China zeroes in on carbon pathways but refrains from raising climate goals

China recently unveiled a series of policy instruments designed to put the country on track to meet its stated climate goals of CO2 emissions peaking by 2030 and achieving carbon neutrality by 2060. But the world's largest GHG emitter stopped short of making more ambitious pledges amid domestic power shortages.

Within a span of two weeks, the Chinese government carried out further coal power market reforms, established near-term energy efficiency and carbon intensity targets, and issued a top-level guideline for decarbonizing its economy for the coming decades.

"These new plans are part of the series of policies that China has planned for putting the fine print on its carbon peaking and neutrality targets," thinktank E3G Senior Policy Advisor Byford Tsang told Net-Zero Business Daily.

"These policies have not raised China's climate goals, the deadline targets…remain the same," Tsang added. "Crucially, [those] do not include any new policies on coal, China's biggest single source of carbon emissions."

Xi first established the 2030 and 2060 targets during the 2020 UN General Assembly in September that year. After the Intergovernmental Panel on Climate Change in August suggested that global warming is worse than earlier feared, governments across the globe are facing calls to ramp up their decarbonization efforts.

Earlier this week, UN Secretary-General António Guterres called on China to present a more "ambitious" Nationally Determined Contribution (NDC) in the run-up to COP26.

China has not formally updated its NDC with the UN following Xi's pledges last year. The world's second-largest economy previously committed to just peaking its CO2 emissions "around" 2030.

Observers said China might struggle to raise its climate targets following the country's worst power crunch in a decade. The Chinese government had to ask coal mines to hike production to ease domestic shortages, which contributed to electricity generation failing to meet demand requirements. Coal accounts for around half of China's power mix.

"Energy is an important material foundation for economic and social development, as well as the principal source of carbon emissions. We will maintain commitment to cutting carbon emissions in a safe manner by vigorously promoting substitution of renewable sources of energy under the condition that energy security is ensured," China's State Council said a policy document 26 October.

It's understandable that policymakers in Beijing have had to push for more coal production to "keep the lights on and safeguard people's livelihoods," Tsang said. "But it does make the politics harder for policymakers to commit to end to coal power, [the country's] most abundant energy source.

"What matters is what China does coming out from the crisis. Whether Beijing recognizes the risks of relying on fossil fuel and scale up renewables…or it doubles down on coal," he added.

Yuan Lin, lead analyst for carbon research at Refinitiv, said China could be able to peak CO2 emissions before 2028. An S&P Global Platts model showed China's emissions would peak between 2026 and 2028.

However, whether China would actually set out a more ambitious goal is "not only a technical question, but also a political question," Lin said. "It also depends on the ambitions from other countries during the COP."

Policy framework

Of China's policy documents published recently, the State Council's Working Guidance For Carbon Dioxide Peaking And Carbon Neutrality In Full And Faithful Implementation Of The New Development Philosophy provides a top-level framework for future policy design.

The Chinese government, for the first time, committed to oil demand peaking between 2026 and 2030 and a target of an at least 80% non-fossil fuel share in primary energy consumption by 2060 in the guidance.

Beijing reiterated the goals of a 20% non-fossil fuel share in 2025 and 25% in 2030. The share was 16% last year. IHS Markit's reference outlook suggests the 2025 and 2030 goals can be met.

In addition, the government retained its target of at least 1,200 GW of installed wind and solar power in 2030, versus 560 GW as of the end of June.

China is aiming to reduce its CO2 emissions per GDP by 18% relative to 2020 levels by 2025, and by 65% or more from 2005 levels in 2030. The previous target was a reduction of between 60% and 65% in 2030. In 2020, the country managed a 48.4% cut from 2005 levels.

The State Council also said China will control methane emissions, increase green bond issuance, promote low-carbon fuels, carbon sinks, emissions trading, and carbon capture, utilization, and storage, without providing quantified targets.

"The guidance will lay a solid foundation for upcoming detailed roadmaps in China's green transition, in all sectors… It also emphasizes the role of market-based mechanisms in saving energy and reducing emissions," Lin said.

"Further detailed roadmaps and tools to implement the peak emissions and carbon neutrality pledges are anticipated to be published before or during COP26," he added.

Sector-based goals

As part of the pathways, Beijing wants the share of vehicles powered by renewable and clean energy to reach 40% of total annual sales by 2030. The proportion of green transportation would need to cross the 70% threshold in cities with a population size of over 1 million.

But the government also said some select energy-intensive industries need to constrain capacity growth and improve energy efficiency before others.

The target is for CO2 emissions from Chinese steelmakers, petrochemical producers, makers of cement and other building materials, and non-ferrous metals smelters to peak in the coming years.

Moreover, the country's total crude distillation capacity will stay below 1 billion metric tons (mt) per year in 2025. Capacity reached 890 million mt at the end of 2020.

When building new capacity, Chinese steelmakers, cement makers, plate glass manufacturers, and aluminum electrolysis plants will be required to shutter the same amount of existing capacity or more.

The government is also banning new or expansion projects in the oil refining, ethylene, paraxylene, and coal-to-olefins sectors—unless those are specifically listed in the national industrial plans.

In addition, more than 30% of Chinese oil refiners, calcium carbide makers, cement clinker manufacturers, plate glass manufacturers, aluminum electrolysis plants, and ethylene and synthetic ammonia producers must meet tighter energy efficiency targets in 2025. Others are given less stringent goals.

Each industry has its own targets, but Beijing did not specify which manufacturers need to perform better. The government said the standards for both groups will be lifted further by 2030, and that a greater percentage will be in the better-performing group, without elaborating.

Lara Dong, senior director for Greater China power and renewables at IHS Markit, said the energy efficiency targets will contribute to peaking the emissions from each industry before 2030.

They will complement China's existing dual-control policy that regulates energy intensity and consumption in each province, Dong added. "The energy efficiency targets have a larger scope than electricity. They incorporate other forms of energy [such as coal], too."

Market reforms

Meanwhile, the National Development and Reform Commission (NDRC) this month moved to liberate China's power market amid high coal prices.

From 15 October, coal plants are allowed to raise or cut on-grid tariffs by up to 20% from the government-set baselines in the wholesale market, compared with a 10% upside cap and a 15% downside limit previously. Spot trading of electricity is not constrained by the caps.

Moreover, industrial users with high energy intensity will have no price cap. But the residential and agricultural sectors will stick to the official guideline rates.

"The coal-fired power tariff change will not be sufficient to bring generators to profitability, but is a vital step in China's power pricing reform," Dong said. "It will help to address the disconnect between market-based coal prices and the tightly controlled coal-fired power tariff."

The NDRC requires Chinese coal plants to sell all of their power in the wholesale market. Solar, wind, and nuclear electricity tariffs are benchmarked to the baseline price of coal power.

With coal generators set to increase tariffs to cover their losses, energy consultancy Lantau Group said the pricing mechanism will allow renewable energy to become more competitive.

"Current coal scarcity and pricing shocks aside, the long-term trend for coal prices is expected to be rising, while [the levelized cost of energy] for newbuild renewables is forecast to fall," Lantau added. "If the economic forces in the wholesale markets are working the way they should, we could see a surge of wind and solar development, with developers looking to take advantage of strong demand."

"These new regulations represent a large step in China's power sector liberalization journey, with significant potential knock-on effects for its decarbonization goals," the consultancy said.

Posted 28 October 2021 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability