China’s High-Quality Economic Growth in the Process of Carbon Neutrality

1 Introduction

The climate crisis is a challenge for all and no country can stay out of it. China has announced to achieve carbon peaking by 2030 and carbon neutrality by 2060, adding the targets to its overall plan for ecological conservation, and an all-round action plan is being developed. The proposal of “promoting a sound economic structure that facilitates green, low-carbon and circular development” in the report at the 19th National Congress of the Communist Party of China has charted the course for high-quality economic growth in the new era and laid the foundation for achieving carbon neutrality. The target of carbon neutrality by 2060 proves the Chinese government’s solid determination and acts to address the climate crisis, on account of China’s huge economy, energy system and inherent industrial inertia. The task should be arduous as the time for China moving from carbon peaking to neutrality will take only 30 years, nearly half shorter than that of developed countries. Given the urgency of carbon neutrality, the low-carbon transformation program will only progress effectively in accordance with China’s national conditions.

The carbon neutrality in China should be understood from two dimensions—domestically, the relationship between economic development level and energy consumption, and internationally, the impacts of differences in economic development levels and development stages between China and developed countries on carbon neutrality. China as a developing country must maintain high-quality economic development in the pursuit of carbon neutrality. For China’s economic growth prospect, the long-range per-capita-GDP objective through the year 2035 is to reach a level that of medium-developed countries, the Communiqué of the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China announced. Lin (2021) believed that China’s per capita GDP is expected to reach half of that of the United States by 2049, about USD 30000; Li (2016) predicted China’s per capita GDP in 2050 will be 70% of that of the United States, about USD 40000. China’s economy will grow into the future, according to economic growth targets and the predictive analysis of experts and scholars. The linkage between economic growth and energy power consumption over the past 40 years of reform and opening up is shown in Figure 1. The average correlation coefficient between electricity consumption growth and GDP growth was about 0.91, and that between the primary energy consumption growth and GDP growth was about 0.58. Since recent years have seen no evident downward trend of the two coefficients, it means the growth of energy power demand is still closely related to GDP. The energy power demand will continue to grow significantly if China’s per capita GDP follows the above prediction. Going forward, the low-carbon transformation needs to replace the past huge consumption of fossil energy while satisfying the increase in energy demand brought by economic growth. Considering this, how to gradually lower the correlation coefficient between energy power demand and GDP growth is a major challenge for carbon neutrality.

Figure 1

Correlation Coefficient of China’s GDP, Electricity and Energy Consumption Growth Rate from 1981 to 2020

Source: CEIC.

Carbon neutrality requires increasing levels of electrification to expand the use of renewable energy. As carbon-neutral energy systems in 2060 will focus on the consumption of electricity, the electricity mix also needs attention. The comparison of major countries (regions)’s electricity mix in 2019 is shown in Table 1. Generally speaking, the industrial electricity consumption (secondary industry) of a nation will take on an inverted U-shaped trend with the increase of per capita income, ascending first and then descending, on the basis of the environmental Kuznets curve. At current stage, China’s high concentration of electricity in industry (67.7%), especially in high energy-consuming industries (49.4% in 2019), ^[1] makes GDP and power demand growth tightly-connected. GDP growth is accompanied by industrial output growth and further drives up electricity demand. Due to the large proportion of coal power in China’s electricity supply mix (62%), ^[2] the pressure of growing power demand is mostly borne by coal power, making it harder to cut coal consumption (Lin and Wu, 2018). On the other hand, China’s residential and commercial sectors will use significantly more electricity as income levels rise, causing an increase in peak loads and then a significant increase in electricity system costs, and carbon neutrality will be harder to achieve.

The carbon neutrality process will also be influenced by resource endowment and energy consumption mix. In current global energy consumption mix, the percentage of fossil energy is about 85%. ^[1] The share of fossil energy consumed in China and the United States was about 84% and 82%, respectively (Table 2), both approaching the world average. China, limited by special resource endowment conditions, has formed a coal-based mix of energy consumption over its long course of development. The status of coal as a principal source of energy is unshakable in the short to medium term, for the current proportion of coal consumption remains high (56.6%) despite that its share in the primary energy consumption mix was declining at an average rate of about 1% annually over the past decade. Accordingly, the basic direction of energy restructuring in China now should be to stabilize oil, increase natural gas, reduce coal use and develop new energy on a large scale.

Based on China’s basic national conditions, major challenges facing carbon neutrality include: (1) the need for considerable economic growth; (2) the high energy consumption of the industrial mix (industry-based); (3) the coal-rich resource endowment and high-carbon energy consumption mix; and (4) the relatively slow energy market reforms due to consumers’ weak ability to pay. The main contradictions and difficulties mentioned above are from the supply side and closely related to the demand side. The target of carbon neutrality is not solely a matter of energy restructuring, but involves profound changes all over the society and economy, and policies should take into account both the supply and demand sides.

