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Guidebook to Carbon Neutrality in China CICC Research, CICC Global Institute Macro and Industry Trends under New Constraints Guidebook to Carbon Neutrality in China CICC Research, CICC Global Institute Guidebook to Carbon Neutrality in China Macro and Industry Trends under New Constraints CICC Research, CICC Global Institute Beijing, China CICC ISBN 978-981-16-9023-5 ISBN 978-981-16-9024-2 eBook https//doi.org/10.1007/978-981-16-9024-2 Translation from the Chinese language editionuni78B3uni4E2Duni548Cuni7ECFuni6D4Euni5B66byuni4E2Duni91D1uni516Cuni53F8uni7814uni7A76uni90E8uniFF0Cuni4E2Duni91D1uni7814uni7A76uni9662,© uni4E2Duni4FE1uni51FAuni7248uni96C6uni56E22021. Published byuni4E2Duni4FE1uni51FAuni7248uni96C6uni56E2. All Rights Reserved. © The Editors if applicable and The Authors 2022. This book is an open access publication. Open Access This book is licensed under the terms of the Creative Commons Attribution- NonCommercial-NoDerivatives 4.0 International License http//creativecommons.org/licenses/by-nc- nd/4.0/, which permits any noncommercial use, sharing, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original authors and the source, provide a link to the Creative Commons license and indicate if you modified the licensed material. You do not have permission under this license to share adapted material derived from this book or parts of it. The images or other third party material in this book are included in the book’s Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the book’s Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. This work is subject to copyright. All commercial rights are reserved by the authors, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. Regarding these commercial rights a non-exclusive license has been granted to the publisher. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is 152 Beach Road, 21-01/04 Gateway East, Singapore 189721, Singapore Foreword At the UN General Assembly session held in September 2020, Chinese President Xi Jinping announced China’s solemn pledge on carbon neutrality and carbon emission peak. In December 2020, President Xi went on to highlight a number of aggregate indicators to show China’s further commitment to the fight against climate change at theClimateAmbitionSummit.AttherecentNinthMeetingoftheCentralCommittee for Financial and Economic Affairs, policymakers discussed fundamental ideas and key measures to accomplish the country’s targets on carbon neutrality and carbon emission peak. To implement and achieve such a profound goal requires exten- sive efforts from both the regulators and the market. Recently, China International Capital Corporation Limited CICC has published Guidebook to Carbon Neutrality in China Macro and Industry Trends under New Constraints, a comprehensive and informative work that serves as a good lead in the research on carbon neutrality and carbon emission peak. I am confident it will become a highly influential piece of work. That said, I think the research on carbon neutrality and carbon emission peak is still in its early stage. Many issues in this field remain controversial and require further in-depth analysis. Peak Volume of Carbon Emissions Careful Estimation is Essential CICC’s work endeavors to derive an exact number for China’s peak carbon emissions and draw a clearer picture of the pathway to achieve this goal in the next 10 years through analysis of aggregate targets. While this is quite important, it is also worth noting that part of the basic data for China in this area remains unavailable. For instance, China’s carbon emission intensity in 2030 should be 65 lower than the levelin2005sothatthecountrycouldachieve thetargetforemissionpeak.Naturally, we will need to know China’s carbon emissions in 2005. Another example would be that China aims to increase its forest stock volume in 2030 by 6 billion cubic v vi Foreword meters from the 2005 level. Then, we also need to know how much China’s forest stock volume was in 2005 and how much carbon dioxide can be absorbed by each cubic meter of forest stock per year. However, due to the lack of accurate official statistics from government agencies or other authoritative sources, the answers to these questions could be inconclusive and misleading. A possible explanation is the inadequacies of China’s data compilation in the past, causing incomplete and incon- sistent data with little verification. Another possibility is that these vague numbers provided additional room for policy maneuvering before China changed its policy stance toward climate change. CICCResearchspentaconsiderableamountofresourcesobtainingitspreliminary estimate on China’s peak net carbon emissions in 2030. Why didn’t government agenciesorrelevantauthoritiesannouncethisnumberdirectlyThereasonispossibly the lack of accurate data of year 2005. CICC’s estimate is based on official data in 2017 and government announcement that the emission intensity in 2017 was 46 lower than the 2005 level. What is the rationale for our endeavors to estimate the peak emission volume This estimation is critical as it is vital to future plans for emission cuts, the choice of proper roadmaps, as well as the design of incentive mechanisms, notably pricing schemes. Therefore, it is quite necessary to analyze this number further. The first issue is the measurements of data. CICC’s work proposes to use emission data in 2005 as the baseline for calculation. However, the measurements of the benchmark data need clarification Is it gross or net emissions volume Does it include other greenhouse gases besides carbon dioxide The data measurements also affect the total carbon emission data in 2020 that has not yet been announced, as well as the strategic roadmap of emission cuts for the next 10 years. Ensuring a unified data measurement is still a challenging job in our calculation and estimation. The second issue is GDP comparability. China aims to reduce its carbon emission intensity in 2030 by 65 from the 2005 level. To achieve this goal, we need to know how much China’s comparable GDP increased over the period of 2005–2020. In principle, calculating comparable GDP with the GDP deflator or GDP growth rate is unlikely to cause much controversy. However, we should still be cautious about the use of data. For instance, there are sometimes substantial differences within the preliminary GDP growth rate, the initial and final verified GDP growth rate, and the revised number released after the national economic census. Such differences were quite visible in GDP data for 2005, 2006, and 2007. But generally speaking, the use and comparability of historical GDP data are unlikely to face significant disputes. However, forecasts