Making China's Economic Transition Work for Global Climate and the Local Environment

When it was first announced in late 2014, China’s climate pledge was a bold and unprecedented step that gave new confidence to global efforts to mitigate climate change. This pledge, enshrined in the 2015 Paris Climate Agreement, commits the country to peak its emissions at latest by 2030 through steady reductions in carbon intensity and deployment of non-fossil energy. As the world’s largest energy user and emitter, and second largest economy, China’s move placed a significant dent in global emissions projections at the time.

Today, the combination of China’s economic slowdown and proactive government realignment of internal priorities toward more sustainable growth has led to lower projections of the country’s emissions trajectory. The question is no longer whether or not China will be able to meet its pledge—indeed, a peak sooner than 2030 looks well within reach, suggesting China’s climate pledge was both prudent and credible. Instead, the question now is whether or not—and how—China can achieve further progress on climate change while advancing its own development goals. Any effort to accomplish this will require strong central coordination in policy making, a commitment to incentives for demand to guide new energy investments, and redoubled capacity for monitoring and implementation.

Expectations Exceeded But New Challenges Emerge

Indeed, it is noteworthy that China has met or exceeded most of the energy and climate goals it has set so far. Take for example progress during the Twelfth Five-Year Plan (2011-2015). China’s energy intensity and carbon intensity reduction goals of 16% and 17%, respectively, were both exceeded by a few percent. The country overshot its original 90 GW target for wind deployment by a large margin, with 145 GW installed at the end of 2015. Solar capacity hit 43 GW, exceeding the original goal—viewed by many as ambitious—of 35 GW.

But there are also some worrisome signs that energy system investment—especially in coal—has not adjusted in the face of slower-than-expected growth. In 2015, electricity demand grew by only 0.5%, while new capacity in the electric power system expanded by 9.5%. Although non-fossil sources nuclear, hydro, wind, and solar accounted for over half of the incremental capacity at about 72 GW, new coal capacity accounted for 52 GW in 2015, the largest increase since 2009. The new capacity will exacerbate an existing glut and could lock in substantial carbon emissions for decades unless the course correction mentioned below is pursued and strengthened.

Another pressing issue is the increasing integration woes of China’s renewable energy investments. In the first half of this year, over 1/5 of all wind energy in the country was unable to be utilized (curtailed), with that fraction rising to over a half in certain areas. In a recent study in Nature Energy, we analyzed how much of China’s wind potential could be cost-effectively integrated in 2030, and the results were striking: reaching 30% of total projected electricity demand, wind could deliver three-fourths of China’s target of 20% of primary energy from non-fossil sources in 2030. Adding in solar, hydro, and nuclear, China has the opportunity to exceed this target by a large margin.

To achieve this, we found, requires at least two major changes to current practice: first, reducing preferential treatment for wind in high-resource areas located far from demand centers, which would ensure new build decisions more strongly reflect integration challenges; and second, increasing the flexibility of power system operation, in particular the dispatch of coal generators, to accommodate the variability of wind and solar. China has already made some changes to deployment patterns, by forbidding new projects in high curtailment regions early this year, and accelerating approvals of new capacity growth in previously untapped regions like Guizhou.

Reforming power system operations is much more challenging, and China still has a long road ahead. Establishing markets for electricity, as proposed in last year’s power sector reform document, could create crucial price signals to incentivize flexibility and improve system efficiency, while also pushing out inefficient or excess generators that currently receive guaranteed electricity quotas. Under typical market designs (known as spot markets), wind and solar are big winners since their marginal cost is near zero. Unfortunately, steps toward the creation of efficient short-term markets have been slow. Acknowledging the importance of short-term flexible operations, the central government has created pilot programs at select coal plants to explore the technical potential for plants to provide more space for renewable energy, but without incentives it is difficult to see how these will be scaled up to deliver widespread relief.

More broadly, policy makers will need to move beyond supply-push policies that help to rapidly expand infrastructure and boost GDP, to market-based discipline—for instance, by removing subsidies, ensuring investors rely on the market for cost recovery, and by pricing carbon—that will ensure investment decisions respond to changing demand conditions. The recent cancellation of plans for new coal construction is a positive step, but has come too late to avoid a worsening of short-term overcapacity. Plans to launch a national emission trading system (ETS) in 2017 will introduce a price on carbon emissions, but there is much work left to make it a fully functioning market. Meanwhile, removing administrative supports that target specific levels of new capacity would impose discipline on investments that are far outpacing demand growth. The announcement that new coal plants will not be granted annual generation quotas is a step in the right direction, as are several new administrative efforts to promote grid integration of renewables. However, already approved plants and co-generation facilities are excluded.

Renewable energy not only brings changes to the grid, it also hits budgets and priorities of local governments, who cling on to tax revenues and employment of coal and energy-intensive industries even more tightly amidst slowing growth. Worrisome is that initial steps of market-based electricity pricing have taken the form of bilateral contracts between primarily coal and large consumers, suggesting that the first beneficiaries of reduced electricity costs will be the very energy-intensive industries that China is trying to transition away from. Allowing market pressures to push down prices while at the same time putting more renewable energy on the grid will be a crucial determinant of the pace of environmental progress. There must also be much more candid conversation on how to transition old industries and their workers—crucial elements of a real reform agenda.

Opportunities at the G20 to Connect the Local and the Global

The upcoming G20 meeting in Hangzhou offers China the chance to reaffirm its intention to make best efforts to peak emissions before 2030 , and to promote a green, low carbon economic transition, not in spite of, but because of, the potential for sustainable economic benefits. All countries need to do more to address climate change. Highlighting the progress China has made—and remaining challenges it faces—in evolving its institutions to support its increasing focus on sustainable development could catalyse greater dialogue and information sharing within the G20. This would go a long way toward expanding the global clean energy economy under the country’s leadership.

The benefits of redoubled efforts to accelerate a clean energy transition in China should come as good news for its policy makers—the actions that enhance climate change mitigation can be beneficial for emerging clean industries and also help deal with country’s major air pollution problems. Incentivizing stakeholders that have long benefited from the status quo to participate will determine how much reforms can deliver—for both the economy and the climate.

Author Information:
Dr. Valerie Karplus, a ChinaFAQs expert, is an Assistant Professor in the Global Economics and Management Group at the MIT Sloan School of Management, and a Faculty Affiliate of the MIT Joint Program on the Science and Policy of Global Change and the MIT Energy Initiative.
Michael Davidson is a PhD candidate in engineering systems at the Massachusetts Institute of Technology (MIT), and a research assistant in the Joint Program on the Science and Policy of Global Change.