China’s Climate Pledges and The Coal-Driven Economy

Author

Eric Chaney

Senior Fellow - Economy

Author

François Godement

Special Advisor and Resident Senior Fellow - U.S. and Asia

At the United Nations General Assembly in September 2020, President Xi Jinping announced that China, the world's largest emitter of carbon dioxide by far, "aims to have CO₂ emissions peak before 2030 and achieve carbon neutrality before 2060". While the pledge is a significant contribution to global efforts to tackle climate change, it came as a surprise given that China has heavily relied on coal to drive its economic growth. All eyes are now focused on how and whether China will fulfill its promises. In a cross interview, Eric Chaney and François Godement, respectively Economic Advisor and Senior Advisor for Asia to Institut Montaigne, put China's climate pledge into perspective. The following is the first part of their exchange.

Is China on the way to reaching Xi Jinping's 30/60 targets? What do you think of the present trajectory on energy shares and emissions?

François Godement:

Xi Jinping set these twin goals - peak CO₂ emissions by 2030, carbon neutrality by 2060 - at the United Nations in September 2020. There was nothing really new about the first commitment, already pledged at the Paris COP in 2015 (back then, the deadline was "around" 2030…). But the 2060 target is new and even if this is ten years later than other major economies, it’s still a very ambitious goal for China. At the Paris Climate Ambition Summit in December 2020, Xi mentioned new commitments for 2030: reducing CO₂ emissions by 65% from 2005, increasing the share of non-fossil fuels to approximately 25%, and bringing total installed capacity of wind and solar power to more than 1.2 billion kilowatts.

These numbers raise all sorts of questions. But perhaps, the biggest issue is that China’s energy trajectory since the COP 21 contradicts its goals, and the new Five-Year Plan (2021-2025) so far shows intent, but only few hard numbers.

Both the government and the experts are aware of this contradiction. So much so that Xi himself and the Politburo have come out with strong messages on energy and emission control in recent months, while experts push for much more radical measures to change the current path. China faces the difficulties of every energy transition (improving alternative energies and their flexibility, economic cost and competitivity…) plus several of its own: a higher starting point due to its coal and fossil fuels addiction, huge energy and manufacturing lobbies, a per capita level of CO₂emissions that is far above that of countries with a similar per capita GDP.

It also faces a statistical fog that top Chinese economists point out themselves: nobody knows what the CO₂ emission levels were in 2005, and for SMEs and households they are still hardly known today. In fact, different Chinese units use very different GDP previsions, and the 14^th Five-Year Plan has no official figures even for the next five years: Xi’s pledges rest on ambiguous ground. Actual energy trends will depend a lot on the level and mix of economic growth. As they currently stand, electricity prices vary widely and are distorted by many subsidies - in fact they are used more as support to the economy than as a nudge for any transition.

Where do we stand now?

On King Coal, total consumption in 2020 rose back to its 2013 record level of 4.2 billion tons. Its share of total energy output also went back up from 52% to 58%, with some estimates being much higher because the actual availability of a coal plant is five times higher than that of wind or solar energy installations. In fact, the rise of coal consumption began one year after the Paris Conference. A related development is that energy consumption per share of GDP is improving much more slowly since the same date. Furthermore, the 2020-2021 revival of the economy after the intense, but short Covid-19 pandemic, is worsening the trend. This is fueled by support for basic state industries - steel, cement, aluminum, as well as the infrastructure and residential construction boom. The two-year trend for January-April 2021 indicates all these figures grew above the average +10% GDP trend: thermal power by 12%, coal by 13%, steel by 17% and cement by 11%. The growth in energy use briefly slowed down under 2% per year in 2015-2016 - it has gone back to 3% in the next three years, and will likely rise above that in 2020 and 2021. It follows that energy use per unit of GDP is decreasing more slowly than planned. Globally, China’s CO₂ emissions have risen by 8% in 2013-2020.

China’s CO₂ emissions now stand at 12 Gtons. China emits twice as much CO₂ as the United States, and its per capita level of emissions is above the average EU level.

Energy use is very hard to assess by sector, because what in most economies would be attributed to the construction sector falls under raw materials in China: the 10% share of construction is grossly underestimated, while the huge manufacturing share is somewhat exaggerated. Again, here we find very different estimates among Chinese official sources. The metallurgic and cement sectors (60% of the world’s output) are sometimes estimated to represent as much as 20% of energy consumption each (and together with aluminum, 30% of CO₂ emissions): these figures would look different if construction was assessed more realistically.

In total, the numbers are inescapable: China’s CO₂ emissions now stand at 12 Gtons. China emits twice as much CO₂ as the United States, and its per capita level of emissions is above the average EU level. Among major economies, only India and Russia exceed its energy intensity per unit of manufacturing.