on China’s average GDP growth over the next 10 years are based on assumptions, and different assumptions may result in a range of estimates. All these issues call for attention in our calculation of aggregate targets. Apart from technical details, there are also debatable questions about the logic of the calculation. As discussed above, we may use the published data from the government to derive China’s carbon emission volume in 2005 and the peak emission volume in 2030. In fact, there is a logical relationship between the emission intensity data for 2005 and 2017 and the 46 decline in emission intensity from 2005 to 2017 based on verified comparable historical GDP. In other words, knowing two of the Foreword vii three numbers would surely enable us to know the third. This inevitably leads to a question Why has no one officially confirmed the 2005 data There may be some other reasons, but it is also possible that there is no disclosure plan in the first place. Forming a Carbon Market and Determining Carbon Price An important view in CICC’s report is that peak emissions and carbon neutrality require significant investment, and we need the carbon market to guide investment into cutting carbon emissions and eventually achieving carbon neutrality. A carbon market would provide incentives for investment from two dimensions 1 A carbon market encourages emitters to increase current productivity or reduce unit emission within their existing capacity, which helps improve carbon balance. 2 The potential of current productivity growth or emission cut is limited as capabilities of current emission control technologies are unlikely to improve much in the near term. There- fore,weneedtoguideintertemporalinvestmenttosubstitutehigh-emissionactivities. A carbon market can provide clear signals for market investment, especially through carbonmarketderivativessuchascarbonfuturestradingandforwardcontracts.Thus, it can help with risk control and calculations for future investment and production. Overall, the second point of investment incentives is critically important as efforts to achieve carbon emission peak and carbon neutrality largely depend on the effective guiding of investments. CICC estimates in its report that China’s demand for green investment would total Rmb139trn by 2060, and I believe this figure is based on the 2020 value of the RMB. However, different institutions offer different estimates. In a report published in March 2021, the International Renewable Energy Agency IRENA estimated renewable energy investments planned globally should rise 30 to US131trn by 2050. Given that China accounts for about one-third of the world’s total carbon emis- sions, China alone would require approximately Rmb283trn worth of investment. Such an enormous amount of investment does not emerge out of mere persuasion. Carbonmarketsshouldplayacrucialroleinstimulatingandguidingsuchinvestment. There also exists some doubts concerning a few aspects of the carbon market, notably fluctuations and instability of carbon prices. One important notion of CICC’s research is to compare the concept of green premium with carbon price and apply these two concepts in different scenarios in light of their respective strengths. In the meantime, we should be aware that high uncertainties in future carbon prices could be attributed to three possible reasons 1 Investment is subject to uncertainties in technological progress and the cost-performance ratios of future technologies. As most investment projects are medium- to long-term ones, the returns and investment accountings are also subject to uncertainties. 2 To strike a balance between current economic growth and future carbon neutrality, the government may introduce transi- tional arrangements before the country reaches the carbon emission peak and carbon neutrality.Suchtransitionalarragementsmaytakemanyformstoreducetheaddtional costs brought by the carbon trading system. In addition, the schedule of emission viii Foreword cuts could be front-loaded or back-loaded. As such, fluctuations in the volume of emission cuts would lead to uncertainties in the quantity of emission allowances traded in the carbon market, which affects carbon prices. 3 There are uncertainties inthegovernment’sfiscalstrengthandsubsidypolicies,whichaffecttheformationof post-subsidy carbon prices. In our exploration of emission-cut roadmaps, we should be fully aware of these uncertainties and their impacts on carbon prices. CICC believes that unified carbon pricing may cause problems, and differentiated carbon pricing might be the solution. The world has become a human community with a shared future. It is virtually impossible to trace all the greenhouse gases in the atmosphere back to industries responsible for the emissions. Each tonne of carbon dioxide has the same negative impact on society and the economy. There- fore, the overall cost not marginal cost of reducing each tonne of carbon dioxide should also be the same. Nevertheless, due to the differences in green premiums and industry characteristics, a unified policy mechanism may have varying effects across different sectors. To address such differences, the government’s industrial policies and fiscal policies should treat various sectors in distinct ways, providing them with differentiated incentive mechanisms. Priority and Structural Optimization As China endeavors to reach carbon emission peak and carbon neutrality, the country should pay adequate attention to differences between various industries, and avoid “penny-wise,pound-foolish”actionswhenprioritizingitsefforts.Thepowerindustry should be the top priority for emission cuts as it accounts for 52 of total emissions in China and 41 on average around the world. CICC’s work calls for an increase in electrification, e.g., a shift from direct consumption of fossil fuels to electricity. Meanwhile, power plants should also switch to green power production or zero- carbon power production. Therefore, electricity’s share in primary energy is set to expand substantially, and CICC expects this figure to reach 70 in 2060. Although all industries should take action to reduce emissions, their demand for emission allowances may differ from each other due to variations in their emission volumes. President Xi Jinping stated at the Climate Ambition Summit that China would increase the share of non-fossil fuels in primary energy consumption to approxi- mately 25 in 2030, meanwhile bringing its total installed capacity of wind and solar power to over 1.2 billion kilowatts. We also need to convert the installed capacity into annual power supply by analyzing annual average utilization hours and grid absorp- tioncapacity.Acriticalfactorintheconversionistheannualaverageutilizationhours for di