Abstract: This article points out that while China’s efforts on fighting climate change, such as the development of the green finance system, face a series of major challenges, the primary one is establishing a clear and transparent aggregate indicators system. To develop green finance and carbon market, it is necessary to clarify the aggregate target and establish parameters and measurement system for carbon finance and green finance, which will help effectively guide investment. Besides, aggregate target is also important to determineing the equilibrium price of carbon trading and carbon tax which are crucial measures to reduce carbon emissions.
The issue of carbon emissions peak and carbon neutrality is very important. I have been engaged in discussions on this topic since a long time ago. The Boao Forum for Asia has always paid close attention to the issue of global climate change, and attaches particular importance to the target of achieving the peak of carbon emissions and carbon neutrality by 2030 and 2060. The Boao Forum for Asia is also planning to arrange discussions at this year's annual conference and a series of events.
Ms. Zhu Jun and Mr. Ma Jun both gave an insightful analysis in their speeches, in particular, regarding green finance and carbon emissions which are of great significance. I would like to take this opportunity to highlight that it is necessary to make further clarification on relevant indicators in order to achieve China’s "30·60" target on carbon emissions peak and carbon neutrality.
I. The "30·60" target on carbon emissions peak and carbon neutrality reflects an important change in China's carbon emissions
As early as when he was working in Zhejiang province, President Xi Jinping put forward the idea that "clear waters and green mountains are invaluable assets". Since becoming the President of China, he has repeatedly emphasized and practiced this idea, reversing China's stance on global climate change in the past when China acted negatively towards climate change, while stressing stressed that economic growth should not be restrained, and was reluctant to committing to any binding indicators as a developing country.
In September 2020, President Xi put forward the "30·60" target on carbon emissions peak and carbon neutrality at the UN General Assembly, making China's commitment at the international stage. This is an important change that deserves profound understanding and implementation. This is not a fine-tuning of previous statements or continuing and updating previous policies, instead it is a change in philosophy, understanding and stance that deserves in-depth learning and practice in long term.
In practice, however, our efforts are still far from enough. For example, coal power projects have shown a strong expansion momentum in Chinese domestic market over the past two years, and China is still involved in the financing of some coal power projects related to the Belt and Road Initiative. These show that it would not be easy to achieve the "30·60" target.
In addition, China's efforts on climate change, including the development of the green finance system, face a series of major challenges. A primary challenge is establishing a clear and more transparent aggregate indicators system for achieving the targets of emissions peak and carbon neutrality. This is important because it helps the society to have a clear understanding on the target while providing measurable, calculable and verifiable tasks for related works.
Of course, this is not easy, either. Relevant agencies need to work actively to truly achieve change in philosophy, understanding and action, while developing reliable measurement system of carbon emission data and targets through open and transparent way so as to achieve the targets on emissions peak and carbon neutrality.
II. The premise for achieving the target on emissions peak and carbon neutrality is having a clear target on total carbon emissions
At the Climate Ambition Summit in December 12, 2020, President Xi further put forward several commitments on aggregate indicators regarding tackling climate change under the “30.6030·60” target: by 2030, China will lower its carbon dioxide emissions per unit of GDP by over 65 percent from the 2005 level, increase the share of non-fossil fuels in primary energy consumption to around 25 percent, increase the forest stock volume by 6 billion cubic meters from the 2005 level, and bring its total installed capacity of wind and solar power to over 1.2 billion kilowatts. These aggregate indicators correspond to the intensity of carbon emissions, carbon sink, and new energy development.
These aggregate targets are very important, because many micro quantitative indicators and data bases are needed in the actual efforts on climate change. However, the premise for determining the micro quantitative indicators is having aggregate targets: Only by breaking down aggregate targets, can we obtain clear micro targets. Aggregate targets also matter to the balanced progress of the "30·60" target on emissions peak and carbon neutrality.
In addition, incentive mechanism is needed to achieve the “30.6030·60” target which will not come true naturally. The incentive mechanism can only be calculated, set and improved based on a clear aggregate target. Some countries have already set clear quantitative targets for their plans on emissions peak. China also needs to have more transparent and readable measures based on its aggregate targets, which thereby can help improve public understanding and turn it into action.
There are mainly two approaches to reduce carbon emissions, which act on both ends of the balance between supply and demand. One is to limit the existing carbon emissions. This is similar to the practice years ago when the food supply was insufficient, food quotas were implemented as so as to suppress demand; the other is to invest in the supply side to increase low-carbon or zero-carbon new energy supply. I personally believe that in the next few decades, achieving carbon emission targets will mainly rely on the latter approach. Heavy investment will be made to increase the supply of new energy and improve energy-saving and low-carbon equipment and technologies.
When making investments, people always consider future returns. To some extent, public investment may not require a return, but public financial funds are usually short. To vigorously promote private investment, it is necessary to clearly calculate the future return on investment. This requires more specific data on the total annual carbon emissions in the future as the calculation of many micro-data indicators depends on the total target. In addition, the scale of our future investment in achieving carbon goals needs to correspond to each year's GDP, that is, what proportion of each year's GDP needs to be invested in tackling climate change.