2 Analysis of Peak Values of Carbon Emission

Here is an analysis of electricity mix changes in 2030 as carbon peaking is reached, starting from 2020. The Chinese government has made planning of the gross energy consumption no more than 6 billion tons of standard coal in 2030, so the projection on peak values of carbon emission in 2030 will only consider scenarios of energy power mix changes. The government-set target of 25% of energy mix from non-fossil energy by 2030 limits the growth rate of energy demand. This paper analyzes electricity mix changes in different scenarios of electricity demand growth, referring to the planned installed capacity of wind power and photovoltaics to 1.2 billion kilowatts. China’s power supply mix in 2020 is shown in Figure 2, 68% contributed by thermal power and 61% by coal. The share of thermal power has dropped by about 10% in the last decade, meaning that electric vehicles are about 10% “cleaner” than they were a decade ago. The installed capacity of wind power and photovoltaics accounted for about 24%, higher than the 17% of hydropower. In terms of generation capacity, however, wind power and photovoltaics have contributed only 9% to the total, half of the contribution of hydropower. China needs to increase natural gas-fired power generation if it is to make its generation system more efficient, but the state of natural gas resources is not optimistic and it is unrealistic to grow the proportion of natural gas-fired power on a large scale. Currently, China’s nuclear power accounts for only 2% of the gross installed capacity but contributes 5% of the supply. Compared with coal power, stable but high-carbon, and wind power and photovoltaics, low-carbon but unstable, nuclear power can have both stability and low carbon. It should be a good option for carbon neutrality if safety and layout issues are well considered.

Figure 2

China’s Electricity Mix in 2020

Source: The China Statistical Yearbook 2021.

Changes in availability hours by generating mode over the last decade in China are shown in Figure 3. The disposal of wind power and photovoltaics has been in progress, though, the overall availability hours were low that the impact of their installed capacity growth rate on the low-carbon transformation should not be overestimated. The availability hours of hydropower that is decided by nature have stayed relatively stable, while those of coal power, as is observed, gradually dropped from over 5000 to more than 4000 in the last decade. The continuous decline in availability hours indicates a functional shift of coal power to be more involved in peak and frequency modulation and securing the stable operation of electricity systems.

Figure 3

Annual Availability Hours of Each Generating Mode from 2011 to 2020

Source: CEIC.

The analysis of peak values of carbon emission in 2030 consists of three parts: (1) the planned targets proposed by the government for 2030 are set as specific quantitative boundary conditions; (2) reasonable assumptions are made on variables including primary energy consumption and availability hours of each generating mode according to historical development trends, and some internal parameters of the prediction framework are concluded; (3) based on historical growth trends of electricity demand, two prediction scenarios are set—the average annual growth rate of electricity demand is set at 3% and 5%, respectively. The electricity mix in 2030 can be concluded with three boundary condition constraints, and specific settings and bases are listed in Table 3.

The Chinese government’s planned energy targets for 2030 mainly include: the percentage of non-fossil energy in the primary energy mix reaches about 25%; the gross consumption of primary energy is controlled within 6 billion tons of standard coal; and the installed capacity of wind power and photovoltaic reaches over 1.2 billion kilowatts (Table 3). Further, assumptions are made by historical development trends and the future development potential of primary energy consumption and availability hours of each generating mode as follows. First, primary energy consumption: the average annual growth rate over the past decade and the past five years was 3.3% and 2.8%, respectively, and are on a downward trend. An average annual growth rate of 2% is assumed for the period of 2020–2030, as the government target is to control the gross primary energy consumption no more than 6 billion tons of standard coal in 2030. Second, availability hours: the variation of availability hours of each generating mode in the past decade was small, fluctuating around 10% of the decade average value, on which basis the annual availability hours of each generating mode in 2020–2030 are assumed to be the real value in 2020. Third, hydropower: the average annual growth rate of hydropower generation in the last five years was 3.8%, and has shown a decreasing trend. Given that current development of hydropower resources has entered the late stage, the installed hydropower scale is basically formed, the hydropower development potential is small and the marginal cost grows, the average annual growth rate of hydropower generation by 2030 is set at 2.5% in the prediction. Fourth, nuclear power: because of long development periods and intractable problems on safety and layout, the average annual growth rate of nuclear power generation in 2020–2030 is set at 8% (other generating forms, given their very small volume, are incorporated into nuclear power) according to historical development trends and related project progress. The electricity mix changes in 2030 under different demand scenarios are derived by the above assumptions.

In a scenario with an annual average growth rate of 3% in electricity demand (see Figure 4), the percentage of installed capacity of thermal power will fall to 47% in 2030, while that of clean energy will be more than half—the installed capacity of wind power and photovoltaics will account for 36%, with generation increasing to 16%. In terms of generation capacity, the percentage of thermal power will drop to 60% in 2030, down 8% from 2020. Since the share of natural gas power has stayed relatively stable (3%~4%), coal power will remain as the major source of electricity supply.

Figure 4

Electricity Mix in 2030 under the Scenario of Electricity Demand Growth Rate Being 3%

When the annual average growth rate of electricity demand is 5% (see Figure 5), compared to 2020, the proportion of installed capacity of thermal power slightly decreases (55%) and that of clean energy increases (45%) in 2030, with the installed capacity of wind power and photovoltaics rising to 30% and generation capacity to 13%, merely 4% higher than in 2020. On the other hand, the percentage of thermal power generation in 2030 is 68%, roughly the same level as 2020. Nonetheless, with electricity demand growing and the overall electricity system expanding, there is still a need for more new coal power plants, in spite of increasing installed capacity of thermal power in absolute terms and generation capacity from 2020, and it conflicts with the government’s planning to strictly control coal power projects.

Figure 5

Electricity Mix in 2030 under the Scenario of Electricity Demand Growth Rate Being 5%

Projected results of the two scenarios illustrate the planned targets on the supply side promote a cleaner electricity mix. The demand side is also worthy of attention. In scenarios with higher electricity demand growth rates, it is ineffective promoting a clean electricity mix by supply-side targets alone, and electricity demand changes could largely determine the future electricity mix and peak values of carbon emission.

“China has committed to move from carbon peaking to carbon neutrality in a much shorter time span than what might take many developed countries, and that requires extraordinarily hard efforts from China,” as Chinese President Xi Jinping noted at the Leaders Summit on Climate on April 22, 2021. As the time for “carbon peaking to carbon neutrality” is short in China, achieving carbon neutrality requires a strict control over peak values of carbon emission in 2030, for a high peak value will mount difficulties for the progress. Since the peak values of carbon emission are determined by both the supply and demand sides and depend on clean energy development as well as energy power growth, the progress in clean energy must match the rate of energy demand growth (Lin and Li, 2015). The government can boost the planned installed targets of wind power and photovoltaics or control the growth rate of electricity demand. The former is more straightforward but constrained by cost and the grid’s ability to dispose. Controlling electricity demand is relatively complex, especially in the case of high correlation coefficient between GDP and electricity demand growth, and it is even more difficult in implementation. An effective solution for carbon neutrality needs the government’s policy effort to promote “dual decoupling”. One is to decouple GDP growth from fossil energy consumption with accelerated development of wind power and photovoltaics; another is to decouple GDP from electricity demand growth, pooling efforts to reduce the correlation between the two, and supporting higher GDP growth with lower electricity demand.

3 A Systematic Carbon-Neutrality Solution Supporting High-Quality Economic Growth: Government and Market

With a net zero carbon emissions target set for 2060, a systemic solution must be able to support “double decoupling” by gradually reducing the correlation coefficient between GDP and energy power demand and boosting higher GDP growth with lower energy power demand, while balancing national energy security and equity. Carbon neutrality begins with the fight against climate change and is part of environmental governance, so it is nothing contradictory to China’s high-quality economic growth (Xu et al., 2021). Current low-carbon transformation policies are focused on the production side, with fewer regulatory instruments that directly target carbon emissions on the consumption side. A major reason is that the production side is more concentrated and carbon-intensive, and policies are easy and operational to design and implement. Therefore, most countries take electricity, transportation and construction as the key industries of regulating carbon reduction. But, the consumption side is equally important to carbon neutrality and cannot be neglected. The ultimate purpose of production is consumption, the fundamental source of carbon emissions. Consumer behavioral preferences determine their consumption and also guide and constrain the production decisions of the production sector. Lin and Jiang (2009) argued that besides per capita income, energy intensity, industrial structure and energy consumption mix exert important effects on carbon emissions. The target of carbon neutrality by 2060 is a mechanism pressing for the linkage among energy, environment and high-quality economic growth. On account of the strong relevance and significance of energy to production and life, the planning for carbon peaking must balance system costs and construct systematic solution, and this systemic solution must promote “double decoupling” wherever possible to support the high-quality economic growth in China. The systemic solution considering both the supply and demand sides covers the following actions.

4 Key Packages for Systemic Carbon-Neutrality Solution

First, because carbon emissions involve externalities, it is impossible to tackle the externality problem by relying solely on the market. Second, the environmental Kuznets curve suggests an inverted U-shaped relationship between economic growth and carbon emissions (Kuznets, 1955). Many developed countries peaking carbon emissions essentially follow the environmental Kuznets curve in reducing their energy consumption and carbon emissions. But when carbon neutrality is set to happen at a particular moment, it will only be made possible with a government-led approach to pool resources and forces. Meanwhile, due to policy limitations and implementation efficiency, the process of carbon neutrality needs to be led by the government to reduce carbon emissions, improve the efficiency of transformation and lower the costs as much as possible through market means. To conclude, China’s carbon neutrality process will be government-led and market-supported.

