China's Climate Policy Has Major Implications for Trade

Reduced Chinese reliance on fossil fuel imports and rising demand for renewables inputs would have major effects on trading relationships.

dai luo
Smokestacks in Suzhou, China (file image courtesy Dai Luo / CC BY 2.0)

Published May 2, 2021 6:21 PM by The Lowy Interpreter

[By Stephen Minas]

Diplomacy is not always diplomatic. This fact of international life was on full display during the recent meeting of top US and Chinese diplomats in Alaska. It has also frequently characterized the long-running United Nations climate negotiations – often with the same protagonists. A Chinese official’s declaration, prior to the ill-fated Copenhagen summit, that developed countries “would be getting a bill for a hundred years” of climate change is indicative of both tone and content.

Underlying these confrontations was the assumption that tackling climate change would be costly. Negotiations boiled down to arguments over the distribution of these costs. China and many developing countries argued that industrialized nations bore “historical responsibility” to lead on reducing the carbon emissions that had fuelled their prosperity.

As international climate negotiations enter their fourth decade, these arguments persist, but the underlying cost–benefit analysis in many countries has shifted radically. For a growing number of countries, reducing emissions is now about transforming economies in order to prosper in the carbon-constrained future. This is the thinking behind the European Green Deal and the slew of commitments to climate neutrality – net-zero carbon emissions – by 2050. Climate change might still be the “great moral challenge” of a generation that former Australian prime minister Kevin Rudd once described, but it is also the opportunity of a century.

Of all the recent announcements, China’s commitment to achieving carbon neutrality by 2060, announced by President Xi Jinping last September, may end up being the most significant. This is because China is by far the largest emitter of greenhouse gases. In 2019, China was responsible for almost 28 percent of global CO2 emissions. Simply put, tackling climate change is impossible without deep emission cuts in China.

Xi’s announcement caught many observers by surprise. It nevertheless followed an identifiable trend in policymaking that can be fairly described as China’s climate pivot. The pivot is from prioritizing GDP growth, even at the cost of rampant pollution, to a growing focus on the quality of economic development.

Quality means moving up global value chains, increasing indigenous innovation and building an “ecological civilization”. In climate terms, this means proceeding with the transition to cleaner technologies, rather than waiting for others to act first.

The outline of China’s 2021–25 five-year plan, issued at the annual “Two Sessions” political meetings in Beijing in March, confirms this approach. The key policy document repeats the 2060 target and foreshadows an action plan for peaking CO2 emissions before 2030. The outline also includes binding targets to reduce CO2 intensity by 18 percent and energy intensity by 13.5 percent by 2025.

Finance is intended to play a key role in this climate transition. Following a landmark 2013 report co-authored by the World Bank, the government has been working to develop a “green financial system”, embracing various financial instruments. The government claims that China is already the largest market for “green loans” (around 12 trillion yuan) and the second largest for green bonds (approximately 800 billion yuan).

People’s Bank of China Governor Yi Gang has identified green finance as a “key task” for the 2021–25 period. The priority areas he nominated, including standardization, disclosure and incorporating climate factors in financial stability “stress-testing”, reflect broader momentum for sustainable finance in transnational markets and major jurisdictions.

Indeed, the PBoC governor flagged cooperation with both the European Union and within the G20 on common green classification standards (a topic that has been joint researched by Chinese and EU institutions in recent years, although without tangible outcomes so far).

China and the US are co-chairing a G20 sustainable finance group which the current Italian presidency reestablished this year (the G20’s previous work on this topic began under China’s presidency in 2016). In April, the group was “upgraded” from a study group to a working group, reflecting growing impetus for sustainable finance among major economies. The group aims to report on “progress” on sustainability reporting and sustainable investment taxonomies this year.

In addition, China’s national carbon market was “launched” in February (trading is expected to begin mid-year), covering thermal power generators. Initial expectations for its impact are modest, although the market will probably be expanded and strengthened in future.

To be sure, there are major questions concerning the pace and quality of China’s climate transition. Coal still dominates China’s energy mix, accounting for 57 percent of consumption in 2020. There is a major contradiction between increasingly ambitious domestic targets and the vast overseas financing for fossil fuels under the Belt and Road Initiative (although the energy mix of the latter may be changing). China’s sustainable finance standards are less rigorous than international best-practice, although efforts have been flagged to correct this.

It has also been estimated that China’s Covid-19 stimulus measures “will damage the environment”, meaning the opportunity to “build back better” on a more sustainable basis was missed. China’s 2030 targets are not as robust as many had hoped for, and some experts maintain that the 2060 deadline for carbon neutrality is too late. Nor should the pitfalls of “state-led environmentalism”, examined at length in China Goes Green by Yifei Li and Judith Shapiro, be overlooked.

Despite these major caveats, however, the trend of policy is clearly in the direction of stronger climate measures. Financing appears to be following policy, with more than 90 percent of new investment in power generation reportedly flowing to non-fossil fuel energy in the first quarter of 2021.

Xi’s 2060 declaration aside, China’s climate pivot has not been headline news. In Australia, recent China coverage has been dominated by the pandemic, trade reprisals, Hong Kong and Xinjiang. Fair enough, too. These are all massive stories.

Nevertheless, China’s climate pivot, if followed through, would be at least as significant as Covid-19 for the direction of the global and regional economies. Most obviously, reduced Chinese reliance on fossil fuel imports and rising demand for renewables inputs would have major effects on trading relationships. More broadly, a serious push for decarbonization in China would become a factor driving change in financial markets, global value chains and technological innovation.

The growing momentum for climate neutrality is in everyone’s collective interest, but getting there will entail competition as well as cooperation. Regarding the latter, the Sino-US joint announcement on renewing climate cooperation is a positive signal, especially given the overall state of their bilateral relationship. Regarding the former, major economies will continue to vie for advantage in the technologies and sectors that will power the net-zero transition. Developments in China will play a big role in this landscape.

Stephen Minas is associate professor at the School of Transnational Law, Peking University and senior research fellow at the Transnational Law Institute, King’s College London, where he completed a PhD in law.

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.