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Going global: exporting China’s decarbonization and rethinking international cooperation for energy transition

Published onJun 27, 2022
Going global: exporting China’s decarbonization and rethinking international cooperation for energy transition

Summary

In September 2020, Xi Jinping’s pledge for China to hit peak carbon dioxide emissions before 2030 and to achieve carbon neutrality by 20601 was received with both euphoria and skepticism outside China. As the country accounts for 28% of global emissions, the commitment is indeed a much-anticipated step towards net zero emissions under the Paris Agreement. The limits of China’s road map towards decarbonization, however, raise questions on whether the country will be able to achieve carbon neutrality and help deaccelerate global warming.

This paper explores the likely effects of China’s decarbonization on world energy markets and the opportunities for international cooperation in support of global energy transition with a focus on Brazil and China.

China’s envisioned energy transition

Xi’s pledge began to move into action in 2021, when China invested US$ 266 billion in energy transition measures accounting for more than one-third of the global total (US$ 755 billion). These measures included the launch of the world's largest carbon market and the suspension or termination of more than US$ 47 billions of Chinese-backed coal projects outside China. 

Normative and policy frameworks were put in place, laying the ground for the transition to unfold. In March, the 14th five-year plan2 proposed to increase the share of non-fossil fuels in China’s energy mix to 20% by 2025, up from 15.8% in 2020. The plan also set modest goals to reduce energy consumption per unit of GDP by 13.5% and cut carbon emissions per unit of GDP by 18%.

Six months later, China's state planners released guidance for carbon dioxide peaking and carbon neutrality3, setting the high-level framework for China’s carbon transition. The ensuing “action plan” contained concrete measures for China to reach carbon dioxide peak before 2030.4. More recently, China's plan on modern energy systems investigated pathways to expand renewable energy in the country.

While these normative and policy frameworks contribute to expanding the share of renewables in China, none of them set a cap on coal use or carbon dioxide emissions. Instead, Xi announced that China would start phasing down coal use only after 2025. Top Chinese officials have stressed the centrality of coal in China's energy mix5 and the “orderly” reduction of carbon emissions to avoid another power crunch like the one in the second half of 2021.6

In a move to bolster energy security, China resumed domestic construction of coal-fired power plants and the expansion of coal mining after a brief interregnum in 2021. The country also announced its intention to cut all coal import tariffs until 2023. Although these measures may make an important contribution to ensuring short term energy supply stability, the success of China’s decarbonization efforts relies on a drastic reduction of the share of coal in the country’s energy mix.

The political commitment, and the normative and policy frameworks that have been put in place indicate that China’s transition is already underway. Yet, the challenges lying ahead in China’s decarbonization road map are clear, and are compounded by issues like energy security and geopolitics.

The effects of China’s energy transition on world energy markets

A study conducted by Fudan University7 indicates that a sharp contraction in China’s demand for coal after 2025 could severely reduce imports of the product. Coal remains China's main energy source; the country is the largest importer of coal in the world; in 2020, 56% of the world’s coal consumption originated in China, up from 51% in 2019.

According to the same study, an impact on global oil and gas markets is also likely to be felt over the long-term — as Chinese demand is likely to plateau in the next decade before it begins to drop. In 2020, 13.2% of the world’s oil consumption originated in China, down from 14.5% the year before. Oil accounted for 19.6% of China’s energy consumption, of which approximately two thirds were imported. In the same year, China was the world’s top importer of crude and refined oil, with a 15.3% share of global imports8.

Positive impacts are expected in global nuclear and hydropower markets, as China is expected to increase nuclear power sixfold and to double hydroelectricity, in order to replace coal. In 2020, 13.6% of the world’s nuclear energy consumption originated in China, with nuclear energy accounting for 2.2% of China’s energy mix. In the same year, China accounted for approximately 30% of the world’s hydroelectricity consumption, with hydropower totaling 8% of China’s energy mix.

Positive impacts are also expected in global rare earth markets with China becoming a net importer. As other countries move up the value-chain by developing their capacity to conduct the preliminary processing of rare earths, China is likely to increase both its imports and its investments in overseas processing industries, creating a favorable circle of decarbonization.

How can China’s own decarbonization contribute to global energy transition?

Whether countries around the world can weather the impacts or reap the benefits from a zero-carbon China ultimately depend on their export profile and their readiness to transition to a low carbon economy.9

On one side are the countries that have started to implement decarbonization plans and which supply the resources needed for the transformation of China’s energy mix. These countries are more likely to step up their engagement with China, including in support of global energy transition. The European Union, for example, is already cooperating with China in clean energy, decarbonization technology and carbon trading.

