China’s economy has grown at a record-breaking pace for almost two decades. This growth was fuelled by a rapid industrial expansion and it causes an ever-growing appetite for natural resources in general and energy in particular, with worldwide implications on commodity markets and on the environment (Moran 2010). China became the world leading carbon dioxide emitter in 2006, five to nine years earlier than what was forecasted as recently as in 2004.
Future prospects for the Chinese economy look bright. Home to one fifth of the world population, China will become a global economic giant. Yet the road to prosperity is long – China’s GDP per capita is still a small fraction of the average GDP per capita in OECD economies (10% if measured in MER, 23% if measured in PPP).1 Such a prolonged period of high economic growth has the potential to multiply China’s carbon emissions by a factor of two or three.
Despite the fact that energy efficiency has increased remarkably over the past 30 years, China still uses more than four times more energy per unit of output than OECD economies and 2.5 more than the world average (if PPP is used energy intensity is 90% and 40% greater, respectively). China also emits more carbon emissions per unit of energy than the OECD and the world average (40% and 30% more, respectively). This mix of high energy, high carbon intensity, and fast economic growth is expected to generate a continuous growth of emissions.
In order to generate more solid quantitative insights we developed a long-term scenario of energy demand and emissions for China using the integrated assessment model WITCH (Carraro and Massetti, 2012; for the WITCH model see Bosetti et al 2006 and www.witchmodel.org). We find that CO2 emissions from fuels combustion might be equal to 18Gt CO2 in 2050, 2.6 times higher than in 2010 (Figure 1). Emissions would increase at a much lower pace in the second half of the century and would be equal to 21Gt CO2 per year in 2100. The model displays a continuous improvement of energy efficiency, but economic growth more than compensates for efficiency gains and the carbon intensity of energy remains constant as coal continues dominating power generation.2
Figure 1. Emission scenarios
In 2050 China is projected to emit as much CO2 from fuel combustion as the whole OECD and will be responsible for one third of global emissions. However, emissions per capita would still be lower than in OECD economies in 2050 (slightly higher than today’s level in OECD economies), but much higher than in other developing countries. For example, India, which is too often mentioned together with China in international climate policy discussions, would achieve China’s present level of emissions per capita only several decades from now (Massetti 2011).
This is a first important message: China is and will be in a singular position in the climate policy debate. It is not rich enough to be considered as one of the advanced economies that we expect should start reducing emissions immediately, but it is not poor enough and it is too big to do nothing for still many years.
For this reason the actual policy question is not if China will enter or not a global agreement to cut greenhouse gas emissions. Indeed, there will not be any global agreement without China. The true question is when and at what rate it is reasonable that China should start reducing its emissions.
Policy scenarios 2020, 2050, and beyond
From now until 2020 China made a (voluntary) pledge to reduce the carbon intensity of its economy by 40%/45% in 2020 with respect to 2005 in the Copenhagen Accord. We find that China would achieve this target in a business-as-usual scenario. This does not mean that the target will not be challenging. It rather indicates that it is in the self-interest of China to increase energy efficiency, even without accounting for the global environmental benefits.3 We therefore expect that domestic considerations will dominate China’s energy policy for at least ten years (Carraro and Massetti 2011, 2012).
It is therefore important to have a rough idea of what might happen beyond 2020, especially between 2020 and 2050. In order to draw useful insights on future climate policy in China in the long run we use again the WITCH model (Carraro and Massetti 2012). We assume that China and all other countries will introduce a uniform domestic carbon tax with lump-sum revenue recycling of tax revenues (Table 1).4 This is a very strong simplification that we use to explore a wide array of policies, both in terms of stringency and in terms of policy tools. This scheme warrants efficiency, but not equity, as we will discuss below.
Table 1. The carbon price scenarios (2005$ Tonne CO2-eq) with the relative concentrations and temperature in 2100
|Temperature increase (°C)||4.0||3.0||2.4||2.2||2.5||2.0|
We find that emissions will stop growing only if the carbon price follows the highest trajectories. It is not necessary to have large taxes in 2020. It is sufficient that economic actors perceive with certainty that taxes will quickly increase over time because the long operational life of energy-sector capital goods induces a strong anticipation of green investments.
By pooling all the tax-emission reductions combinations from the five tax scenarios we find that the elasticity of emissions is higher in China than in the OECD until the tax reaches 500 $/tCO2-eq (Figure 2). This implies that China will abate emissions more than the OECD when the tax is low, will contribute relatively more to reduce global warming and will incur higher costs. For high levels of the tax, emissions become very inelastic in China.
Attaining the 35% contraction of emissions with respect to 2005 implied by the 2009 Major Economies Forum declaration at the L’Aquila G8 meeting can be very expensive for China and other developing countries alike.5 Our scenarios indicate that China would achieve the MEF target in 2050 with a tax equal to about 750 $/tCO2-eq.
