Publication
Country Snapshot: China
Global | Publication | October 2015
Content
INDC
On 30 June 2015, in advance of COP21, China submitted its Intended Nationally Determined Contribution (INDC). The submission specified a target to peak CO2 emissions by 2030 at the latest, lower the carbon intensity of GDP1 by 60% to 65% below 2005 levels by 2030, increase the share of non-fossil energy carriers of the total primary energy supply to around 20% by that time, and increase its forest stock volume to a total of around 4.5 billion cubic metres, compared to 2005 levels.
Environmental commentators have rated, based on scientific analysis, the targets set in China’s INDC submission as medium. China’s commitment to peak CO2 emissions by 2030 and to increase its renewable energy capability to 20% of total primary energy supply demonstrates China’s commitment to addressing climate change.
‘Based on its national circumstances, development stage, sustainable development strategy and international responsibility, China has nationally determined its actions by 2030.’
The Chinese government stated in its INDC that it is accelerating the implementation of the National Strategy for Climate Adaptation (2014 – 2020)2. The strategy outlines a wide range of measures to be implemented by 2020 in order to protect water resources, minimise soil erosion and strengthen disaster prevention.
‘China will accelerate the transformation of energy production and consumption and continue to restructure its economy, optimize the energy mix, improve energy efficiency and increase its forest carbon sinks, with a view to efficiently mitigating greenhouse gas emissions.’
China has made a commitment to strengthen laws and regulations on climate change and to integrate climate change related objectives into the national economic and social development plans.
Notwithstanding the above, there are some signs that China is preparing to accept an absolute cap on emissions. The US Sino treaty move to agree to no further increase beyond 2030, the fact that its calculation of emissions has moved from energy intensity to an absolute cap on emissions (and this is reflected in the schemes), the moves to develop and then unify the emission trading schemes into one scheme and certain statements by some officials point in this direction. Accordingly, China will be one to watch at Paris to see where it moves from its INDC submission.
The full text of China’s INDC submission can be accessed here.
Carbon pricing
Following on from the success of the seven pilot carbon trading schemes across seven of China’s largest cities, China has made a firm commitment to implement a nationwide Carbon Emission Trading System (CETS) that will play a central role in resource allocation and is expected to be fully functional by 2017. The ‘cap and trade’ emissions trading system which will place a limit on emissions while also creating a market where companies can trade carbon allowance follows the success of the test systems launched since 2013.
During President Xi Jinping’s recent state visit to the United States, China confirmed that its new CETS will cover ‘key industry sectors such as iron and steel, power generation, chemicals, building materials, paper-making, and nonferrous metals’. The CETS is expected to cover 40 per cent of China’s economy and be worth up to 400 billion yuan by 2020 which would make the market twice as big as the EU equivalent emissions trading market, which is currently the world’s largest.
For China, these emission schemes are not only about reducing emissions, they are also in some cases more importantly also about reducing pollution, which in some cities has got to the point that it is a politically sensitive issue.
Domestic offsets scheme
Currently the seven test CETS3 trade China Certified Emission Reduction (CCER) credits as offset credits which are issued by the National Development and Reform Commission (NRDC). The CETS allow a varying percentage of CCERs to be used as offsets between 5 to 10 percent. It is expected that the national CETS will allow participants to offset their emissions by up to 10 percent.
Projects producing CCERs (i.e. offsets generated by carbon reduction projects) are only eligible if construction of the project started after February 16 2005 and it has been approved as an eligible project. Various tests and analyses must be carried out to establish whether a project is eligible to produce CCERs and whether the origin of the CCERs will impact on whether companies are able to purchase them as offsets.
In order to be tradable on the CETS, carbon emission projects or Chinese Clean Development Mechanism (CDM) projects must first de-register from the UN CDM offset credit trading scheme before they can participate in China’s domestic carbon markets so as to avoid double counting of the emission reductions. A Chinese official said that UN registered projects applications are rejected as "We cannot accept projects that could also sell credits to the international market because of concerns over double counting."