Incentives for such investment can come from two sources. One is to (let enterprises) obtain returns through quota trading or carbon tax, which means that entities with high carbon emissions should be required to raise pay funds to support emissions reduction investment; the other is to guide investment in this direction through mobilization with no additional policy compensation. I personally believe the first approach should be the major way to promote investment in emissions reduction.
Therefore, the extent to which we can make the entities with excessive carbon emissions, especially those key industries and enterprises, take the responsibility and support emissions reduction investments through carbon allowance trading or carbon tax is a very important issue. Only when the aggregate target is clear, can we have an equilibrium price.
At present, China has not established a unified carbon trading market, and carbon prices vary in different markets, bringing many problems to pricing. Therefore, in order to have a consistent carbon price, it is necessary to have a clear aggregate target and to connect and unify various carbon markets.
In the process of promoting carbon emission allowance trading and carbon tax, there will be cost shifting, which I believe is inevitable. One has to pay the price when consuming more carbon-emission energy. Cost shifting can help achieve the transformation of resource allocation, so that more of the new funds will be invested in emission reduction and green finance.
However, too much shifting may increase inflationary pressure, and domestic residents may be against it. The key to the problem of cost shifting lies in determining an appropriate amount. This involves a trade-off between the total carbon target and inflation target. However, not allowing cost shifting won’t be a correct decision, and people should not regard such shifting as a shortcoming.
Future emission reduction tasks can partly depend on public investment, and the structure of public investment is a kind of resource allocation. Because Wwhen this part of public investment is not used for carbon emission reduction, it can be used to provide public goods and benefits including medical care and social security.
Since resource allocation is involved, it is necessary to figure out whether there is a gap between the multiple goals of public investment and the emission reduction targets, expected goals, and quantify how big the gap is, so as to correct fiscal and other public policies, and determine the proportion of public investment to private investment.
As mentioned earlier, President Xi Jinping’s carbon reduction commitment reflects an important change in China, and it is not easy to make this change. In fact, a few years ago, the mainstream view of carbon emissions in China was that economic development should not be affected by carbon reduction. The quantitative arguments are mainly the following:
First, emission intensity, some insist that emission intensity should be related to GDP growth, which means that if China's GDP grows fast, the country should be allowed to make more carbon emissions.
Second, some emphasize average value, that is, per capita emissions. China has a large population and its per capita emissions are not much compared with Western countries, so it has more room for emissions.
Third, some believe that it’s is acumulative carbon emissions that count. Western countries started the process of industrialization very early, and they had emitted a lot at the early stage. From this perspective, China has more room for emissions.
This is essentially arguing against emission reduction. To put it in a mild way, this runs against the 2060 goal for carbon neutrality. Because achieving that goal would entail net zero emission regardless of economic growth, population and the level of accumulated emission. Thus, it’s imperative to further clarify the goal for total carbon emission, which requires all related authorities to develop in-depth understanding of the goal, step up transformation, and formulate quantitative action plans to enable the 2030/60 goals.
III. Basis for determining a target for total carbon emission
Chinese President Xi Jinping declared China’s goals on carbon intensity, carbon sink and new energy at the 2020 Climate Ambition Summit. Particularly, there is the first goal to reduce by over 65% the carbon dioxide emissions per unit of GDP from the 2005 level and increase the proportion of non-fossil fuels in the primary energy consumption to around 25%. To this end, it’s necessary to choose proper historical statistics and plan for the future quantitatively. However, China lacks a sound basis for related calculation including official statistics and important parameters, which makes it impossible to clearly gauge the above-mentioned indicators at the moment.
First, there are several different measures to calculate the annual total carbon emission in 2005 and during the years up until now, which are provided by academic institutes and international cooperation programs. But there seems no official data.
If we want to reduce the carbon intensity by 65% in 2030 from the 2005 level, we need to know the level of carbon emission in 2005 at first. But we find different numbers are available, and none is widely recognized as authoritative. According to some of the research, China emitted about 7.8 billion tons of carbon in 2005, but considering that 1 billion tons got absorbed by forest carbon sinks, the ultimate total carbon emission that year would be around 6.7-6.8 billion tons. If this figure is accurate, we can roughly determine an emission target for 2030 by incorporating the factor of GDP. But this is not the authoritative figure. Most of the literatures assume the amount of emission in 2005 to be somewhere around 5.5 billion tons, ranging from 5.38 billion to 5.6 billion tons or so.
In addition, we need to think about the comparability of GDP.
The GDP in 2030 needs to be comparable to that in 2005 for us to set a scientific 2030 carbon intensity target. The nominal GDP in 2005 was about 19 trillion yuan, but we need to convert it with the GDP deflator into a figure that is comparable to the 2020 and 2030 numbers.
