China’s Climate Pledges and The Coal-Driven Economy 

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.

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