Climate change – China as a partner

GED blogpost series on China’s role(s) in the world economy (Part 2)

In the first part of our series on China’s role in the world economy, we gave a brief overview of the political and economic background of China’s rise as a global super power.

We argued that the advanced economies have substantial benefited from their partnership with China, since it was mostly based on the principle of comparative advantage in the past.

While in the future, China will become more of a competitor or even rival in many areas, it will remain an important partner in the field of climate change mitigation, which is topic of this part of our series.

China’s rapid economic rise has been accompanied by a massive exploitation of the environment and natural resources. Therefore, the country has not only become the world’s factory but also the world’s largest emitter of CO2 (see figure 1).

The major cause for this is China’s primary energy mix, almost 60 percent of which still consists of coal. The Chinese government has long since been aware of the alarming environmental situation. For example, an entire chapter has been devoted to China’s pressing environmental problems since the 10th Five-Year Plan (2001-2005), and a cascade of environment-related laws and regulations has followed over the years at all administrative levels. However, there was often a lack of stringent application and implementation, so that the practical effects were rather limited.

Source: Climate Action Tracker, Country Assessments September 2020 – http://climateactiontracker.org, download of data: 7 July 2021. Projection starts from 2019.

China‘s environmental policy and its concrete implementation have gained significant momentum under Xi Jinping: For example, political cadres are now evaluated not only according to the economic but also the environmental performance of their respective locality, so that environmental policy failure can become a career killer.

And even if Xi may at the same time be pursuing more leverage for eliminating political opponents through such activities, he is also making a promise to actually deliver in regard to China’s environmental problems.

The highlight of his environmental policy promises so far was the announcement at the G20 summit in Saudi Arabia in September 2020 that China would become climate neutral by 2060. If the Chinese government wants to implement this announcement, it must quickly walk the talk:

According to calculations by the Boston Consulting Group (BCG), China needs to invest 90 to 100 trillion RMB (13.5 to 15 trillion U.S. dollars) through 2050, particularly in the energy, industry, transportation, buildings, and agriculture sectors, to actually achieve climate neutrality by 2060. This sum is roughly equivalent to China’s current GDP.

In addition to its national efforts, China must also rely on international cooperation and multilateral approaches, since climate change as a global phenomenon can only be combated really efficiently on a global scale. This makes it a key partner in this policy field for the EU and the USA, both of which are now pursuing the goal of becoming climate-neutral by 2050, and vice versa.

The EU and China are already cooperating in important areas such as clean energy, low-carbon technologies, or green transportation. Against the background that China is already a leader in important environmental technologies, an expansion of this cooperation can be expected and is also necessary from a global perspective.

Apart from such bilateral cooperation in individual areas, the EU, China and the USA could consider establishing a so-called “climate club”. The countries participating in such a club agree on a common climate policy, for example a CO2 tax, and also implement it jointly.

The idea originated with economist and Nobel laureate William Nordhaus, who introduced it in 2015 as an alternative to the Kyoto Protocol, which he described as dysfunctional due to the widespread problem of “free-riding” in international climate policy.

“Free-riding” in this context means that some countries rely on other countries to reduce their CO2 emissions and therefore do not take action themselves. In turn, countries that do take action to reduce their emissions could suffer a competitive disadvantage as a result if companies relocate their CO2-intensive production to non-participating countries due to environmental policy requirements (“CO2 leakage”).

A climate club has the advantage that a larger share of global emissions is covered as the number of participating countries increases. In addition, it reduces the risk of relocation of emission-intensive production, as fewer countries are available for this purpose.

For a global problem like climate change, a global solution, i.e., an international climate club in which all countries worldwide participate, would be most efficient. However, looking at the historical participation in and implementation of international climate initiatives such as the Kyoto Protocol, a global solution seems illusory for the foreseeable future.

Nevertheless, according to our recent study this scenario would have the greatest impact on reducing global CO2 emissions (see figure 2). In contrast, a regional solo effort by the EU and also an extension to transatlantic cooperation would have comparatively minor effects.

The second-best solution would therefore be a tripartite club of the EU, the U.S. and China, which are now responsible for more than half of global CO2 emissions. If these three actors – who are central to the fight against climate change – were to cooperate on climate policy, they could reduce global CO2 emissions by up to 31 percent, depending on the packages of measures taken.

At the present time, such extensive cooperation between the U.S., China and the EU does not yet seem realistic, even on an issue as pressing as climate change. By 2030, however, the three sides could move toward each other, especially if it becomes clear that the ambitious climate neutrality targets will require much more extensive multilateral cooperation from 2030 at the latest and can only be achieved with ambitious international partnerships.

In the future, China will have to prove that, as an emerging superpower, it is able and willing to act in an internationally responsible manner and to participate in solving key global problems. Both its own population and the international community will therefore also judge the Chinese government by the contribution it actually makes to counteracting global environmental problems and climate change – at home as well as in other countries.

In part 3 of our series on China’s role in the world economy, we look at key technologies of the future. In this field, we argue, China will foremost be an increasingly serious and strong competitor for the advanced economies.