Global decarbonisation relies on major Asian emitters accelerating their energy transition at home and greening their overseas investment. This puts China under the spotlight over whether it is able to ensure domestic growth and advance decarbonisation in other developing countries amid international pressure for more emissions reduction.
Since Beijing pledged carbon neutrality by 2060 a year ago, China has taken many steps to showcase its transition ambition. During COP26 in November 2021, China called on developed countries to provide support to help developing countries do better in dealing with the climate crisis. Before the conference, it also submitted an updated National Determined Contribution (NDC) to the United Nations with slightly more ambitious targets than previously, reaffirming Beijing’s pledge to peak carbon emissions before 2030. It also released a new decarbonisation framework – Action Plan for Carbon Dioxide Peaking Before 2030, restating the country’s goal for 2025 and 2030. In his speech at the UN General Assembly on 21 September 2021, Chinese President Xi Jinping pledged thatChina would not build new coal-fired power plants overseas and would step up support for other developing countries in developing green and low-carbon energy. The question is how China will deliver on these pledges.
How serious is China about the energy transition?
China’s updated commitments and new Action Plan demonstrate its continuous effort to integrate its response to climate change into its long-term development vision. Yet, it also delivers a clear message that China will follow its own conservative approach toward balancing environmental goals and the economic importance of fossil fuels, rather than the more robust path taken by European governments. Despite the large-scale development of wind and solar power, China’s latest plans indicate that coal will likely remain China’s key choice for power generation over the next decade because renewables are not yet ready as a replacement. Alongside coal, natural gas is set to be the most optimal option for China to balance environmental goals and energy security during this period before cleaner options are ready.
With a conservative target, China should be able to smoothly deliver its pledge on peaking emissions before 2030. However, the concern is whether these targets are insufficient to meet the Paris Agreement 1.5°C limit and are more compatible with a level of 3°C to 4°C. A key concern is that China’s targets mainly focus on CO2 and omit other emissions from the industrial and agricultural sectors. Besides, cutting emissions by unit of GDP also makes the target uncertain, given the continuous expansion of China’s economy.
Figure 1: Net zero policies are a global phenomenon but progress varies across countries (State of net zero targets - as of Jan 2022)
Source: Net Zero Tracker
Nevertheless, China’s climate commitments have still created strong political incentives for local governments to implement low-carbon policies proactively. Industrial hubs from northern and southeastern China face higher regulatory pressure to decarbonise. Chinese regulators will continue to conduct more frequent environmental and price investigations in carbon-intensive sectors as a way to curb steel production. The government will continue to see the Emissions Trading Scheme (ETS) and green bonds as instruments for offsetting emissions without greatly impacting the economy and fossil fuel industries. We also expect the government to step up support for clean energy innovation, especially carbon capture, utilisation and storage (CCUS), that could help decarbonise the use of fossil fuels.
However, a politically driven transition with inadequate preparation will always result in energy supply disruptions. The power crisis in 2021, which was driven by a combination of tightening emission standards and rising electricity demand, reflected that renewables and nuclear alone are not able to sustain China's electricity demand. It highlights a dilemma embedded in China's green strategy that aims at balancing its environmental goals and development needs. In August 2021, the National Development and Reform Commission asked major Chinese cities and provinces to reduce energy consumption to meet the annual emission target. The move consequently cut power to some factories in major industrial hubs in Jiangsu, Zhejiang, and Guangdong, accounting for almost one-third of China's economy.
How about a greener BRI?
Beijing has long claimed that the BRI will be green and efficient. Since China signed the Paris Agreement in 2016, the Chinese authorities have sought to accommodate climate finance and sustainable development under the framework of the BRI. According to the Vision and Actions on Energy Cooperation, BRI energy cooperation must ‘attach great importance to the issue of environmental protection in the process of energy development and strive to encourage the efficient development and utilization of clean energy’. China claims that it ‘will strictly control the emission of pollutants and greenhouse gases, raise energy efficiency and contribute to green and efficient development in all countries that participate in the BRI’. This statement implies that certain environmental conditions might be included in BRI energy investments. Institutionally, China seeks to promote clean energy and infrastructural investment via the Asian Infrastructure Investment Bank (AIIB). An expansion in investment in renewable energy such as solar power, as well as power transmission lines, can enhance connectivity in the region.
China’s recent pledge to halt overseas coal investment appears to be a more solid step to advance its goal of sustainable development embedded in the BRI. It is expected to drive Chinese investors to replace coal projects with green investment, particularly renewables, gas-fired power plants and CCUS, along the Belt and Road regions. However, the commitment will likely significantly limit the financing of coal plants in the developing world (see figure below), undermining their economic development that relies on cheap coal-fired power. It is notable that it does not rule out China from continuing its cooperation with other fossil fuel producing countries. For example, in early 2022, China advanced its oil and gas relationship with Russia by signing a new gas pipeline from Sakhalin and a new oil supply deal.
Figure 2: Xi's climate pledge could end China's plan to support over 40 gigawatts of new coal-fired power plants in 20 developing countries
(Developing countries with 46 proposed coal projects financed by China)
What are the geopolitical implications of energy transition?
Amid the global ambition to limit global warming to 1.5 degrees, a significant gap has formed between developed and developing countries regarding how fast the energy transition of their economies should be. The last-minute intervention from China and India at COP26 to weaken the language on fossil fuels in the Glasgow Climate Pact reaffirmed this deepening global division. The energy crisis in 2021 also showed that some developing countries are not well prepared for an accelerated phasing out of fossil fuels, particularly coal, and have to limit the disruption that decarbonisation could have on their supply chains amid pressing development agendas. More developing countries will likely join China and India and call for a balancing act in the energy transition. This could drive the formation of a block negotiator (for example the Like-Minded Developing Countries Group) that presses the rich developed countries for “climate justice” to increase financing for transition in developing regions.
Meanwhile, China is set to keep a high level of manufacturing capacity of clean technology in the post-pandemic era. It will allow China to dominate the global supply chain of materials that are indispensable inputs for clean energy development in the global green tech competition. China’s solar PV manufacturing accounts for over 70% of the world’s total capacity. China is also the source of 60% of the world's rare earth minerals and a key refiner for lithium and cobalt, accounting for over 60% and 70% of the global share respectively. Meanwhile, it is rapidly building up its manufacturing capacity for EV battery components and green hydrogen electrolysers to cater to increasing orders from overseas. As a response, some strategic competitors of China have begun to diversify the supply chain of strategic materials to other Asian countries via government-led initiations such as the Australia-India rare earth alliance, but any relocation could take years.
Although China appears to be serious about its energy transition, its climate commitments face major challenges and has to rely on a more conservative approach than other climate leaders in Europe. While the power crisis has pushed the government to speed up renewables expansion, it will also increase the political pressure to ensure the security of fossil fuels, particularly coal. Market disruption due to the Ukraine crisis in 2022 has even further reignited the Chinese leadership’s concern over energy security, especially when renewables are not ready. Countries along the BRI are also facing similar challenges, meaning that the global division on climate action between developed and developing countries will continue to deepen over the next decade. Last but not least, geopolitical risks, while not new, will also continue to be a factor disrupting the energy transition supply chain. All these factors could delay global climate action to a point that would make climate disruption on business even more severe.