Road to COP26: Balancing China’s Twin Economic and Climate Challenges

China’s economic success over the last 30 years has been stunning, eliminating poverty and raising average living standards faster than any other country. But one inevitable consequence is a massive increase in CO2 and other greenhouse gas emissions from around 2.5 gigatons (GT) in 1990 to over 12GT today.

These emissions now account for 26% of the world’s total. So if the world is to avoid potentially catastrophic climate change China must join other major nations in rapid emission reductions. That’s why President Xi Jinping’s commitment last September that China will achieve carbon neutrality by 2060 was such a hugely important step forward and an example of responsible global leadership.

Achieving that objective is undoubtedly technologically and economically possible. Indeed, given China’s high investment-rate, technological prowess, and entrepreneurship, still faster progress could be achieved. As the Energy Transitions Commission has described, China could by 2050 be a fully developed rich zero carbon economy, using new technologies to eliminate greenhouse gas emissions at almost no cost to economic growth.

Setting stretching mid-century targets is vital, and over the last two years almost all rich developed countries have committed to achieve zero emissions by 2050. But to avoid harmful climate change we must also reduce global emissions significantly during the 2020s; some climate models suggest 50% by 2030 is essential. Rich developed countries must lead the way, and the U.K. has committed to reduce emissions to 68% below 1990 levels by 2030. China is committed to peak emissions by 2030 and it is vital for the world that China meets that objective and ideally exceeds it. The COP26 climate conference in Glasgow this November will be a crucial opportunity for all countries to strengthen their commitments, and if China committed then to peak emissions earlier than 2030 that would be a further hugely important step.

To make progress in the 2020s, China needs to address imbalances in its overall economy as well as in its energy system. Fortunately indeed, the policies which China needs to accelerate emissions reductions are also those needed to reduce economic waste, reduce financial risks and put China on an unstoppable path to towards developed economy standards of living.

To do that, China needs to address imbalances in its overall economy as well as in its energy system. Fortunately indeed, the policies which China needs to accelerate emissions reductions are also those needed to reduce economic waste, reduce financial risks and put China on an unstoppable path to towards developed economy standards of living.

Achieving a zero-carbon economy will require massive clean electrification, decarbonizing all electricity production and electrifying as much of the economy as possible. At the global level, the ETC believes that electricity use will grow from today’s 20% of final energy demand to over 60% by 2050, with power demand growing from 27,000 terawatt hours (TWH) to about 100,000TWH. In China, electricity demand could grow from today’s 6,700 TWH to 15,000TWH, and by 2045 electricity should all be produced in a zero-carbon fashion.

From now on all new growth in electricity supply should therefore come from zero carbon sources, and solar and wind power are now so cheap that China could follow this policy without adding to the cost of electricity.

But some sectors of the economy cannot be wholly electrified, and one of those is construction and related steel and cement production. Reducing emissions from this sector is vital everywhere, but even more so in China, where it accounts for 30% of all emissions versus 15% in the rest of the world.

In the long run we must produce cement and steel in a zero carbon fashion, and the technologies to do this — such as using hydrogen as the reduction agent in steel production — are becoming available. But China must also limit the unnecessary use of cement and steel if it is to meet President Xi’s commitment to peak emissions before 2030. And to do that China must rebalance its economy away from excessive investment in infrastructure and property construction.

China invests a huge 45% of GDP; this is far higher than in other countries which have achieved rapid growth; and within the total, 25% of GDP is invested each year in buildings and construction.

Much of that investment is valuable. China has built a superb high-speed rail network and a good highway infrastructure. But a significant share of the total is wasted on unneeded real estate which will never be occupied. An April 2020 survey by the PBOC revealed that 40% of Chinese urban citizens own more than one apartment, and other studies suggest that 15% to 20% of all apartments are unoccupied. The PBOC and the CBIRC rightly therefore worry that excessive real estate construction, financed by credit, could create financial stability risks, and have used multiple policy levers in an attempt to damp speculation.

Apart from financial stability concerns however, unnecessary investment is simply a waste of China’s savings: and the scale of waste could grow in the coming years. China’s population will peak in about 2026 and then slowly decline: the urbanization rate, currently at 62%, will be over 70% by 2030 and approaching developed country levels. Migration from the countryside to cities will slow, and demand for urban real estate decline. If China keeps investing in real estate at the current pace it will pour lots of unnecessary concrete and emit large amounts of CO2 to create assets of no value to the Chinese people.

Many Chinese economists have therefore correctly argued for years that China must rebalance its economy away from excessive construction investment. An excellent joint report of the Development Research Center of the State Council and the World Bank, entitled Innovative China, highlights the challenge and possible solutions.

One priority is to shift investment from “old” to “new infrastructure — spending less on buildings and more on robots, 5G and fiber-optic networks, and data centers. But since the cost of these technologies is relentlessly falling, there is a limit to how large investment in them can possibly be. They are vital to build China’s high productivity economy of the future, but cannot fully replace construction as a source of employment and economic activity.

Large-scale investment in renewable energy should also play a major role, with another 1000 gigawatts of wind and solar capacity in place by 2030, and no need for new carbon emitting coal plant. Recent reports by the Energy Transitions Commission set out the details. But with even such large scale capacity growth unlikely to cost more than 1.5% of GDP, it cannot fully compensate for the desirable decline in construction investment.

Alongside reallocation of investment, China must therefore stimulate consumption as a share of GDP. In part this may occur naturally. The same demographic trends which limit future needs for housing will create labor shortages which stimulate productivity and wage growth, allowing Chinese people to enjoy higher living standards. But better social welfare provision and health services are also needed to reduce the need for high precautionary savings.

China is on the cusp of a hugely attractive opportunity. It could enjoy several decades of rising productivity and wages in an increasingly high technology economy. And it could cut carbon emissions faster than currently planned, making an even bigger contribution to fighting global climate change at no cost to China’s rise to become a fully developed rich economy by 2050.

The opportunity is extremely attractive, but seizing it requires strong government action to address China’s twin challenge: rebalancing its economy away from the old construction bias and rebalancing its energy system away from old fashioned fossil fuels to the clean electricity of the future.

Adair Turner chairs the Energy Transitions Commission, an international think tank, focusing on economic growth and climate change mitigation. He is also former chairman of the U.K.’s Financial Services Authority.

This article is part of a series of commentaries, in collaboration with the British Embassy in Beijing, in the run-up to the 26th U.N. Climate Change Conference of the Parties, scheduled to take place in Glasgow in November 2021.

The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.

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