- President Xi Jinping pledged that China's carbon emissions would peak by 2030 and decline to net zero by 2060.
- Achieving the ambitious 2060 goal will require a mix of market-oriented reforms in the power sector and administrative tightening to reduce reliance on coal.
- Stiff resistance from the coal power industry and economic pain from closures of dirty power plants will test the leadership's commitment to reform.
President Xi Jinping told the UN General Assembly in September that China's carbon emissions would peak by 2030 and decline to net zero by 2060. The targets imply policy reforms that would reshape China's energy landscape, but enacting them will require overcoming powerful resistance from entrenched interests, especially the coal sector and the electricity grid operators.
The 2030 pledge will be relatively easy to achieve on China's current energy trajectory. As the economy pivots away from smokestack industries towards consumption, services, and technology, emissions will naturally decline. The 2060 target is far more ambitious, however.
An early indicator of the government's degree of commitment will be the 14th Five-Year Plan covering 2021-25. A high-level summary of the plan was released in October, but the National People's Congress will publish a more detailed version in March with specific targets for the energy sector. A target for the share of non-fossil fuels in China's total energy consumption of above 18% would signal a relatively strong commitment. China's ratio was 15.3% in 2019, and under the Paris Climate Accords, Beijing has committed to reaching 20% by 2030.
Market reforms needed
Increasing renewables’ share of China's energy mix will require installing between 128 to 158 GW per year of new renewable capacity per year on average, according to Industrial Securities. But the bigger challenge than building new capacity will be accelerating market-oriented reforms of China's electricity market to increase the commercial viability of renewables.
China's electricity remains highly subject to administrative interference, with limited reliance on price signals to influence production, consumption, and distribution. Marketization faces heavy political resistance, and even a decade from now, China's power sector will still not be fully market-driven, but there is significant scope to increase the role of market forces.
A pilot program launched in 2015 included several key reforms, such as creating spot-power markets and enabling electricity trading across provincial borders, but implementation has been patchy. If fully implemented these measures would reduce the underutilization of existing renewable energy capacity – known as curtailment. In late October, the government said it would scale up a carbon emissions trading scheme to cover the entire country by 2025. The system is currently operating as a pilot program in select regions.
Marketization of China's power sector will not be easy because it would likely result in the closure of inefficient power plants, with associated job losses and debt defaults. Around 50% of Chinese coal power plants were operating at a loss in mid-2019, according to state media, while average capacity utilization was also 50%, reflecting overcapacity. Meanwhile, wind, and solar generation are now increasingly competitive with coal on cost, despite the phase-out of subsidies for renewable energy projects.
Efficiency and electrification
A second policy campaign that will fuel progress towards carbon neutrality is electrification. This means replacing coal-fired boilers, stoves, and off-grid coal power plants in rural areas with modern appliances that draw power from the electricity grid, where energy is produced more efficiently. Electric appliances are typically also more efficient than their coal-fired equivalents, which reduces energy demand. A third trend will be tougher enforcement of mandatory energy efficiency standards, for both electricity production and consumption.
Biting the bullet on coal
Alongside market-oriented reforms, administrative measures to reduce reliance on coal power will also be necessary. These measures will meet political resistance and inflict economic pain on some regions and companies, testing the leadership's resolve. Coal accounted for 58% of China's total energy mix in 2019, down from 64% in 2015.
Approval of new projects was frozen entirely in 2017-18 but resumed in 2019. As of October, 98 gigawatts (GW) of new coal power plants were under construction in China, while projects worth an additional 154 GW had been approved. Combined, these figures exceed the entire installed capacity of either the US or India.
China's state planner, the National Development and Reform Commission, will need to get tougher on coal plant approvals if China is to meet its goal. Some already approved projects could be cancelled, while some existing plants will be shuttered. The government already retired 103 GW of coal power capacity in 2000-2020, according to EndCoal, but new plant openings more than offset those closures.
Test of political will
The clearest sign that China's leadership is committed to the policy reforms necessary to achieve the 2060 commitment is Xi's decision to make the pledge at all. The commitment was unexpected, and the government was not under particular pressure to make it. That Xi did so anyway suggests a high-level consensus that difficult reforms are necessary.
Politically, the supply-side structural reform (SSSR) campaign that ran from roughly 2015 to 2018 offers a template for how to overcome resistance to coal cutbacks. SSSR encompassed both financial debt reduction and industrial consolidation in swathes of the manufacturing and mining sectors afflicted by overcapacity, especially coal mines and steel production. Like coal power plants, these companies were often a valuable source of GDP, employment, and local tax revenue, even as they posted operating losses.
Though the government had long sought to deal with overcapacity and cut the flow of credit to unprofitable “zombie” enterprises, breakthroughs were possible only when SSSR became a high-level political priority. Liu He, China's top economic policymaker, spearheaded the campaign, and Xi repeatedly stressed its importance.
Yet the fate of SSSR should also serve as a warning about the difficulty of overcoming the political power of the coal industry. While SSSR achieved significant success, the problem of zombie enterprises and manufacturing overcapacity is far from solved. Yet slowing economic growth in 2019 eventually forced policymakers to soften the campaign and partially revive the stimulus tools that helped create the debt and overcapacity problems.