A project funded bythe European Union
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On 25th May, the European Union Chamber of Commerce in China (European Chamber) in partnership with Roland Berger, published Carbon Neutrality: The Role of European Companies in China’s Race to 2060. Based on a member survey and extensive interviews, the report identifies areas where EU-China cooperation can be deepened so that China can frontload the technologies and holistic solutions it needs to accelerate its carbon neutrality drive and accomplish its 30/60 Goals.
China’s recognition of the importance of fighting climate change was reflected in the ambitious pledges made by President Xi Jinping at the United Nations General Assembly in 2020. The unprecedented scale of the challenge demands an inclusive approach, with China bringing to bear all the tools it has at its disposal. It will require China to fundamentally restructure its energy economy, reshape whole industries and accelerate the development of nascent technologies and value chains, as well as promote an environmentally conscious and energy-efficient society.
Driven by stringent environmental regulations and consumer demand, and guided by their global corporate carbon neutrality pledges, European companies are well placed to help China to pursue its 30/60 Goals. The report finds that 67 per cent of European companies operating in China are already pursuing carbon neutrality, and 40 per cent have established decarbonisation teams in China, many of which report directly to the board. However, three main barriers currently prevent European firms from fully contributing to China’s carbon neutrality drive.
First, more policy guidance at the national, local and sectoral levels is needed to enable businesses to make informed investment decisions today with 2060 in mind. Although China has started rolling out its ‘1+N’ policy framework, it needs to be quickly fleshed out. As it stands, 65 per cent of European companies report that a lack of industrial guidance and best practice sharing from the government or NGOs could prevent them from achieving their decarbonisation goals in China.
Second, there is also the need for a more transparent, open, and flexible power market. While China leads globally in installing new renewable energy generation capacity, barriers prevent businesses from fully utilising it. This is a serious challenge for 69 per cent of companies, whose decarbonisation efforts in China could be derailed without sufficient access to renewable energy. China’s emissions trading system (ETS) also needs to be reformed and its deployment accelerated.
Third, the development and roll out of leading green technologies is stifled by a lack of open markets and common standards, as well as limited corporate and consumer awareness. For example, 54 per cent of respondents from the environment sector to the European Chamber’s Business Confidence Survey 2022 (launched in June 20th 2022) reported missing business opportunities because of market access restrictions or regulatory barriers; and 31 percent of companies report that the lack of a low-carbon culture in China could be prevent them from achieving their decarbonisation goals. Furthermore, common standards are needed to provide assurance to those looking for truly ‘green’ investments and to eliminate green washing.
Although China’s 30/60 Goals are extremely ambitious, European Chamber members believe they can be achieved provided China leverages all the tools at its disposal, including implementing deep market reforms and utilising proven European technologies and holistic solutions that companies have developed through experiences acquired on the ground. Having worked on decarbonisation with government stakeholders, non-governmental organisations (NGOs) and civil society in their home markets, they are in a position to make strong contributions.
However, European companies currently face numerous challenges that prevent them from doing so, which include the following:
Achieving carbon neutrality is the world’s most urgent common mission. It is also the first subject in history that has managed to align—at least some extent—all the great powers. They understand that greenhouse gases (GHGs) have no ‘passport’, and that that exceeding 2°C of global warming would have disastrous socioeconomic consequences, mainly hitting the world’s poorest.
China’s 30/60 challenge
When China began to open and reform its economy in 1978, the approach it adopted was ‘crossing the river by feeling the stones’, which served the country well and gave it the confidence to move cautiously but steadily forward with further opening, culminating in WTO accession in 2001. At that time, China was a developing economy by most measures, and hence every step and condition to complete the accession process was meticulously negotiated.
While it was expected by other WTO members that post-accession reform and opening would accelerate, China continued to exercise restraint. This worked to China’s advantage as it selectively opened parts of the economy to foreign investments where it needed technology and/or competition, while protecting its domestic companies to allow them to build scale and develop competence in strategic areas of the economy (this plan became concrete with the launch of Made-in-China 2025 in 2015, which clearly outlined the strategic industries in which China had determined to become self-reliant).