The cost of following the tax trajectory that hits the 2°C target in 2100 varies depending on the interest rate we use for discounting. We find costs range between 5.4% and 3.2% of future discounted GDP for China, and from 2.8% to 1.3% in the OECD. All other policy targets are more expensive for China than for the OECD (Figure 3). Abatement costs are clearly non-linear.
Figure 2. Carbon taxes and emission reductions with respect to the business-as-usual scenario
Figure 3. The cost of reducing greenhouse gas emissions
Notes: Costs are expressed as the ratio between the discounted sum of GDP losses with respect to the BaU scenario and cumulative discounted GDP in the BaU scenario. Interest rate: 3%, 5% and the endogenous, region specific interest rate of the model. The interest rate for OECD economies is an average of five regions’ interest rates, with weights equal to their GDP. In the BaU, the interest rate is equal to 12% in China and to 3.6 in the OECD, in 2010; in 2100 the interest rate is equal to 1.5% in China and 1.6% in the OECD. The interest rate used varies among tax scenarios. Source: Carraro and Massetti (2012).
A climate policy roadmap for post-2020
The main message that we get from our scenario analysis is that ambitious climate policy will be costly for China and it will be very likely rejected on grounds of equity. However, the world cannot afford to let China’s emission unfold uncontrolled for still many years. The current climate negotiation track based on the idea of a global cap-and-trade system with tight abatement targets and international transfers has not worked well. For this reason we propose a pragmatic approach to include China in a future, truly global agreement based on the following four principles:
- It is important that decision makers in China soon realise that emissions cannot grow uncontrolled for many decades. Delaying a well-defined, long-term commitment beyond 2020 can be too costly because China would then be locked in a very high emission trajectory. It is not necessary to start with ambitious targets. It is rather important to give a credible sign of discontinuity.
- Ambitious emission cuts – as those implied by the 2°C target – can be very costly for China if efficiency is the only guiding principle of international negotiations. Large transfers would be necessary to convince China to accept such targets but these transfers might be politically controversial. Instead we suggest China should be included in the post-2020 climate agreement on a separate track. A domestic carbon tax that starts around $10 per tonne of CO2 in 2020 and grows to about $50 per tonne of CO2 in 2050 (and to $500 in 2100) seems to be politically feasible and might also bring domestic co-benefits. Our scenarios show that this low carbon tax could reduce emissions by 30% in 2050 with respect to the business-as-usual scenario, about 75% of China’s emissions today.
- The tax should be perceived by all actors as permanent and increasing over time. Developed countries could complement China’s effort by additional abatement measures sponsored by international finance.
- On a parallel track, developed countries should promote the role of China as a regional mitigation leader. A developing Asia emission bubble, with regional trade of emission permits and regional cooperation, might give China access to cheap mitigation options (Massetti and Tavoni 2012). Developed countries could push China to accept more stringent mitigation targets while at the same time granting exclusive access – and lower carbon prices – to a sort of Asia emission trading scheme. China could become a regional leader of climate policy in 2050.
We recognise that with this policy package emissions would likely grow beyond what desired by many. However, concerned as we are by the prospects of totally uncontrolled global warming, we believe that it is high time that climate policy be rooted in what can be done rather than in what should be done.
1 Data from the World Bank Development Indicators database.
2 Emissions could be lower if China invests more in nuclear and renewables to reduce its dependency on coal and to address local pollution problems. Also, a global expansion of natural gas supply from shale formations might increase the share of gas power, which is now extremely low in China. We do not include these factors in our analysis and we might therefore set an upper-bound to carbon intensity of energy in China. We also expect that the fast improvements in energy efficiency, in line with those that occurred in the ‘80s and ‘90s, may well be very hard to replicate. Contrary to the 2050 outlook of Zhou et al (2011), we do not see emissions peaking, not in 2030, not in any other period. We have a trajectory that is closer to Blanford et al (2008), ERI (2009), and IEA (2010). Our emission scenario is in line with a large number of IAM generated emission pathways for China (Blanford et al 2012).
3 A recent modeling comparison (Asia Modeling Exercise – AME) shows that 12 out of 22 models see China achieving this target already in the business-as-usual scenario. According to all models China would achieve the target with a set of policies that impose, implicitly or explicitly, a carbon tax equal to 30$/tonne of CO2 (Calvin et al 2012).
4 We use the term carbon tax loosely but we mean a tax on all greenhouse gas emissions, in all sectors.
5 MEF leaders announced that they intend to cut global emissions by 50% in 2050 with respect to 2005. High-income economies would take the lead and cut their emissions by 80%. This implies that developing countries must reduce their emissions by about 30/35% with respect to 2005, according to our business-as-usual scenario. This target is only aspirational and far from being part of an international treaty. However, it offers a useful benchmark to evaluate possible future climate policy scenarios.