5 A Safe, Stable and Adequate Supply of Energy for Carbon Neutrality

A scientific process of carbon neutrality requires a safe, stable and adequate supply of energy. The Chinese government stressed in July 2021 that the work of carbon peaking and carbon neutrality must be done in a coordinated and orderly manner and the action plan for carbon peaking before 2030 be rolled out as soon as possible and that a whole-of-nation approach would be taken and the campaign-style carbon mitigation be avoided. At the same time, it will insist construction before destruction and firmly curb the irrational expansion of energy-intensive and high-emission projects. Non-fossil energy will share over 80% of energy consumption by 2060 and a clean energy-based electricity system will be built, according to the government’s development plans. Given that hydropower is limited by development potential and nuclear power is troubled by safety issues, wind power and photovoltaics will become major energy in the electricity mix.

The phaseout, concession and transformation of coal power are the way to build a new electricity system based on wind power and photovoltaics, but fundamental issues—the electricity system’s transformation cost and its security and stability—must be taken into account. There have been many literature discussions over the impact of grid-connected wind power and photovoltaics on costs. It is believed that this grid-connection will drive up capacity cost, and also bring additional system cost of peak and frequency modulation to the grid. As a result of an increasing sacle of wind power and photovoltaics connected to the grid, grid costs will show a non-linear growth, with the cost of disposal rising slowly when the percentage of wind power and photovoltaics is low, while the overall costs will climb rapidly as the percentage of wind power and photovoltaics rises (Lin, 2018).

Still, how a large scale of wind power and photovoltaics connected to the grid will impact the electricity system’s stability is not estimable, the coal power system must play the role of “stabilizer” and “ballast” in pushing forward carbon neutrality to ensure a safe, stable and adequate supply of electricity, and better solutions are sought at the same time. On the one hand, with a comprehensive view to the technical route, resource endowment, cost-benefit and so on, a large-scale wind power and photovoltaics connected to the grid will pose serious challenges to the stability and security of the electricity system. “Wind power and photovoltaics plus energy storage” seems to be a solution, but the realization of energy storage configuration on a large scale is subject to technology and cost. On the other hand, China’s coal power plants are known to be new, efficient and large in inventory in the world. In 2020, its installed capacity of coal power was 1.03 billion kilowatts, with an average service life of only 11.6 years, where the proportion of advanced plants such as supercritical and ultra-supercritical plants reached over 55%, and a more reasonable capacity layout has been formed. Therefore, coal power could escort the low-carbon transformation and ensure the electricity system safe and stable. To keep system stability and cope with climate extremes by retaining the coal power system intact is consistent with the call for construction before destruction and the basic principle of ensuring a safe, stable and sufficient supply of energy. Especially when extreme weather occurs or when electricity demand is volatile, coal power could be taken as a backup source of stable and reliable electricity to protect normal production and life.

From a cost perspective, coal power will need to be retired completely for the carbon neutrality target by 2060. In addition to zeroing out fixed costs, demolition expenses and relocation, employee resettlement and re-employment costs will be brought about for decommissioning coal power plants. Therefore, if the “decommissioning expectation” of coal power plants is included and full consideration is given to the various costs of dismantling and retiring plants as well as the flexible retrofitting expenses, coal power may cut carbon emissions by slowly reducing annual availability hours and shifting its profitability from electricity rates to capacity rates (Lin, 2021a). The overall cost of electricity system may be somewhat lower than that of the high energy storage ratios required for a large scale of wind power and photovoltaics connected to the grid. Further, due to the uncertainty of carbon sinks (e.g., forest and ocean carbon sinks), the coal power system can only play a greater role in future electricity systems if carbon capture, utilization and storage (CCUS) technology is introduced. Today, the society is full of doubts about the economy of CCUS, resulting in a serious lack of investment in the industry chain. Notably, the economic assessment of CCUS tends to directly add up the costs of coal power and CCUS, without including the “decommissioning expectation” of coal power plants. If the economic assessment of “coal power + CCUS” only cover a small part of variable generation costs and CCUS retrofitting cost, its cost competitiveness will be largely enhanced compared with the “wind power and photovoltaics plus energy storage” model (Lin, 2021b). Therefore, China may as well use existing young and advanced coal power plants for CCUS retrofitting to reduce the demand and pressure on energy storage systems in the context of a large scale of wind power and photovoltaics connected to the grid, to support economic growth and achieve carbon neutrality at lower costs, and to indirectly make efficient use of huge coal power plants and coal resources. For the sake of both economic growth and carbon neutrality, China will insist construction before destruction and break a low-carbon transformation path with national characteristics.