China made remarkable economic progress, and its focus on manufacturing and exports saw it become the ‘factory of the world’. However, while this economic model propelled growth at breakneck speed, it also came at a significant ecological cost. Over the past four decades, China has suffered rapid environmental degradation because of its over-reliance on cheap, highly polluting sources of energy (mainly coal) to fuel its manufacturing economy. The result is huge amount of soil depletion, wastewater, solid waste, and high GHG emissions from the energy supply and overall industrial and social systems.
The climate crisis came to prominence as a global topic in 1988, when the Intergovernmental Panel on Climate Change (IPCC) was formed. Since then, China’s level of participation in related discussions has steadily increased. In 1993, China ratified the United Nations Framework Convention on Climate Change (UNFCCC), and it was a non-annex I signatory to the Kyoto Protocol in 1988, with ratification following in 2002. China’s status under the Kyoto Protocol allowed it to only undertake nationally appropriate mitigation actions (NAMAs), whereby it declared its ‘intent to mitigate greenhouse gas emissions in a manner commensurate with… [its]…capacity and in line with… [its]…national development goals.’
In March 1994, China officially passed the China 21 Actual Agenda – White Paper on China’s 21 Actual Population, Environment and Development, and during the 11th Five-year Plan (11FYP) period, China put forward the concept of ‘sustainable development’ as a major national development strategy and put it into practice for the first time.
However, by 2004, China had recorded the world’s largest carbon footprint, hence investing in low-carbon technologies, strengthening environmental controls and density controls appeared in China’s 11th Five-year Plan (11FYP) (2006–2011), and were even more prominent in China’s 12FYP (2011–2016). Meanwhile, within the context of the Kyoto Protocol, some in China argued that climate change was largely caused by developed nations, and therefore those countries needed to shoulder the most responsibility for fixing it. This argument became harder to sustain when it was reported that China had emitted more GHGs than the entire developed world combined in 20195. As the world’s largest carbon emitter, China now accounts for about 29 per cent of the world’s total GHG emissions, while its GDP represents about 19 per cent. Hence, China’s carbon intensity is far higher than world average, and accounts for approximately three times that of the European Union.
China’s firm commitment to fighting climate change followed when in September 2020 President Xi Jinping announced to the United Nations General Assembly China’s pledge to peak carbon emissions before 2030 and to be carbon neutral by 2060 (30/60 Goals), putting climate change high on China’s policy agenda.
China’s carbon neutrality pledge was not just a result of mounting external pressure, nor was it following in the footsteps of Europe with its 2050 carbon neutrality pledge and the launch the European Green Deal. The increasingly extreme weather conditions that China faces and the huge costs resulting from environmental depletion (estimated at around nine per cent of GDP) have been pivotal, as has the recognition that the situation presents just as much an economic opportunity as it does an existential threat.
Decarbonisation is now an imperative in China and local government authorities and Chinese companies are being forced to address it. Prompted by President Xi’s decisive commitment, China’s 14th Five-year Plan (14FYP) (2021–2025) incorporated among its pillars ‘Green Development’, deemed indispensable to building an ‘ecological civilisation’. However, although the need to strengthen ecological and environmental protection has been explicitly acknowledged by China’s top leadership, its national 14FYP did not provide specific objectives. The few targets included in the plan, i.e., reducing CO2 intensity by 18 per cent and energy intensity by 13.5 per cent over a five year period, lack ambition and are not in line with the top-down commitments for carbon peaking and neutrality. While various ministries and government bodies—including the Ministry of Ecology and Environment, the National Development and Reform Commission, the National Energy Administration, the Ministry of Housing and Urban-Rural Development—have issued their own 14FYPs with further details, they still do not focus on how to practically achieve the 30/60 Goals. This makes 2025 another significant milestone in addition to 2030 and 2060. By that time China will need to have fleshed out its ‘1+N’ policy framework, and have added more granular detail at the provincial, municipal and industry levels.
China is aiming to achieve carbon neutrality under extremely challenging conditions relative to the rest of the world. This situation is recognised by European companies and makes it more difficult for them to reach their own decarbonisation goals in China and, therefore, globally.
