December 2009 does not seem so long ago. The UN climate conference in Copenhagen had just come to a disappointing end, and I headed home feeling depressed. I returned to China for holiday and was surprised to see the widespread awareness of climate change and the collective sense of urgency for action. The concept of "low carbon" was discussed in all major and local newspapers. To my amazement, I even found an advertisement for a "low carbon" wedding. I finished my holiday and went back to Washington with optimism and hope: Despite the failings of Copenhagen, China, the biggest emitter in the world and the largest developing country, was going through a real transformational change. China clearly saw action on climate change as serving its own interest and as an opportunity to pursue a green growth model that decouples economic development from carbon emissions and resource dependence.
In the past five years, the world has witnessed the emergence of China as a leader for tackling climate change. A few weeks ago, colleagues at the World Bank Group heard an evidenced-based presentation by Vice Chairman Xie Zhenhua from the National Development Reform Commission (NDRC) of China, who showed what China had done in the past, is doing now, and plans to do in the future. He shared his candid assessment of the challenges, mistakes, and lessons learned from China's experience.
China’s progress is impressive. Between 2005 and 2013, average economic growth has been above 8 percent while the country’s emissions intensity has decreased by 28.5 percent compared with 2005 levels. This equates to emissions reductions of 23 million tons of CO2. These reductions were achieved through massive closures of inefficient coal fire plants, aggressive energy efficiency programs, expanding the renewable energy program, and large investments in clean technology.
While these numbers are impressive, sustaining them will be harder. Over the last 10 years, China has targeted its "low-hanging fruit" for mitigation options. The challenge today is how China will sustain annual GDP growth of more than 7 percent while continuing to reduce its economy’s emissions intensity.
The country’s leadership is determined to make it happen. There is a strong understanding that low-carbon, green growth offers opportunities to push through economic reforms and structural adjustments that are critical for China to build a 21st century economy that is competitive and green and to achieve its dream to reclaim "ecological civilization."
I see a Chinese modality of low-carbon development emerging. It combines top-down, aggressive command-and-control measures, massive clean investment and technology, and leveraging the power of markets. The model is illustrated in the following:
Use hard measures and government orders to suppress growth or phase out excessive capacity in industries with high energy consumption and emissions. For example, in 2014, the national target is to eliminate 27 million tons of steel production capacity, 42 million tons of cement production capacity, and to put an annual cap on coal output of 3.9 billion tons by 2015.
Optimize certain strategic economic sectors by increasing the share of the service industry to 47 percent by 2015 and promoting development of high-tech industries.
Direct massive investment into clean energy. China is already a global leader in renewable energy, with the largest installed capacity of renewable energy power. Wind power capacity has doubled every year since 2005, reaching 61 GW in 2012, the largest in the world. Moreover, in 2012, China invested US$65.1 billion in clean energy – a 20 percent increase from 2011. This was unmatched by any nation and represented 30 percent of the G20 nations’ collective investment in 2012.
Motivate local governments to participate in low-carbon city programs. The NDRC has launched 42 low-carbon cities, a number of which have started to analyze emissions peaking years as a way to better plan and manage urbanization and industrial expansion.
Leverage the power of markets in resources allocation to reflect the externalities of pollutants, including the cost of carbon. The launch of the seven emissions trading pilots is a good example of relying on markets to deliver emission reductions at scale. These pilots cover a population of 230 million, 25 percent of the national GDP, and 10 percent of total GHG emissions (about 800 million tCO2e per year). In December 2013, emissions units traded for between US$4 to US$12 (when EU allowances traded around US$6.8). With the support of the World Bank's Partnership for Market Readiness, the Chinese government has already started to design its national emissions trading system and aims to launch it in 2018.
The emergence of China’s national carbon market will fundamentally change the landscape of carbon markets globally. Markets must play a "decisive role" in resources allocation – a central pillar of China’s new national economic strategy. Indeed, emission reductions at such a large scale require a market mechanism if they are to be achieved efficiently.
Can China maintain 7 percent GDP growth while pursuing a low-carbon economy? No doubt this is a daunting task. But this is also the race to a new economy for the 21st century – a competitive economy that drives innovation and clean energy and reduces its emission intensity. China has a plan and is racing to win.