Guidebook to Carbon Neutrality in China: Macro and Industry Trends under New Constraints

Chapter 1
 Exploring the Road to Carbon Neutrality
 Abstract How to deal with carbon emissions—a rare externality that spans a large
 time frame and geographical scope—is a difficult task for the world. This task
 is particularly challenging for China, mainly in that the country must coordinate
 dual objectives, including existing economic growth targets and the newly added
 carbon neutrality goal. Over the past 40 years of reform and opening up, China has
 been setting economic growth targets and striving to achieve them. In recent years,
 although growth targets have softened along with the secular decline in potential
 growth rate, economic growth remains a top priority for China, the world’s largest
 developing country. We expect China to reach the current standard for a high-income
 country by the end of the 14th Five-Year Plan period, and to double its GDP or per
 capita income by 2035. Currently, China is adding a new constraint over the next
 40 years. As the world’s largest carbon emitter, China has set out a clear timetable
 for carbon neutrality—to reduce its carbon emission intensity in 2030 by more than
 65% from the 2005 level, and reach the peak of carbon dioxide emissions by 2030
 and become carbonneutral by 2060. Wenotethatit will take 71 and 45 years, respec-
tively, for the EU and the US to achieve the carbon neutrality goal from peak carbon
 emissions (reached by the EU in 1979 and by the US in 2005) to net zero emissions.
 China’s aggressive timetable to achieve carbon neutrality within 40 years means that
 the country will face a much steeper slope of carbon emissions than the EU and the
 US. How will China strike a balance between the objectives of economic growth in
 the past 40 years and carbon neutrality in the next 40 years? We discuss this issue
 from an aggregate and a structural point of view. In our aggregate analysis, the most
 important task is to identify the peak of China’scarbonemissionsin2030.Webelieve
 that in order to take economic growth and emission reduction into consideration, it
 is more appropriate to set the carbon peak target in a range to avoid rigid constraints.
 From a structural perspective, we discuss how China can achieve its carbon peak
 and neutrality goals. Under the framework of a “green premium”, we come up with
 a preliminary idea of “technology + carbon pricing” based on the analysis of eight
 high-emission industries. We prove that this idea can strike a balance between the
 constraints of economic growth and carbon neutrality goals through general equi-
librium analysis using the computable general equilibrium (CGE) model. Finally,
 we incorporate social governance into our analysis by discussing the meaning of a

 negative green premium, and arrive at this formula: the road to carbon neutrality =
 technology + carbon pricing + social governance.
 1.1 Seeking a Peak: 9.9–10.8bn Tonnes of Net Carbon Emissions
 We examine China’s carbon emission is sue from a historical and a future perspective.
 As shown in Table 1.1, while China’s annual carbon emissions in 2019 were much
 larger than other economies, the US and the EU, which started industrialization
 earlier, had greater cumulative emissions. Moreover, China’s carbon emissions per
 capita were 7.1 tonnes, still less than half the US’s 16.1 tonnes (see Table 1.2). Such
 historical perspective is very important for countries to distinguish their “common
 but differentiated” responsibilities when making coordinated carbonneutrality goals

Guidebook to Carbon Neutrality in China: Macro and Industry Trends under New Constraints