In focus

China: the most radical climate reformer of all?


In the race to net zero, no part of the world is receiving as much attention as China. The media coverage of China’s plans to stop funding new coal power plants overseas is indicative of how every single announcement on climate policy is put under the microscope and debated.

The reason is simple. The world needs China to help reduce global carbon emissions. It is the largest emitter, followed by the United States (US), the EU-28 (European Union including the UK), India, Russia and Japan. Importantly, China has become the largest emitter in a short period of time.

While in the early 1990s large parts of the developed world were reaching peak emissions, China (but also India) started a new journey of industrialisation as the chart below illustrates, rapidly growing its economy and emitting more carbon in the process. So although, for example, the level of US emissions has remained broadly stable and EU emissions have actually declined since 1990, the chart below shows that China’s emissions have quadrupled.

Highest-emitters-countries.png

China’s announcement in September 2020 that it plans to reach net zero carbon emissions by 2060 took some by surprise, particularly as other major economies such as the US and Australia had not set an equivalent goal at the time. There has also been some criticism of China’s choice to give itself an extra decade compared to other regions, such as the EU, that are aiming to reach net zero by 2050. 

Two important points are often missing from this net zero debate. 

The first one is that countries measure their emissions and set their targets based on production-based emissions. But another way to look at this is through consumption-based emissions, which are emissions that have been adjusted for trade. So if a product is exported to another country, then the emissions from its production would count towards the importing country’s emissions.

Since China is a net exporter, its consumption-based emissions are lower than its production-based emissions. The chart below highlights this point. This means that its emissions are linked to the consumption of countries that are importing Chinese goods and, therefore, the burden of emission reduction will also fall to consumers in those countries too.

share-co2-embedded-in-trade.png  

The second point that is seldom brought up in this debate is how ambitious China’s net zero target actually is, particularly if one considers where it is now and how much time it has given itself to reach its goal.

While other regions such as the EU reached peak emissions back in 1990, China has not reached peak emissions yet. It plans to do so in 2030. When it does, China’s peak emissions in 2030 will probably be two to three times higher than the peak of the EU including the UK.

This means that China will have to transition in half the time the EU has and it will have to cover more than double the distance. China will also have 15 years less time to transition compared to the US. 

Getting-to-net-zero.png

The fact that China has a longer transition and less time to do it would imply that the most radical and interventionist change in terms of green policies and sustainable finance should be expected there.

This transition will mean structural changes in the Chinese economy such as a significant reduction in manufacturing and a substantial change in its energy mix that will see it move away from coal quite rapidly. Boston Consulting Group estimates that the cost of this transition to be about $13.5-$15 trillion through to 2050, which is about 2% of China’s cumulative GDP from 2020-2050.

So although the EU is often seen as the leader in the race to net zero, it may well be that the most radical action comes from China. Indeed, China could become one of the global leaders in climate change policy in the decades to come.

If successful, China's transition could show other emerging market economies, such as India and Russia, that it is feasible. 

Important information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This article is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored.