Will China use climate change as a bargaining chip?

Alicia Garcia Herrero, Natixis Asia Pacific Chief Economist, Bruegel Senior Fellow

With less than four weeks before the start of the 26th U.N. Climate Change Conference of the Parties, or COP26, in Glasgow, China is increasingly the center of global climate policy attention. The country missed the July 31 deadline set by the United Nations to submit new emissions reduction pledges, known as nationally determined contributions (NDCs), ahead of the conference, sparking doubts about its contribution under the Paris Agreement.

While several other countries, including India, Saudi Arabia and South Africa, also missed the deadline, the delay by China is of particular concern. As the largest global emitter of greenhouse gases, the country is key to the success of COP26 and the global effort to achieve climate neutrality. The most worrisome factor is that China’s delay might reflect not a holdup in the preparation of its NDC, but a well-rehearsed plan to leverage its climate change commitments into other areas where the Biden administration has increased pressure on Beijing.

Before the U.S., and potentially also Europe, considers compensating China for operationalizing its long-term emissions targets for carbon neutrality by 2060, two issues must be considered.

First, the weaponization of climate change measures might be seen by the Biden administration as cutting off the last possibility of cooperation with China, making the bilateral relationship much more hostile. This is also a possibility in the case of Europe, given the increasing importance of climate change in European citizens’ priorities.

Second, it is not at all clear that China is ready to take the necessary measures to fulfill the climate objectives that it has set for itself, the more so for those closest in time, namely the peaking of emissions by 2030. Coal still represented 57% of China’s energy mix in 2020, and there is no sign of any rapid change, as coal remains heavily subsidized. Last year alone, China put 38 gigawatts of new coal-fired power capacity to use, the equivalent to the entire coal-fired power generation capacity of Germany. On this basis, 2021 is expected to mark China’s all-time high consumption of coal.

Moreover, the 14th five-year plan, presented in March, does not really offer a breakthrough on China’s existing energy mix or any other action to ensure that emissions will peak in 2030, including any suggestion of a carbon emissions cap.

During his virtual intervention at the 76th session of the United Nations General Assembly, Chinese President Xi Jinping pledged to end the financing of new coal-fired power plants overseas. This is good news, but it comes at a time in which Chinese financing of coal-fired power plants overseas is already on a firmly declining trend. In 2020, for example, no new Chinese-backed coal-fired power plant overseas was announced. So, domestic coal consumption represents the real story here.

The 14th five-year plan also makes several references to the further development of coal, instead of introducing a coal consumption cap. For some, China’s introduction of a national emissions trading system has been a good sign, but the reality is that it has remained very illiquid since its inception on July 16, with the daily carbon price remaining stagnant at very low levels between $7 and $9 per ton of CO2, several times lower than that of European carbon.

Given the above, it does not seem advisable for the U.S., or the EU, to agree to any demands to lift pressure on Beijing in areas including trade, tech and sanctions in exchange for precise actions related to climate change, especially regarding peak emissions in 2030.

Entering into any kind of negotiations stemming from China’s weaponization of climate change would shift the burden of decarbonizing China to the rest of the world. The most obvious risk in this scenario would be that other countries may start to do the same, eventually scaling up the overall cost of addressing climate change.

To avoid this scenario, the U.S. and the EU might have no choice but to join forces when it comes to climate policy. The most obvious way to do this would be to create a climate club through which they can coordinate measures so as to create external incentives to reduce global emissions beyond their own borders.

The best instrument to help achieve this goal would be the introduction of carbon border adjustment measures, which should be viewed as a first step toward a multilateral mechanism open to all countries willing to join. For this action to incentivize China’s decarbonization efforts, the carbon border adjustment mechanism might need to quickly get broad sectorial coverage, well beyond initial carbon-intensive goods.

All in all, China’s grand strategy to leverage climate so as to obtain U.S. engagement in other policies may be the catalyst for the U.S. and Europe to work together and use their own leverage to stimulate tangible actions to reduce carbon emissions, including from China. With carbon border adjustment proposals already under discussion in both the U.S. and the EU, this outcome is not impossible. All in all, China might want to reconsider such a policy turn that might end up costing it much more.

*This article is co-authored with Simone Tagliapietra (senior research fellow at Bruegel) and also published by Nikkei Asia at

https://asia.nikkei.com/Opinion/Will-China-use-climate-change-as-a-bargaining-chip

Senior Fellow at Bruegel