Abstract: Although the impact of China's decarbonization goals on production activities and short-term economic growth has only been felt in a few regions, the tendency merits attention. LIU Shijin warns against campaign-style carbon reduction, arguing that meeting the goals requires replacing old technologies with green ones rather than lowering productivity, slowing growth, or disrupting regular supply and demand when green technologies have not been available. He stresses the importance to create carbon accounts and green responsibility accounts as part of the wider efforts to promote technological innovation and institutional innovation in support of green transition.
China's pledge to reach carbon peak and carbon neutrality demonstrates its efforts as a responsible power while also implying the need for a thorough and green transformation of its economy and society. To put it simply, the transformation is not a request but a self-imposed pursuit.
The steps to achieving the target will have a wide-ranging, long-term influence on the economy and society. In short, it will restructure the industrial structure, create opportunities for technological innovation and investment, reform the supporting system, and reshape life, production, development philosophy and methods.
I would like to discuss three issues based on what has happened in reaching the 30/60 goal as we have seen in our research.
I. SAY NO TO THE “CAMPAIGN-STYLE” CARBON REDUCTION
To begin with, there is no such thing as a "one-size-fits-all" solution to carbon reduction. We must recognize China's realities and work together to promote carbon reduction, pollution reduction, greening, and growth.
China is still a developing country in general. The situation it faces is different from developed economies, which have already passed the peak of industrialization and carbon emissions, shifted to the service industry, reduced pollution and improved ecological environment. More crucially, developed economies have reached a point of maturity. "When the apple is ripe, you won't be able to grow it any quicker." However, in China's case, we have concerns other than carbon emissions, such as pollution and environmental damage; more importantly, we have a need and ability to maintain relatively rapid economic growth.
Some may wonder if this will hamper carbon reduction. And the answer is NO; instead, it will be a booster. The externalities of carbon reduction and routine pollutant management are vastly different. For example, if a hotel wants to release polluted water or air, it will be under a lot of pressure, especially from the surrounding neighborhoods. However, it is difficult to find a volunteer who is willing to suffer the cost of carbon reduction alone when the entire planet shares in the benefit.
Carbon emissions and regular pollutants often come from the same sources, and this proportion is around 70%-80% according to Shenzhen's experience. By taking a more integrated approach toward decarbonization and pollution reduction, we can leverage the stronger desire to tackle pollution to drive the comparatively low motivation to cut carbon. We have noted that Shenzhen has made quite successful attempts at combining pollution mitigation and decarbonization actions.
Another example is ecological restoration and afforestation, which can increase carbon sinks that neutralize carbon emissions. More importantly, green growth, especially the development and deployment of green technologies with high productivity, low or zero emissions and low costs, could both promote economic growth and contribute to carbon reduction, pollution reduction and greening.
Second, a recent meeting of the Central Finance and Economics Committee pointed out that China should not carry out campaign-style carbon reduction.
Recently, I paid visits to some regions and heard from local officials that short-term pressure to reduce emissions has been so enormous in recent days that it even affected economic growth in the short run. There are also reports saying that in some places electricity has been cut off in order to meet emission reduction targets, and as a result, people cannot turn on air conditioners in the hot summer. This situation may not be very common, but it deserves attention because it reflects a tendency.
The current situation is that China has adopted administrative measures to promote emissions reduction. The target is passed all the way down from the central government to local authorities. At the moment, no better means is available. It has its advantages such as quick achievements in the short term. However, the problems are apparent. For example, the quota may be irrational, and the cost of “free riding” is high.
We should make it clear that the key to reducing carbon emissions and achieving carbon neutrality is to replace traditional technologies with green technologies. To reduce carbon emissions is neither to reduce production capacity, nor to reduce the growth rate. In the absence of green technologies, we should never disrupt the normal order of supply and demand. In this process, we must follow the laws of green transformation and market economy. Otherwise it is very likely to turn the good things bad.
Usually, we say that the old must be broken down first and the new will be built afterwards; but in the matter of green transformation, I think it should be that the old must not be thrown away before the new is available. A recent meeting of the Central Finance and Economics Committee particularly emphasized this point. China needs to focus on forming new green supply capabilities and realizing stable transformation on the premise of ensuring the safety of industrial supply.
Third, carbon emission reduction needs the right indicators.
Recently there is a debate over whether it is reasonable and effective to measure the progress towards decarbonization goals with the dual indicators of total energy consumption and energy intensity. We found that local governments right now rely on these two indicators to assess emission reduction. The two energy indicators were originally introduced to encourage energy conservation, increase energy efficiency and limit overuse of energy so as to ensure sustainable development, and for these purposes they serve well. However, when it comes to decarbonization targets, two questions remain to be discussed.
One problem is that energy saving is not the same as carbon reduction. Energy consumption can be high-carbon, low-carbon or even zero-carbon. Our goal is to gradually reduce carbon by adjusting the energy structure and substituting low-carbon or zero-carbon energy for high-carbon energy without compromising energy supply.
