As China moves towards net zero emissions, is the world ready for the economic impact?

Fossil fuel markets worldwide could start to feel the impact of China’s net zero commitment in the next few years
Whether countries stand to reap benefits from a zero-carbon China, however, depends on their export profile and their readiness to decarbonise domestically

Karin Costa Vazquez

Published: 1:00am, 19 Jul, 2021

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Xi Jinping’s pledge last year for China to hit peak carbon dioxide emissions before 2030 and achieve carbon neutrality before 2060 was received with a mix of euphoria and scepticism outside China. As China accounts for 28 per cent of global emissions, its commitment to carbon neutrality is a much-anticipated step towards net zero emissions worldwide.

The acceleration in the construction of coal-fired power plants in the past year and the lack of a robust road map towards China’s decarbonisation in the most recent 14th five-year plan, however, raise questions about whether China will be able to meet its commitment. Then again, China has a history of under-committing and over-delivering on its five-year plans; what the world has not yet asked is, what happens if China becomes carbon neutral within the next four decades?

A study I conducted of how China’s decarbonisation will redefine trade, investment and external relations, recently published in the Torino World Affairs Institute’s report “Drivers of Global Change”, indicates that fossil fuel markets worldwide could start to feel the impact of China’s net zero commitment in the next few years.

In 2019, 51.7 per cent of the world’s coal consumption originated in China. Coal also accounted for 57.6 per cent of China’s total primary energy consumption, of which 7.8 per cent was imported. In the same year, China was among the world’s top importers of coal briquettes, with a share of 14.8 per cent, behind only India and Japan. A sharp contraction in China’s demand for coal within the next decade could reduce coal imports to the same degree.

Oil, gas and other fossil fuel markets could suffer a similar impact. In 2019, 14.5 per cent of the world’s oil consumption originated in China. Oil accounted for 19.7 per cent of China’s energy consumption, of which 66.2 per cent was imported. In the same year, China was the world’s top importer of crude and refined oil, with a share of 13.5 per cent of imports. As oil and gas consumption in China is likely to plateau in the next decade before it begins to drop sharply, the impact on world markets will be longer-term, though.

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China’s carbon neutrality goal could also accelerate the world’s energy transition. In 2019, 12.5 per cent of the world’s nuclear energy consumption originated in China, with nuclear energy accounting for 2.2 per cent of China’s energy mix. China was also the world’s third largest importer of non-irradiated fuel elements for nuclear reactors, with a share of 9.86 per cent, after Ukraine and France.

In 2019, China accounted for 30.1 per cent of the world’s hydroelectricity consumption, with hydropower accounting for 8 per cent of China’s energy mix. China would probably need to increase nuclear power sixfold, and double hydroelectricity to replace coal-fired power generation. If this happens, the transition could have an immediate positive impact on global markets.

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China’s decarbonisation could create new, dynamic possibilities for trade and investment, and enable countries to realise their own plans to reach net zero emissions.

In 2018, China became a net importer of rare earth elements. As other countries move up the ladder with regard to the preliminary processing of rare earths, China is likely to follow with increased imports and investments in their processing industry, creating a positive spiral of decarbonisation.

Whether countries stand to reap short- and long-term benefits from a zero-carbon China, however, depends on their export profile and their readiness to decarbonise domestically.

At one end of the spectrum are the countries that have started to implement decarbonisation plans and which also supply the raw materials needed for the transformation of China’s energy matrix. These countries are more likely to step up their engagement with China. The European Union is already cooperating with China in clean energy, decarbonisation technology and carbon trading.

In the middle are countries like Canada, Myanmar, North Korea and the US, which may or may not have decarbonisation plans and are supplying non-fossil and fossil fuels to China. 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.

At the other end of the spectrum are the countries which have not rolled out domestic decarbonisation plans and are supplying the raw materials 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, Brazil, Indonesia, Iraq, Malaysia, Mongolia, Qatar, Russia, Saudi Arabia and Turkmenistan.

The effects of China’s energy transition could be felt in “megadiverse” countries like Brazil, Indonesia and Malaysia, which account for most of the world’s plant and animal species. This is because China is likely to reduce emissions by launching carbon capture and storage schemes and nourishing new forest growth. The weak institutional and regulatory frameworks in these megadiverse countries, however, could prevent them from joining carbon trading schemes and attracting investment in reforestation.

Beijing’s decarbonisation plan not only compels countries to redefine their bilateral trade and investment relations with China, but also to adapt their domestic energy mix. In exploring mutual adaptation with China and its energy supply sources, countries will need to understand the disruptive potential of a carbon neutral China, anticipate the impacts and identify the elements that may contribute to an effective response.

Karin Costa Vazquez is a scholar at the Centre for BRICS Studies at Fudan University and an associate professor, assistant dean and executive director of the Centre for African Latin American and Caribbean Studies at O.P. Jindal Global University, India