The key issues around the schemes to date, has been the lack of liquidity, difficulties around movement between the schemes and pricing volatility.
China’s efforts cannot be looked at through CETS alone. China has a host of different measures aimed at dealing with emission reductions, from demand side regulations, tax incentives, government subsidies for renewables and ESCO projects, incentives and penalties for local officials with respect to emissions in their area, directives to state owned enterprises to shut down coal fired projects, directives to banks not to lend to emissions intensive industries and there have been discussions around carbon taxes as well. The CETS is only one part of China’s armada in reducing emissions.
Renewable energy
China has bold ambitions to increase adoption of renewable energy to reduce its dependence on fossil fuels and to battle severe air pollution. As of 2014, China obtained 11.2% of its total primary energy from non-fossil sources. The share of coal in the energy mix has been decreasing and imports of coal have decreased significantly.
As set out in their INDC, China intends to increase the share of non-fossil energy carriers of the total primary energy supply to around 20% by 2030. China has set ambitious targets for solar and wind energy production with a view to installing 100GW of solar capacity and 200 GW of wind by 2020.
Despite the signs that China’s economic growth is slowing, the Chinese government remains committed to the ongoing development of its renewable sector.
The head of the International Energy Agency (IEA) has commented that China is spending as much as the US and Europe put together on clean power and that,
‘they are now the largest wind power market in the world. They have increased their power generation from renewables from really nothing 10 years ago – and now it’s nearing 15%. These are very important signs that China is moving in the right direction.’
But despite its admiration for China's achievement, the IEA is still critical of what it says is the nation's lack of transparency on data.
Energy efficiency
The 12th Five-Year Plan (2011-2015) set a new 16 percent energy intensity reduction target for 2015, compared with the 2010 level. Several types of policy measures have been implemented to promote energy efficiency and conservation: energy efficiency labels, minimum efficiency standards, financial incentives, pricing and government procurement. Financial tools include direct funding of energy efficiency projects in industry and buildings, subsidized loans, and loan and credit guarantees.
From 1980 to 2010, while China’s economy increased 18-fold, energy consumption increased only 5-fold. Energy intensity per unit of GDP declined by about 70 percent during the same period.
Marianne Fay, Chief Economist, Climate Change Group of the World Bank said,
‘Transforming China’s energy sector towards a low-carbon path is the most important climate change mitigation action in the world. We commend Chinese government’s strong commitment and effective policies to promote energy conservation and emission reduction.’
China has developed Energy Service Companies (ESCOs) as a tool for implementing their energy efficiency agenda. According to the World Bank, the ESCO industry in China has grown from an initial three companies established 20 years ago to nearly 5,000 companies which had nearly US$ 10 billion in energy performance contracts in 2012. ESCOs have been reasonably successful although a key issue has been recovery of energy efficiency savings from counterparties (i.e. general counterparty risk) and this has to date been the key obstacle to its development.
Additionally, the China Utility Based Energy Efficiency Finance Program (CHUEE) has played a role in providing marketing, engineering, project development, and financing services to commercial, industrial, and multi-household residential sector energy users to support the implementation of energy efficiency projects. More details on CHUEE can be found here.
Financial support
China was the number one investor in renewable energy in 2014, investing US$ 83.3 billion which accounts for nearly a third of global investment and the Chinese government’s financial support for environmental protection shows no signs of abating with US$ 817 billion of investment expected during the course of the 12th five-year plan.
The China Clean Development Mechanism Fund (CCDMF) is a national climate fund that supports low carbon growth and climate resilience in China. It is a revolving fund that receives regular capital injections from levies collected by the government on clean development mechanism projects in China.
It is clear that that the Chinese government will continue to offer significant financial support for environmental protection.
Footnotes
Annual emissions divided by GDP.
A strategy published by the National Development and Reform Commission published in November 2013.
Beijing, Shanghai, Tianjin, Shenzhen, Guangdong, Chongquing and Hubei.
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