Contradictions and Compatibilities between China and Climate

Author

Eric Chaney

Senior Fellow - Economy

Author

François Godement

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

China has clear mid- and long-term climate targets: CO₂ emissions must peak before 2030 and achieve carbon neutrality before 2060. However, less clarity is offered on "how" China plans to achieve its targets without undermining its other political priorities. That leaves observers wondering about the path China plans to take, given the high level of uncertainty around it. The following is the second part of an exchange between Eric Chaney and François Godement, respectively Economic Advisor and Senior Advisor for Asia to Institut Montaigne, in which they discuss the challenges for China’s objectives. The first part can be found here.

Energy security, economic growth, and greening: how compatible are these goals for China?

François Godement:

These goals conflict everywhere, but especially so in China. Energy security breaks down into two components: geopolitical security of supply and protection against scarcity and price variations. In the 1980s reform decade, China built large and modern grain storage sites along the coast, solving its food supply problem with imports, and accepting an obvious dependence and vulnerability of these sites. That is far less likely today, when self-reliance and economic security are put on top of the agenda. This is where coal reigns, as a domestic and largely inland resource. Even the other fossil fuels - oil and gas - are largely imported, and Liquefied Natural Gas (LNG), which relies mainly on American supplies, constitutes a particular vulnerability. Hydropower is of course a contender, but excluding Southwest China where distant and costly projects are now envisioned, most of China’s capacities are now installed.

In purely economic terms, the coal and steel constituencies are huge and well represented in the central government. They are huge employers, far larger, for example, than the solar, wind, hydropower and nuclear industries. Over the past decade, thermal plan construction has intensified inland, in accordance with the economic rise of coastal regions and the protests against air pollution there. Inner Mongolia alone now has 530 coal power plants that provide for much of North China. In 2020, the government relaxed, instead of toughening, the criteria for new coal power plants. The 200 GW added capacities now planned are equivalent to Germany’s thermal plant output. This is also a thriving export industry.

The situation on the consumption side is also daunting. Electricity and fuels for household and industrial use have always been subsidized in China. For cars, the price of gas at the pump has at times been under the global trading price for oil, and farmer or taxi driver demonstrations against price rises have not been uncommon. The supply to industry is part of the huge hidden subsidy issue, as investors often get deals on free or cheap electricity. Prices vary: an outside estimate places China’s household electricity prices at 0.085 USD/Kwh, vs. 0.150 USD/Kwh in the US, 0.221 USD/Kwh in France and 0.375 USD/Kwh in Germany. Prices for consumers have fallen by 23% since 2018, and by 17% for industrial users in large cities. This is of course a disincentive for energy producers to use more costly and less dependable energy sources. Repeatedly, Prime minister Li Keqiang’s mentions of energy in 2020 have emphasized "clean coal" and the economic imperative, as much as alternative energy.

Under this new direction from the top leader, an active debate on energy transition has again started in China, with few holds barred.

There remains, of course, the greening goal. Xi Jinping seems to have seized on it, not prior to his September 2020 speech at the United Nations, and not even prior to the publication of the outline for the 2021-2025 Five Year Plan, but in more recent months. Politically, the turn is significant, especially as it comes with President Xi’s trademark methods. To begin with, he has doubled down on purges for corruption among Inner Mongolia coal and energy cadres.

Then, the National Energy Agency, a unit of the National Development and Reform Commission, was castigated and put under disciplinary inspection. Many coal, steel, cement and aluminum units are put under similar inspections. A cap at 2020 levels of production for these energy-guzzling sectors has been announced for 2021 - a very demanding target since the first four months of 2021 have seen a steep rise. Under this new direction from the top leader, an active debate on energy transition has again started in China, with few holds barred. China’s Ministry of Ecology and Environment, long a side actor, now enjoys a new popularity as Xi explains that "green hills and lush mountains are a source of silver and gold" (绿水青山可带来金山银山)…

Eric Chaney:

Cutting CO₂and other greenhouse gas emissions does not have to be in contradiction with economic growth, once all the dimensions of the equation are taken on board. In this regard, China is a case in point, and one that is different from other countries. Of course, all geographies are sensitive to climate change, but some more so than others, as is the case of China, according to climate experts. Not only does climate change have an impact on the well-being of the Chinese people, it also has negative consequences on economic activity.

But there is more. Smaller territories have little incentive to reduce emissions in order to limit the damages caused by climate change. Given their small size, the economic cost of national emissions cuts is not commensurate with climate benefits. The opposite holds for China, which is by far the largest emitter of CO₂ in absolute terms (though not on a per capita basis). In 2018, China emitted 27.5% of the world’s total emissions, vs. "only" 14.8% for the US. Therefore, by cutting down its emissions, China is doing even more good for its own population, than for the planet.

