Introduction

Once a talking point, carbon neutrality by 2060 has started to turn wheels in Xi Jinping’s design for a secure, prosperous and more liveable PRC. Admittedly the world’s biggest emitter, Beijing aspires to be a model of green transition. Industries, regions and bureaucrats are on notice to overhaul their growth models. Energy security remains an imperative, as do manufacturing capacity and economic stability; all demand carbon-savvy futures. Few in China doubt Beijing’s resolve, but is there enough time and political space for the transition?

Dismounting the carbon tiger

Decarbonising is the agreed sole feasible means of mitigating the catastrophic effects of climate change. A harder target, carbon neutrality, is at least for now integral to Xi Jinping’s socio-economic mantras of ‘high-quality growth’ and ‘rejuvenation of the nation’. Solutions to domestic climate issues are also intended to deliver global standing in, and acceptance from, the world.

Winding down Deng’s ‘growth at all costs’ doctrine, unassailable for four decades, Xi envisages a self-reliant nation with an advanced tech industry and a prosperous and equitable society (see CEB September 2021 ‘China’s post-COVID macro playbook’). In official minds, carbon neutrality via homemade green technology—from solar panels to electric vehicles—paves the way for this self-reliance (see CEB February 2021 ‘Open to autarky: China’s coming 5-year plan’).

The challenges are formidable, not least for local governments who must juggle Beijing’s many priorities. Provinces must limit emissions while maintaining economic growth: a recipe for conflict as long as power hungry manufacturing—a mainstay of many provinces—remains reliant on coal. Energy demand will, for all the efficiency gains, continue to rise in the foreseeable future. Average PRC citizens currently consume only a third of the energy of an average American, or about two-thirds of an average European: they will not remain content to do so.

The 14th 5-year plan retains industry’s strategic share in the economy. Natural emissions-reduction pathways—transitioning from energy-intensive manufacturing to services—are less relevant to China than to advanced economies. Beijing has opted for a path less taken: maintaining its manufacturing capacity as it simultaneously builds a services sector.

Mission to end emissions

Transition must be orderly, agree China’s top leadership: haphazard decarbonisation measures could incur enormous social and economic costs. Poor coordination between policy goals poses an equal threat: the nationwide H2 2021 power crisis is primarily due to slowed coal production, brought on by rigid, inefficient power markets. Decarbonisation campaigns were not to blame.

Wealthy regions with services-based economies will lead; some industries will reach peak carbon and neutrality faster than others. In the primary energy mix, coal use—as pledged by Xi—will peak by 2025. But to smooth the transition to full reliance on renewables, gas will enjoy a growing share between now and 2040, in combination with CCUS (carbon capture, use and storage).

Power: Integrating renewables

Power generation, the PRC’s greatest source of carbon emissions, accounts for some 40 percent of the total. Coal remains the go-to source, generating about two-thirds of the nation’s power in 2020. Demand for electricity should more than double by 2060, when it will be the supply source for over two-thirds of energy used in China, up from just 21 percent in 2015. Everything from steelmaking to transport will be electrified in pursuit of decarbonisation.

Renewables have made great strides, with the state firmly behind them. Beyond high-profile projects like the Three Gorges hydropower station, the cost of solar, and to a lesser extent wind energy, have dropped dramatically. This is thanks to lavish subsidies, robust manufacturing and supply chains, immense economies of scale and tech innovation driven by white hot competition. Already accounting for a third of globally installed renewables, the PRC is sprouting new capacity faster than the rest of the world combined. Contributing 5 percent of China’s total power, nuclear will remain as backup for intermittent renewables in coastal provinces, even as current policy clearly favours renewables and storage.

Power prices are set by the state, their input costs by the market: a recipe for inefficiency. Reform will be essential to ensure renewables are taken up. Freeing up electricity prices has long been politically loaded, complicated by family dynasties, vested economic interests and fear of inflation. But as Beijing seeks to reduce emissions by pricing carbon and getting renewables into the grid, power markets need to liberalise. They must transfer costs to end users, modulate demand and allow renewables and storage projects to realise potential profits. The recent power crisis is accelerating slow-moving reform. Sweeping new measures, effective from 15 October 2021, removed all power price ceilings for energy-intensive industries, a move that officials hope will allay the crisis and, in the long term, promote restructuring of industry and drive down emissions.