It’s also important to know the total emission in 2020 so that we understand how much we have done in the past 15 years and how much faster we will need to be in the coming decade. I remember there is this pair of figures that China’s GDP in 2020 was around 100 trillion yuan with a carbon emission of about 10 billion tons.
If we take 2020 as the base year (which makes our calculation easier), the deflated level of GDP in 2005 would be around 30 trillion yuan; multiply this number by 65%, and we reach a cap for carbon intensity in 2030. The key is to calculate based on comparable GDPs in order to clarify the carbon reduction blueprint.
Third, the goal that China has declared is one on carbon emission intensity, based on which GDP growth in the next decade should also be taken into account to determine a target for total carbon emission in 2030.
Different GDP growths will produce different results in the calculation of this target. If we set 2020 as a comparable base year and assume the average GDP growth to be 5% in the next decade and the GDP in 2005 to be around 30 trillion yuan, then the total carbon emission in 2030 would be 10.1 billion tons or so, which is only about 100 million tons greater than today. However, if we assume the average GDP growth to be 6% instead, the number for 2030 would be 11.1 billion tons. In that case, the task would be more arduous during 2030 and 2060.
Some economists estimate that China will have 10.5-10.6 billion tons of carbon emission in 2030, which indicates they assume the annual GDP growth to be around 5.5%. Hence, there is not a clear roadmap with annual carbon reduction targets, planning, or scientific calculation of the price of carbon for the years ahead until 2030, although such a roadmap would be essential to enabling the goal.
Fourth, carbon sink, wind power and solar power will need to be accounted for to produce a measurement of total carbon emission target for 2030. As mentioned above, there is the estimation that around 1 billion tons of carbon was absorbed by forests and other green vegetation in 2005, which is not much relative to the level of carbon emission that year. If China steps up afforestation and elevate carbon absorption to 1.5 or even 2 billion tons in 2030, this amount is still small compared with the projected level of carbon emission. The current measurement of carbon sinks is also ambiguous with inconsistent parameters, such as the amount of carbon that can be absorbed by forests of different sorts or sizes.
Besides, by 2060, fossil energy would might still be used in power peak regulation and other remaining areas. According to the Institute of Energy, Environment and Economy in Tsinghua University (Tsinghua 3E), fossil energy will account for 13% of the total by 2060, which will bring a large absolute value of carbon emissions. As a result, to achieve carbon neutrality, the carbon emissions thereby must be absorbed through carbon sinks or carbon deposition, as well as carbon capture and storage (CCS) and other new carbon absorption technologies. A large amount of basic data and authoritative parameters are also necessary for measurement and calculation, so that we can have general grasps of the deductions of total carbon emissions.
To better measure the emission reduction in power industry, the installed capacity of wind and solar power generation, whose devices generate fewer power hours per year and need to be compatible with energy storage or peak regulation capabilities, the installed capacity must be converted into the proportion of power supply to the total power generation.
In short, we need to clarify the aggregate total target and establish a set of parameters, indicators, and approaches of measurement and calculation, to lay the ground for task planning and, investment guidance for , and prosperity of green finance and carbon market.
IV. Market economy with quotas and its general equilibrium
It has been worried that setting more quotas will undermine the basic framework of China's socialist market economy. In particular, the large and wide emission quotas might have greater impact on prices than supply and demand do, because it not only undermines the market's decisive role in resource allocation, but also facilitates administrative setting and allocation of quotas.
Such doubts do make sense, but we could apply a computable general equilibrium model with quotas to study this economic system. To make it brief, the conclusion is: with fixed number of quotas, if we let the market supply and demand determine the quota price and market distribution, we can still achieve general equilibrium with quotas, that is, despite of slight changes, the price is still up to the market, and the basic framework of a market economy still functions.
We could infer that if quota prices and distribution are not determined by the market, or without a clear cap limitations on total amount, it will have unknown influence on the basic framework of market economy.
In terms of resource allocation, its connection to the carbon market is essentially a general equilibrium with quotas.
So why should we care about the general equilibrium with quotas? First of all, with a quota, there must be allocation, prices or implied prices. If we make the right choice on policies, quotas won’t affect the understanding and calculability of the general equilibrium model.
Meanwhile, China has good experience from its previous practices. China’s foreign trade used to rely on textile exports in the 1980s and 1990s. At that time, however, there were quotas of several types of textiles, mostly set by developed countries, under the Multi-Fiber Agreement (MFA) initiated by the General Agreement on Tariffs and Trade. The problem for China was how to allocate the textile export quotas. The mechanism permitted quota auctions in market, a counterpart of the carbon quota trading we are talking about.
Therefore, reviewing previous work and research can help us understand the interaction between the current carbon market and the overall market economy resource allocation.
What needs to be emphasized is that this new equilibrium with carbon quotas still depends on market supply and demand, and it must also focus on the intertemporal general equilibrium. As mentioned above, emission reduction mainly relies on investment, and investment can only return across time. However, intertemporal investment decisions are based on price forecasts. That is why the clear total amount aggregate indicators for the future and various parameters are significant.
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