In the middle are countries like Canada, Myanmar, and the US, which either do not have decarbonization plans and are supplying non-fossils or have decarbonization plans and are supplying fossil fuels to China.10 As China’s energy transition will require new supply chains with producers of raw materials like copper, lithium, and cobalt, some of these countries could potentially see new patterns of trade with the Asian giant and contribute to global energy transition.

On the other side are the countries which have not rolled out domestic decarbonization plans and are supplying the resources that may no longer be needed by China. These countries are likely to see their exports to and investments from China decline in the long term. This may be the case for Australia, Angola, Iraq, Indonesia, Malaysia, Mongolia, Qatar, Russia, and Saudi Arabia.11

Brazil is likely to feel the double effect of China's energy transition. First, through the decline of exports and inward investments. Crude oil and oil derivatives are among Brazil’s top exports to China totaling US$ 11.37 billion in 202012. A reduction in China's demand could, therefore, have a significant impact on Brazil's trade balance. The fact that Brazil has not yet signaled how it will decarbonize its economy, coupled with the country’s largest oil company, Petrobras, decision to expand production by 45% until 2026 to the detriment of low carbon investments, could reinforce this trend.13

China's decision to stop construction and public financing of coal-fired power plants abroad will also negatively impact foreign investments into the sector in Brazil. Chinese companies invested approximately US$ 1.5 billion in coal-fired power projects in Brazil between 2005 and 2019. A replacement will be needed after China’s withdrawal, and this may disrupt the industry.14

Second, through the unexplored opportunities. China will likely combine its transition to a cleaner energy mix with carbon capture and storage and the growth of new forests to offset fossil fuel waste. Brazil’s controversial environmental policies and incipient institutional and regulatory frameworks, however, may disincentivize investments in reforestation and biodiversity and limit the country's participation in carbon trading schemes.

Brazil also has the second largest reserve of rare earth elements in the world; but it is not currently amongst the largest producers. China's growing demand for these minerals to produce electric cars, wind turbines, semiconductors and other high-tech and green-tech goods could open new markets for Brazil, but only if means of exploiting the reserves can be found.

Opportunities for Brazil-China cooperation in support of global energy transition

China has announced it will support emerging countries in their pursuit of green and low-carbon development and strengthen its support for renewable energy in developing countries. It is now Brazil’s turn to say how a more strategic engagement with China could help the country meet its own development priorities. Political leadership and vision, policy frameworks and financing are required to promote this change.

The US, the European Union and China itself have launched plans to align post-pandemic economic recovery with energy transition and sustainable development more broadly. In Brazil, the Brazilian Development Association (ABDE) 2030 Sustainable Development Plan15 has made concrete proposals for public policies, with an emphasis on financing, that could contribute to a more sustainable, inclusive, and innovative development for Brazil, in line with the Paris Agreement and the Sustainable Development Goals.

The ABDE Plan could be a starting point for putting Brazil-China cooperation on a more sustainable basis, thereby also supporting global energy transition. For example, Chinese technology, investments, and funds could support the development of sustainable infrastructure and cities in Brazil; the maintenance of environmental assets and the development of innovative products and services with high added value in the bioeconomy; and the development of carbon sequestration projects.

These could further contribute to the generation of carbon credits and encourage the development of a carbon market in Brazil and Latin America. Cooperation could involve the trading of relative green competitive advantages, building on experiences like the China-EU Common Ground Taxonomy. An EU-Brazil-China triangular cooperation on common green taxonomies and standards, with the aim of establishing taxonomy comparability and interoperability, could help increase the fungibility of carbon credits and cross-border sustainable capital flows among these countries.

The development finance institutions in which Brazil and China participate could also help foster global energy transition. The New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB) could, for example, provide intellectual support for member states, in addition to infrastructure finance. By supporting research and knowledge exchange, these banks could help countries to unpack the likely impact of these global transformations, to assimilate them in their development strategies, and to design programs that prepare them for the future.

The NDB and AIIB could further support the development of financial instruments like longer maturity terms and lower interest rates to induce economic agents to anticipate the impacts of China’s decarbonization and other global transformations in their investment decisions.

Conclusions

  • The challenges lying ahead in China’s decarbonization road map  are clear, and are compounded by issues like energy security and geopolitics. At the same time, there is no question about the centrality accorded to low carbon development in Beijing; and China’s decarbonization is well underway.

  • China's decarbonization will force the rest of the world to come to terms with the disruptive potential of a carbon-neutral China, to anticipate expected impacts, and to identify elements of these impacts that can contribute to their effective repositioning. This will be particularly felt in exports and inward investments in crude oil and coal.

  • For Brazil, the gains from a low carbon China could be transformational if Brazilian engagement is consistent with Brazil’s own development priorities and post-pandemic economic recovery plans. Here, international development finance institutions in which Brazil and China participate could play a catalytic role, with positive impacts beyond the two countries.

Karin Costa Vazquez16

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