An array of political and technical hurdles persist in preparing the grid to handle large volumes of renewable power, expected to increase sevenfold by 2060. Robust cross-provincial transmission is needed to funnel clean energy from the renewables-rich west to the power-hungry east. Energy storage solutions are needed to back up intermittent power generation, but policy uncertainties, high costs and insufficient standards hinder expansion.

Industry: Better structure, better tech

The PRC’s manufacturing sector remains core to its industry policy and central to its drive for industry chain security (see CEB September 2021 ‘China’s post-COVID macro playbook’). This will not change.

As a global manufacturing hub, the PRC racks up a disproportionately high volume of emissions from this sector, compared to other nations. Its heavy polluting industries stand in need of replacement by high-tech, energy-efficient alternatives running on electricity.

Reductions in emissions from industry have tended in the past to consist of windfall efficiency gains or supply-side reform. But as carbon neutrality rockets up the priority list, Beijing has begun to decarbonise the sector top-down. Just three sectors—steel, cement and chemicals produce some 80 percent of CO2 emissions from industry. All have seen draconian measures to curb production. A case in point was the central decree issued days after the 14th 5-year plan’s adoption in March 2021: Tangshan, the world’s biggest steel-producing hub, was ordered to slash production, sending steel prices through the roof. Further, provinces suspended production in slews of factories in H2 2021 to meet Beijing’s energy consumption targets. The strict and continuing measures limiting energy- and emissions-intensive projects are classically topdown: new steel mills and cement factories will find it ever harder to gain approvals and old, polluting factories will be shut down.

Progress depends on policy certainty, a combination of administrative measures and market-based policy tools. Local governments have been reluctant to change their existing heavy industry base, despite low profit margins. To bring about sustainable changes, as opposed to the shock therapy seen this year, Beijing needs to align carbon neutrality with other political goals: becoming a manufacturing powerhouse, ensuring energy security, and others. This includes rules for highemissions industry bases, setting long-term expectations for carbon price hikes, and sustained R&D investment in low-carbon technologies, e.g. secondary steelmaking and green hydrogen. Only then will localities face a hard reckoning and see carbon neutrality as an opportunity, rather than another requirement from the centre that must be satisfied.

Transport: Road to rail

Transport is China’s third largest emitter; 80 percent of its emissions come from roads. Impressive progress is claimed: after hundreds of billions in subsidies and R&D support through the 2010s, NEVs (new energy vehicles), mostly EVs (electric vehicles) and plug-in hybrids, finally took off. Monthly sales reached 17 percent of all vehicles in September 2021, close to the 20 percent goal previously set for 2025.

Investing famously in public transport, the state has built a dense network of interregional high-speed rail, emitting far less than aviation or private cars. Rail is preferred in part due to supply chain security: the PRC still relies heavily on foreign suppliers in aviation, whereas its rail tech, having borrowed extensively from pioneers overseas, is now worldclass. The last mile may well be the toughest: aviation and shipping are still in search of feasible low-carbon solutions.

Brace for policy conflict

The PRC has taken giant steps in tech solutions for a carbon neutral future: solar panels, long-distance power transmission, electric vehicles. Now comes the hard part. To dispel uncertainty, Beijing may need to specify the trade-offs between carbon neutrality and other priorities, above all social stability, energy security and manufacturing prowess. Agendas are bound to conflict: emissions campaigns or not, coal remains indispensable in heading off power shortages through winter.

Yet synergies between long-term goals are possible as well as:

• moving up the industrial value chain both increases value-added manufacturing and reduces emissions intensity
• a renewables-storage regime for the power grid dampens risk of commodity price fluctuations, bolstering energy security
• fostering NEVs, etc.; low carbon tech positions the PRC as a go-to supplier, while reducing emissions

Big bets on green tech — energy storage, hydrogen and CCUS — while essential, face a labyrinth of challenges. As top-down measures and the market bend China’s development trajectory towards net zero, fierce conflicts of interest are expected.

Xi Jinping’s commitment to carbon neutrality is non-negotiable. The question is not the will, but whether there is enough time and political space to deliver neutrality.