.
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