Eric Chaney:

As François Godement rightly points out, China’s official targets are very ambitious, given that the initial Chinese energy-mix was one of the most carbon-intensive in the world. For instance, the share of fossil fuels in primary energy sources used for power supply reached 83% in 2007, when Chinese growth was roaring, riding the then fast globalization trend. Since China has abundant reserves of coal, decarbonizing its economy implies, among others, cutting its dependency on a domestically available resource. That is something most coal-rich countries, including Poland in the European Union, are very reluctant to do, not to mention India, which has made it clear that domestic coal as a means to generate electricity is a key asset for the development of the country and for the eradication of poverty.

Since the heyday of globalization, China has gone a long way to decarbonize its economy, at least in relative terms. The share of fossil fuels used to generate electricity has fallen from 83% in 2007 to 69% in 2020, an impressive achievement by international standards but still a big number. Meanwhile, the share of low-carbon primary sources (hydro, nuclear, wind) has sharply increased, from 17% in 2007 to 28% in 2020, with wind and, to a lesser extent, nuclear energy presenting the most impressive rise.

Since coal is by far the most carbon-intensive source of energy, it deserves a special focus. China is almost self-sufficient as far as coal is concerned: in 2018, coal consumption reached 3.97 billion tons, while domestic production was 3.70 billion tons, a 93% coverage ratio. The coal intensity of China’s GDP (production of coal per unit of real GDP), which peaked out in 2004-2005 has dropped by 50% since then. In absolute terms, coal consumption (of which power generation takes 52%) peaked out in 2013 (4.24 billion tons) before falling to 3.97 billion tons in 2018, a 6.4% decline.

Yet, even though China’s efforts are impressive for a middle-income economy which is still a long way from offering its citizens the living standards of the European Union, they are insufficient to reach its official goals if current trends are merely extrapolated. After the sharp fall reported above, coal production rose again, from 3.41 billion tons in 2016 to 3.89 billion tons in 2020. This last observation is important: even if the coal intensity of the Chinese economy continued to decline, the absolute output of coal rose again, after the 2016 economic slowdown.

Therefore, it is useful to watch the elasticity of coal production relative to GDP. Elasticity measures the percentage growth of coal production for every percentage point of GDP growth. An absolute decline in coal production yields a negative elasticity. A positive but lesser than one elasticity indicates that the coal intensity of the economy is declining, though coal production continues to rise. Any measure above one shows that coal intensity is rising.

The conclusion is straightforward: based on current policies, China will not get anywhere close to its goals.

Back in 2010, China’s coal elasticity peaked at 1.4: the economy was growing ever hungrier for coal. From 2010 to 2016, the elasticity literally plummeted, bottoming at -1.3 in 2016, a sign that the economy was getting rid of coal at a fast speed. Since then, however, the elasticity has risen again, averaging 0.57 over the 2017-2020 period. Even if the coal elasticity stabilized at 0.5, indicating a sharp decline in coal intensity, China’s production of coal would nevertheless have increased by more than 30% by 2030. The conclusion is straightforward: based on current policies, China will not get anywhere close to its goals.

According to a research paper checking the compatibility of China’s targets (emissions peaking before 2030, carbon neutrality before 2060) and the 1.5°C warming limit of the Paris agreement published by Science, China will need to dramatically cut its use of coal by 2035, down to zero according to some of the models used by the authors. Renewable and nuclear power will have to massively increase -there is much less scope for hydroelectricity. Carbon capture and storage will also be necessary to slash 90% of current CO₂ emissions by 2050, an interpretation of China’s new targets which the study finds coherent with global warming limited to 1.5°C.

How can China shift gears to get there? In addition to massive public investment in low carbon energy sources - which includes the electrification of transportation - China has decided to broaden its carbon markets. Until now, they have been limited to some regions (Beijing, Guangzhou, Shanghai). They will become mandatory at the national level, initially only for power suppliers, a path that only the European Union has undertaken comprehensively. Carbon markets have a great advantage for observers: policymakers must in theory decide how many CO₂ emissions permits should be tradable in the carbon market. Then, supply and demand will determine the price of "carbon emissions allowances". Yet, China’s targets are based on "carbon intensity goals", instead of absolute caps. That practically means that the Minister of Environment and Ecology decides which amount of CO₂ emissions are allowed per MWh of power production, a system consistent with the national goal expressed by Xi Jinping, i.e. a 65% reduction in carbon intensity relative to GDP, which is a relative, not an absolute target.

This is far from the cap-and-trade principle used in the EU, UK, California or Ontario. The Chinese administration is willing to harness the power of the market to reduce CO₂ emissions, which is commendable, but only to a certain extent. The best indicator to assess the credibility of the Chinese policy will be the price of CO₂ resulting from the new system, which should be rolled out by mid-2021. The Beijing pilot ETS yielded an average price of USD 11.6 / tCO₂ in 2020. A national carbon price below the Beijing benchmark by the end of this year would indicate that Chinese authorities are excessively erring on the side of caution and would bode ill for the credibility of their CO₂ emissions reduction goals.

Copyright: NOEL CELIS / AFP