Decarbonizing China: Status, Outlook, Implications for Business

26 June 2023 / Report

Insights for What’s Ahead

China faces massive climate transition challenges. Long-term decarbonization goals are ambitious, but big gaps remain across a range of important areas, and short- and near- term policy agendas are partially misaligned. The most recent softening policy stance on coal is not only hampering the country’s decarbonization agenda, but it is also economically inefficient. Looking ahead, it is uncertain how policy will shift beyond 2025 to support the government’s goal of peaking carbon emissions before 2030; and then in the post-2030 period to achieve carbon neutrality by 2060.

Over the past decade, China has made clear progress eliminating carbon dioxide emissions (decarbonization) from its economy. Progress achieved so far is largely the result of efficiency gains and moving away (descaling) from heavy industry – the primary focus of Chinese environmental policy for many years. In the long run, achieving carbon neutrality will require China to: (i) supply clean energy to its industrial producers and (ii) fully decouple emissions from growing household consumption.

While the Chinese economy is undoubtedly rebounding following the lifting of zero-COVID restrictions, it is doing so at an uneven and slower-than-expected pace. Against this backdrop, near-term economic and energy security concerns are clearly outweighing decarbonization ambitions. But assuming China’s long-term climate commitment remains unchanged, a pivot point must come soon.

Longer-term, being a climate laggard does not serve China’s interests – neither economically, nor geopolitically. We therefore expect that addressing major decarbonization challenges will escalate as a policy priority domestically once the immediate post-COVID recovery period is behind us. Delayed progress in some areas will then require urgent catch-up. This means measures to curb carbon-emitting activities will likely ramp up significantly in the 2025-30 policy cycle.

It is of paramount importance for strategic planning that companies sift through the short-term noise to discern firm, enduring government policy objectives, and ascertain the degree of certainty with which these objectives will be adhered to 5, 10 and 15 years from now. Not only is this crucial because of R&D and other strategic investment planning, but also because clean energy supply is essential for companies to advance their own climate transition programs in China, and to satisfy ESG-oriented investors, shareholders, activists, and consumers.

Policy signals on coal, investments in renewables and grid upgrading, the expansion of the domestic emissions trading system, a carbon emissions cap (vs an intensity target), and China’s reaction to international trade regulations are some of the important guideposts to watch

Insights for What’s Ahead

Over the past decade, China has made clear progress eliminating carbon dioxide emissions (decarbonization) from its economy. Progress achieved so far is largely the result of efficiency gains and moving away (descaling) from heavy industry – the primary focus of Chinese environmental policy for many years. In the long run, achieving carbon neutrality will require China to: (i) supply clean energy to its industrial producers and (ii) fully decouple emissions from growing household consumption.
While the Chinese economy is undoubtedly rebounding following the lifting of zero-COVID restrictions, it is doing so at an uneven and slower-than-expected pace. Against this backdrop, near-term economic and energy security concerns are clearly outweighing decarbonization ambitions. But assuming China’s long-term climate commitment remains unchanged, a pivot point must come soon.
Longer-term, being a climate laggard does not serve China’s interests – neither economically, nor geopolitically. We therefore expect that addressing major decarbonization challenges will escalate as a policy priority domestically once the immediate post-COVID recovery period is behind us. Delayed progress in some areas will then require urgent catch-up. This means measures to curb carbon-emitting activities will likely ramp up significantly in the 2025-30 policy cycle.
It is of paramount importance for strategic planning that companies sift through the short-term noise to discern firm, enduring government policy objectives, and ascertain the degree of certainty with which these objectives will be adhered to 5, 10 and 15 years from now. Not only is this crucial because of R&D and other strategic investment planning, but also because clean energy supply is essential for companies to advance their own climate transition programs in China, and to satisfy ESG-oriented investors, shareholders, activists, and consumers.
Policy signals on coal, investments in renewables and grid upgrading, the expansion of the domestic emissions trading system, a carbon emissions cap (vs an intensity target), and China’s reaction to international trade regulations are some of the important guideposts to watch