China’s top-down approach to push for net-zero carbon has put the country firmly on the path to decarbonise by 2060. This is no small ask: ANZ Research believes the country will need to cut 85 per cent of its 2020 carbon emissions to achieve its lofty goal.
China’s motivation is likely to play a big part in the push. It is clear to ANZ Research that China’s carbon neutrality policy is macroeconomic policy, not a pure climate policy. China’s role in global supply chains and its growth profile closely correlate with its carbon emissions path.
As China has offloaded part of its role in global supply chains and focussed more on domestic circulation, it makes economic sense to reduce its carbon emissions in the next few decades – and support global efforts to achieve the ambitious goal of limiting global warming to 1.5°C this century.
China significantly increased its climate ambitions in 2020 by officially pledging to peak its carbon emissions by 2030 and reach carbon neutrality before 2060. China’s emissions have risen exponentially and the country is currently the world’s largest carbon emitter by a large factor.
That rise came as China’s GDP more than doubled from 2000 to 2006. An econometric analysis on China’s GDP and its carbon emissions suggests a robust relationship.
Energy consumption increased in China with production activities in the manufacturing sector, and total emissions began to increase in 2000. China’s CO2 emissions per unit of GDP increased 7 per cent between 2000 and 2005 and stayed more than double of the US level in the following years.
In the 1990s China accounted for a mere 4 per cent of world output, while the US was the leading manufacturing hub, accounting for nearly 22 per cent of world production. Correspondingly, the US was the largest carbon emitter at that time, producing one fifth of emissions globally.
As global supply chains have reoriented in the past few decades, China has taken up a critical role in global manufacturing, accounting for nearly 30 per cent of world’s production, leading the US and Japan.
As a result, the source of carbon emissions has also shifted. China has now replaced the US and been the world largest carbon emitter for more than a decade, on the back of the emission-intensive stages of manufacturing like smelting and processing of raw materials.
Research shows China is the largest net exporter of embodied emissions, with eight times more emissions in its exports than its imports, compared with 0.5 in the US, 0.5 in Japan and 1.3 in India.
Another academic study shows developed countries outsource their carbon emissions to developing countries via foreign investment in the past decades, exerting heavy environment burdens to the latter.
From this perspective, the decarbonisation campaign is consistent with China’s structural reform plan under the roof of Xi’s New Era through to the middle of the century.
With a focus on domestic circulation and an upgrade to high-value added manufacturing and services, China’s decarbonisation policy supports China’s approach to high-quality growth.
The hurdles that China faces in cutting carbon emissions are high.
International experience suggests developed economies usually take an average of 50 to 60 years to reach carbon neutrality after they reached peak emissions. China’s commitment is to halve that time, an ambition that is only possible due to technological advances, falling costs of low carbon alternatives and policy determination.
Reducing carbon emissions is not without cost. The Dynamic Integrated Climate-Economy (DICE) model takes into consideration the cost and benefits of decarbonisation. It calculates the marginal social cost of emitting one more tonne of carbon into the atmosphere any point in time.
In the early stages of decarbonisation, rising costs of using technologies for clean energy or carbon concentration exert upward pressure on inflation. The social costs may also be high.
More importantly, China’s carbon emissions and GDP growth historically presented a stable positive correlation. Achieving carbon neutrality will have to break the stable relationship between China’s carbon emissions and its GDP growth, especially when China aims to maintain a steady growth path.
China’s 14th Five-Year Plan set a binding target of reducing carbon emissions per unit of GDP by 18 per cent between 2021 and 2025, the same as it achieved in the previous five years. While this looks feasible before China reaches the peak of emissions around 2030, it requires much more effort to reach carbon neutrality by 2060.
Under the 1.5°C scenario, China will need to reduce carbon emissions by 85 per cent of its 2020 level. If we assume China’s potential GDP growth at 5.5 per cent and 4.5 per cent for 2021 to 2025 and 2025 to 2030 and then further slow to 3.5 per cent throughout 2031 to 2060, it indicates carbon emissions per unit of GDP will have to reduce at 34.5 per cent every five years from 2020 onwards.