While Europe is moving towards carbon neutrality at a time when its per capita electricity consumption and overall energy intensity are decreasing, China is doing so while its per capita electricity consumption is continuing to increase, despite its energy intensity decreasing slightly each year. China’s economic growth is also still largely dependent on manufacturing for both domestic consumption and export, and while this remains the case its transition towards an economic model based on services and consumption—which would allow it to vastly reduce its energy intensity—is still some way off.
According to European companies, the main challenges to China achieving its 30/60 Goals are reducing industrial dependence on cheap energy while maintaining energy security, and the fact the current energy mix contains only a small proportion of renewables.
Most European companies in China have global decarbonisation pledges to fulfil and are already comparatively well advanced with their strategies: 40 per cent have established decarbonisation teams in China, with many of these teams reporting directly to boards; and 69 per cent have achieved at least a basic level of preparation.
Hence, China does not need to reinvent the wheel in its pursuit of carbon neutrality. European companies have deployed effective, innovative decarbonisation technologies and holistic solutions in their home markets and want to work with China to help it quickly frontload, presenting a strong argument for deepening EU-China industrial cooperation.
The two most significant drivers for European companies to decarbonise are environmental, social and governance (ESG), and regulation. This creates a mutually reinforcing situation as these companies are both driven to meet their own corporate commitments and obligated to comply with regulations, globally.
At the government level, the European Union (EU) is already deep into the process of developing and rolling out the European Green Deal. Much like China’s provinces, each EU Member State is at a different level of development and has unique socio-economic conditions, making the EU a logical institutional partner for China to collaborate with on formulating practical decarbonisation policies.
A less tangible challenge for China will be bringing about a wholesale change in mindset, starting with local officials that are still highly target-driven and often struggle to see the bigger picture (this was one of the main reasons for the electricity shortage and curtailment crisis in 2021). Even when local authorities are presented with KPIs related to decarbonisation, the methods employed for achieving them often lack a measured, scientific approach. Addressing this will require further fine-tuning to China’s environmental governance model to ensure robust incentive and accountability mechanisms are in place through more effective and professional enforcement at the local level.
Within corporate culture and consumer society there also needs to be a wider understanding of both climate change and the need for international common standards to ensure that ‘green washing’ does not take hold. This can be accelerated through the creation of a framework that enforces corporate transparency and accountability regarding emissions. All companies operating in China must be held to the same environmental standards and should be subject to the rigors of independent, third-party environmental assessments, adopting well-established international standards. China could play a proactive role by adapting and tuning its economic and industrial conditions and not introducing new local standards which would make it challenging, if not impossible, to create a global carbon market.
Despite these challenges European companies believe that China can achieve its goals: 75 per cent believe China will be able to peak emissions before 2030, and 78 per cent think it can become carbon neutral by 2060.
Conclusions
China and the EU have both made formal commitments with stringent goals to become carbon neutral. Both are facing unprecedented challenges to drastically reshape their economic and social models across all value and supply chains, as well as to develop a low-carbon culture among businesses and the population as whole.
China’s success will be predicated on its ability to leverage as much expertise as possible. This will require providing European companies with increased market access and a level playing field on which to operate so they can make greater and more proactive contributions.
A clear mutual benefit in this regard is that China is fertile for both receiving and developing European technologies and cooperating to improve and localise them. European companies can also significantly contribute to China’s 30/60 Goals through comprehensive environmental protection and circular economy solutions, including resource recycling, energy efficiency, demand side electrification, district energy modelling, energy storage, green hydrogen, and digitalisation of the energy system, among others.
However, it must be borne in mind that even with the political will to achieve carbon neutrality, China’s plan could be derailed by decoupling. The scale of the challenge of achieving the 30/60 Goals demands an open and collaborative approach – China cannot go it alone. The EU and China must therefore remain open and committed to multilateralism and keep the channels of bilateral communication and cooperation, as well as trade and investment, fully open.
Guido D. Giacconi
Vice President
European Union Chamber of Commerce in China
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