Why China has more to gain from fighting climate change than other countries
- If the current trajectory of emissions growth continues, China could see its credit rating drop six notches and face billions more in debt service
- China has much to gain from getting serious on carbon neutrality, and any delay would be tantamount to economic self-harm
When it comes to economic growth and development, China has been the envy of the world for decades. Since 1980, the economy has expanded on average by 9.4 per cent per year, four times the speed of the Organisation for Economic Cooperation and Development average.
China has one of the most challenging population profiles in the world. The growth sweet spot lies behind it. The race for the country to get rich before it gets old is in full swing.
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So far, so well-known. What is less appreciated, however, is that China is also in the bull’s eye of the second megatrend: climate change.
New research from a team of economists from the Bennett Institute at Cambridge University sheds some light on the expected effect of climate change on sovereign creditworthiness. By linking climate science with economic models and real-world sovereign ratings methodology, they simulate the effect of climate change on sovereign credit ratings for more than 100 countries under different warming scenarios.
The research finds material impacts of climate change as early as 2030. Under a high warming scenario that closely traces recent emission trends, 63 sovereigns would suffer climate-induced sovereign downgrades of around one notch by 2030, rising to 80 sovereigns facing an average downgrade of 2.5 notches by 2100.
The main transmission channel is, in most cases, through drops in growth and prosperity with a resulting rise in government debt.
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China would be one of the hardest-hit sovereigns if the current trajectory of carbon emissions continues. By the end of the century, its credit rating could be chopped by six notches, just enough to relegate it into the ranks of non-investment-grade issuers. Two of those downgrades could come as early as this decade.
The difference matters. Keeping temperatures within the Paris goals would raise China’s government debt service cost within a range of US$4 billion to US$6 billion annually in 2100. This estimate is based on historical bond yield increases in the wake of sovereign downgrades.
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Applying past trends of sovereign rating cuts feeding through to corporate funding conditions, Chinese corporations could be on the hook for an extra US$13 billion to US$22 billion in interest payments by the end of the century.
China clearly has more to gain from stabilising the climate than most other countries. This is even more so as Chinese companies are current or emerging world leaders in the technologies needed to achieve carbon neutrality.
From photovoltaic equipment to wind turbines and electric mobility, China has much to gain from getting serious on carbon neutrality. Any delay would be tantamount to economic self-harm.
Moritz Kraemer is chief economist of CountryRisk.io and senior fellow at SOAS Centre for Sustainable Finance at the University of London. Previously, he was chief sovereign rating officer at S&P Global Ratings.