China’s Carbon Neutral Opportunity: Economic Growth Driven By An Early Emissions Peak

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China energized international climate ambitions in 2020 by pledging to peak emissions before 2030 and reach carbon neutrality before 2060, building upon an earlier European Union commitment to do the same by 2050. President Biden’s election has sparked hope the United States will follow suit at the United Nations’ COP26 climate summit in November 2021. Climate ambition on the part of the world’s three largest economies could set a new global pace.

China and other countries are recognizing scientific consensus that only rapid decarbonization can prevent dangerous climate change impacts. And China also has a strong incentive to reduce local air pollution, a highly visible and deadly problem.

Aerial Photovoltaic Panels
TAIZHOU, CHINA - JANUARY 13, 2021 - Aerial photo taken on January 13, 2021 shows more than 500 mu of photovoltaic panels lined up in the rising sun in Shangzhang township, Xianju county, Taizhou City, Zhejiang Province, China.- PHOTOGRAPH BY Costfoto / Barcroft Studios / Future Publishing (Photo credit should read Costfoto/Barcroft Media via Getty Images)

But new research shows the growing economic advantages of stronger climate policies could be a principal reason China chooses to increase its climate ambition. As clean energy becomes ever cheaper, the world’s top greenhouse gas emitter can export the very technologies it develops to decarbonize at home, driving innovation and improving the competitiveness of domestic companies in international clean energy markets. A recent study accounting for this macroeconomic dynamic found faster power sector decarbonization could increase China’s economic growth up to 15% by 2030.

Future targets, current technology

Under its updated national climate goals, China will cut carbon intensity of the nation’s gross domestic product more than 65% from 2005 levels. To get there, President Xi Jinping committed to deriving a quarter of primary energy from emissions-free sources, including nuclear. China plans to nearly triple its wind and solar power capacity over the next decade, reaching 1,200 gigawatts (GW) from a 2019 installed capacity of 415 GW.

China’s announcement touted it would “promote greener economic and social development in all respects while pursuing high-quality development,” but its plan to achieve the new goals remains somewhat undefined, and some observers saw China’s pledge as staking a claim to global climate leadership while anticipating new cooperation from the Biden administration.   

Fast-falling clean energy prices are paving the way for China to reach its clean energy goals. The average cost of electricity from a new solar farm in China has fallen 82% over the last decade, while wind power prices have dropped by a third, making both cheaper than new coal power plants.

Solar and wind are now competitive with coal in China
Solar and wind are now competitive with coal (average cost of electricity from new plants in China). ENERGY INNOVATION GRAPHIC USING DATA FROM THE INTERNATIONAL RENEWABLE ENERGY AGENCY, CARBON TRACKER INITIATIVE, WOOD MACKENZIE 

Recent research found China could achieve 62% clean energy by 2030 while cutting power costs 11%, and separate analysis found China could peak power sector emissions as early as 2024, then lower those emissions by 150 million metric tons every year even as electricity demand rises.

Rapid technological progress and falling battery costs mean China will be able to store that renewable energy and build a zero-emissions vehicle fleet. Battery-electric storage costs have plunged 87% since 2010, creating increasingly compelling economics for storing renewables and transportation electrification. Electric vehicles are in some cases already more affordable than conventional vehicles on a cost-per-kilometer basis, and upfront purchase prices will reach parity by the mid-2020s if not sooner. An executive at the Chinese electric automaker NIO recently predicted parity will be reached by 2023.

Continued dependence on coal

But China’s continued coal investments risk its climate leadership and clean energy aspirations. In the first six months of 2020, China built more than half of the world’s new coal power plants within its borders, and it is planning 250 GW of coal-fired capacity, more than the U.S.’s and India’s combined existing capacity.

It will be difficult for China to realize the economic potential associated with wind, solar, and other clean technologies if it continues investing in new coal. A recent assessment found 43% percent of the country’s existing coal plants are running at a net loss and estimated that replacing these units with new renewables could have yielded $18 billion net financial savings this year.

Continued fossil fuel investments will eventually generate “stranded costs” due to probable early retirement. The world is trending toward retiring coal plants due to public health and climate change concerns, as well as increasingly cost-competitive renewable energy. Energy Foundation China’s president warns newly built coal plants are fated to “become nothing but scrap metal, a drag on our economic growth.”

A strong position in surging clean energy markets

China has established strong positions in the essential technologies for decarbonizing the electricity and transportation sectors, including solar power, wind power, advanced batteries, and electric vehicles.

While we’re still in the early days of clean energy economic growth, these rapidly growing export markets can become new pillars of the Chinese economy. After all, renewable energy’s explosive growth is far from over. Solar generation over the next two decades will be more than seven times what it was from 2000 to 2019, according to the International Energy Agency; output from wind turbines will increase by a factor of nearly three.