China’s per capita income just exceeded the level of 10,000 US dollars. By 2035, according to the national plan, we will reach the per capita income level of a moderately developed country, that is, 30,000 or 40,000 US dollars in current prices. From 10,000 US dollars to 30,000 or 40,000 US dollars, there is still a lot of room for growth in all fields, including per capita energy consumption, especially per capita electricity consumption. Therefore, it would be against the original intention of development if we unreasonably limit energy consumption, to the point where economic growth is restricted.
The other question is, leaving aside the issues of carbon emissions and conventional pollutant emissions, what is the best way to control the quantity and intensity of energy consumption? Should we adopt an administrative or market-oriented approach?
In this scenario, energy consumption control is actually an issue of cost control. Only the firms involved can figure out how to use inputs and how much to use. It is difficult for the government to make the decision at the macro level.
For instance, in recent years, the cost of solar photovoltaic power has been quite low. If some company utilizes this green electricity to produce high-tech and high value-added products, then even if the energy consumption might be slightly higher, overall it makes a good deal.
We suggest that China step up efforts to create conditions for the use of the dual carbon emission indicators (volume and intensity) to replace the dual energy consumption indicators to help realize the carbon reduction goals. Of course, the latter are still useful as an indicator for assessing economic transformation.
II. INTRODUCE GREEN ACCOUNTS
To address these challenges, it’s important to lay a solid groundwork underpinning the green transition over the long run. The key in the next step is to promote technological innovation and institutional innovation in support of green development.
Green technology is the basic driving force enabling carbon reduction. Now is time to systemically replace the traditional grey, black and other non-green technologies with green ones.
Ideal green technologies are supposed to have three features: high technological content and high productivity; low or zero emission; and competitiveness, especially cost competitiveness, relative to traditional technologies. Realizing these three features is not as challenging as some have thought.
Take the photovoltaic industry for example. Few would have believed ten years ago if I said coal-fired power plants would one day feel competitive pressure from their photovoltaic peers in terms of cost. But truth is, over the past decade, the cost of photovoltaic power generation has been reduced by 80-90%, and now it’s already cheaper than coal-fired power. I’ve heard from experts that its cost could further go down significantly in the next few years.
So it’s possible to realize the three above-mentioned features, and that’s going to be the focus of our innovation efforts going forward. In the past, we focused on boosting productivity; in the future, we should turn to reducing or even eliminating carbon emissions at a low cost. Innovation could make many things deemed impossible come true. The key is to shift the focus of efforts.
To boost technological innovation, we should step up promoting the application of the already mature technologies that are expected to produce remarkable social and economic benefits in the future; in the meantime, it’s imperative to create institutions, mechanisms and a sound policy environment to enable green technological innovations and their application.
In the past, green innovation and economic growth were generally thought to be incompatible. Some worry that the pursuit of green development and environmental protection could impair economic growth. This did happen before, because in the past the focus of green technological innovation was to reduce pollution; however, going forward, we will turn to focus on creating and multiplying values with green technologies, such as boosting the development and application of low- or zero-carbon technologies. Research shows that this could potentially stimulate hundreds of trillions of investments, and such tremendous potential for growth would never have been possible without our endeavors toward green development.
Now turn to institutional innovation. There is a basic question here: should and can the market play a decisive role in green development? Objectively speaking, it can’t, at the moment. But as we enter the period of green transition under the carbon neutrality goal, we have to put in place new systems and institutions, in order to provide a sound micro basis for the market to play the decisive role, and we could do that through efforts.
Many things need to be done for institutional innovation. A basic task is to create carbon accounts and green responsibility accounts, and to this end we need to improve the accounting for carbon and ecology. Accounting is the basis for green transition. Clear and scientific accounting is the premise for any administrative or market-based measure to work. This is important and urgent. Lack of proper accounting in this area has not been paid enough attention. The reason why the targets on total carbon emission and intensity are hard to realize is also the lack of a necessary basis for accounting.
An outstanding problem facing the development of green finance is the lack of appropriate green standards. How to properly define green finance is also, to a large extent, a matter of green accounting.
We have not attached enough importance to green accounting or achieved enough progress in related research for it to play its due role in enabling the development of green finance. Hence, going forward, we need to create carbon accounts and ecology accounts based on proper accounting, before introducing green accounts for governments at various levels, businesses and individuals that incorporate four core elements of carbon reduction, pollution prevention, ecological restoration and economic growth. The goal is to help define the green responsibility of the related parties, or, from an economic perspective, define the property rights and accountabilities, which is the basis for market forces to work.
We will be able to build a cleaner world if we all do our parts. Explorations of green accounts must be encouraged at local level. This will help us break down the national carbon neutrality goal into implementable targets and realize them one by one to achieve tangible progress in green transition.
This article is the translation of LIU Shijin's speech at the 2021 China International Finance Annual Forum held on September 8, 2021, as part of the 2021 China International Fair for Trade in Services. The English version has not been reviewed by the author. The views expressed herewith are the author’s own and do not represent those of CF40 or other organizations.