Although this may sound like a paradox, Chinese policy makers actually have more incentives to cut emissions than their counterparts in France (0.9% of territorial emissions in 2018) or other European countries, from a strictly selfish standpoint. In plain English, cutting emissions in China brings more political bucks than it does in the US or Europe, in the long term at least. This makes me relatively optimistic about the Chinese climate policy, under the assumption that Chinese policy makers behave rationally for their own good.

Where is China taking the lead in the energy transition, what obstacles are there on this path?

François Godement:

The main paradox of China’s energy and emissions scene is that while it is the world’s largest headache, it also leads the way in sectoral developments towards an energy transition, in quantity and sometimes in quality. China is the world’s first battery manufacturer (even if these are produced with energy-intensive methods and little planning for disposal), the world’s paramount solar panel and cell producer (60% and 80% of global production), and the world’s first wind power producer: it built half of the world’s new capacity in 2020. More tellingly - because this is a highly complex industry - it has the largest nuclear plant industry in the world and also the largest plans for new installations, with the United States, Japan, France and Russia as suppliers for what it cannot design itself. In all alternative energy sectors, the targets are huge. China also leads the way downstream, when it comes to boosting the clean use of energy. It now manufactures 97% of the world’s electric buses - putting to shame meager European plans for a few thousand buses, and at much lower prices.

For electromobility, a key global bottleneck is going to be road chargers.The EU’s entire stock of public road chargers stands at 250,000, France’s at 30,000. In December 2020 alone, China produced 117,000 public road chargers, making its electric car goals much more believable. China also leads in other sectors such as power lines, intelligent grids, hydrogen, and hydropower stockage. It is comfortable, but false, to say this would only be the pursuit of export opportunities rather than an overall green commitment. Most of these industries produce for the domestic market above all.

The main paradox of China’s energy and emissions scene is that while it is the world’s largest headache, it also leads the way in sectoral developments towards an energy transition.

Is this enough? If one follows the current (and highly unusual debate for the times) in China, it is not. Some obstacles are those that every country faces when changing its energy mix, compounded with China’s speed of economic growth. One issue is that alternative energy is even less reliable and flexible in China than elsewhere. Estimates for wind and solar availability vary, but they remain low overall. Production therefore lags behind capacity. Grid interconnection (almost nonexistent 15 years ago) is still very low. In early 2021, State Grid announced a plan to raise the interprovincial connection capacity to 25% of production by 2025 - with 50% available for energy renewables. Flexible power generation stands at 8% of total capacity, vs. 18% for Germany and 49% for the United States.

It is also clear that energy-wise, there are at least two Chinas: fast-growing coastal provinces are ahead in the energy transition, while others lag behind and have often become the suppliers of emission-heavy energy. The catalog of measures and projects being unrolled in 2021 is impressive and too long to describe here. It is also largely made of sectoral and local decisions. One sector alone could make a huge difference: house insulation is nearly nonexistent, and there are now sudden and ambitious plans to move to 70% green units of housing, with a preference for prefabricated modules. That alone is a huge change of process which would certainly transform the demand for key materials.

The authority wielded by Xi Jinping, who now seems to put his domestic actions behind his earlier international words, will also need to be complemented by a permanent push for these dispersed initiatives to continue. China is a system where locals know how to respond to sudden pushes from above, and then to forget about them when the pressure abates.

Two interlinked issues need to be tackled if a statist push is to be seconded by market mechanisms. The pricing of energy must change beyond existing schemes. There are already some different prices for energy-intensive sectors, but they are less meaningful for SMEs and household consumption. In the past, the State gave counterbalancing subsidies to alternative energies. This is now being discarded, as it led to waste and financial losses, and also because the scale of these energy sources is now larger. Beyond pricing, both carbon trading and a carbon tax are debated. Carbon trading and an ETS were promised by China at the Paris COP 21. They will finally start rolling out on a national scale in June 2021, more than four years after schedule.

What’s more, they only concern major companies - in essence, two to three thousand state enterprises where CO₂ emissions can be reliably assessed. Zhou Xiaochuan, the former Central bank governor and now green finance guru, outlines that an ETS system based on spot rates is not enough, because investment in alternative energy needs a predictable long-term horizon. He and other economists are now pushing for a revamped carbon tax, assessed at uniform rates, for those enterprises that are not in the ETS scheme. Like a carbon border tax or a customs surcharge (comparisons which he dares to make!), this carbon tax would not rest so much on producers of energy as on the users in the manufacturing and service sector, and therefore also on consumers. Some also point out the need for the tax to be either neutral (replacing other levies) or redistributed for the green transition. That in itself will be a problem. In theory, China leads the way in green bonds. But in practice, these are loosely supervised and have often been used to "provide liquidity" or…for "clean" coal.

These proposals are indeed audacious, and some others do mention a risk of political unrest associated with rising energy prices. In this writer’s view, their best chances to be adopted lie with the possibility that China’s trade partners would institute an adjustment border tax. Faced with the option between a tax collected by others and one which they collect themselves, the choice might become simpler, and its justification easier to make towards the Chinese public.

Copyright: GREG BAKER / AFP