China is the global leader in installed solar power, solar manufacturing capacity growth, and solar power technology exports. It is home to most of the world’s leading manufacturers of solar photovoltaics, the technology now preferred in global markets and still gaining strength. China’s lead in solar gives it an advantage in this important market segment, and Chinese companies are also strong in wind and battery-electric storage.

Cumulative global installed solar capacity 2010-2019
Solar power capacity installed in China far exceeds capacity installed in other countries from 2010-2019. ARNULF JÄGER-WALDAU, “SNAPSHOT OF PHOTOVOLTAICS—FEBRUARY 2019”

Electric vehicles are rapidly gaining market share and outperformed conventional cars during the economic turbulence of 2020. Bloomberg New Energy Finance forecasts that globally, electric vehicles will reach 28% of 2030 new sales and 58% of 2040 new sales. Prior predictions have consistently underestimated the pace of electric vehicle sales increases, suggesting the ascent will likely happen even faster.

The environmental upside of a clean energy economic shift

Cleaner air and other environmental improvements from clean technologies increase China’s quality of life. Improving air quality has been a top priority for citizens and leaders alike for years, and China has made progress on blue-sky goals.

The connection between improvements in environmental quality and stronger economic performance may be less obvious, yet is undeniable. Reduced pollution will improve public health, lower health care costs, increase worker productivity, and strengthen educational outcomes. The International Monetary Fund recently concluded China “would experience substantial economic gains from co-benefits [from ambitious climate action]—on the order of 0.7 percent of GDP immediately and 3.5 percent of GDP by 2050.” Quite the economic payoff.

Improved energy security will result from reduced fossil fuel dependence, considering China is the world’s largest petroleum importer and fastest-growing natural gas importer. Yet China’s domestic renewable energy potential far exceeds current or future demand, offering a path to less reliance on those imports. The reduction in oil use from switching to electric vehicles is well understood, but substantial opportunity exists in using advanced heat pump technologies for space heating and hot water in buildings instead of natural gas.

China is highly susceptible to climate change, facing the threat of desertification in the north, flooding from sea-level rise along the coast, and temperature and precipitation extremes nationwide. The costs of uncontrolled global warming would be as catastrophic here as they would be worldwide – the economic toll from flooding alone could reach $132 billion a year.

Policies to encourage China’s clean energy transition

Decades of experience in climate and energy policy have identified which policies can deliver emissions reductions. China’s carbon-neutral opportunity involves peaking carbon emissions by 2025 as a core economic strategy, and several policies can help achieve this.

China’s national emissions trading system, which establishes a price for carbon dioxide emissions, has rightly captured much attention in recent years: It will help level the playing field for renewables and promote low-cost options for meeting carbon targets.

But carbon pricing is not a silver bullet. China also needs industry-specific performance standards to drive innovation in areas such as transportation, where ever-stronger electric vehicle sales requirements can be combined with financial incentives to encourage purchases.

The effectiveness of China’s national carbon market also will be closely related to power market reform, particularly the rules grid operators use to decide which power sources to dispatch. Currently, each plant is guaranteed a market share based on technology, not cost, which undercuts potential carbon pricing benefits.

China need not sacrifice economic growth when implementing decarbonization policies. An October 2020 paper from the Berkeley-Tsinghua Joint Research Center found that in an aggressive mitigation scenario, falling renewable costs could interact with the national emissions trading system to slash the power sector’s greenhouse gas emissions in half compared to 2015 and still produce net-positive economic growth.

Wind Turbine Blade Manufacturing In Nantong
NANTONG, CHINA - MARCH 02: Aerial view of wind turbine blades sitting stacked at a factory of Shanghai Aeolon Wind Energy Technologies Development (Group) Co Ltd. on March 2, 2021 in Nantong, Jiangsu Province of China. (Photo by Xu Congjun/VCG via Getty Images)  VCG VIA GETTY IMAGES

In addition to market and grid reforms, RMI argues China must improve power planning to support renewables integration, incentivize long-term private power agreements, and upgrade grid technical requirements to ensure stability as clean energy’s share grows. Once again, climate progress is proven technologically achievable and economically viable.

A time for ambitious effort

Deploying ever-cheaper renewables and other clean energy technologies can boost China’s economy and provide environmental benefits while significantly increasing the chance of success in global efforts against climate change.

By embracing a faster renewable energy transition, China can ensure a cleaner, more secure, and cheaper energy system. But this transition will not happen on its own, and certainly not on the timeline outlined by the Paris Agreement, without additional policy. Only well-designed policies can drive technological transformation at the required pace. Original post.


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