Randeep Somel, Fund Manager, Climate Solutions, comments on the ‘awakening’ of the US and China in the global effort to reach carbon ‘net zero’.
The goal of ‘net zero’ becomes a true global effort as China and the US make public their intentions.
At COP¹ 21 in Paris, held on 12 December 2015, parties to the United Nation’s (UN) Framework Convention on Climate Change reached a landmark agreement to combat climate change and to accelerate and intensify the actions and investments needed for a sustainable low carbon future.
This agreement tried to bring all nations into a common cause to undertake ambitious efforts to combat climate change. The deal required countries to set their own national targets beginning in 2020.
While signing the deal was a very positive first step, shortly afterwards China had not yet set national targets for carbon neutrality, and the US saw a change in President. The new US President was not a supporter of the Paris Climate Deal and vowed to take the US out of the agreement. This left the deal in an ominous position with the world’s two largest carbon emitters (China at 28% and the US at 15%) still not fully engaged.
This was similar to the Kyoto Protocol in 1997, where China signed the deal with no binding targets and a new US President withdrew his country from the deal.
However, come 2020, and in the space of six weeks the future of the Paris Climate Deal was transformed by two significant events.
Enter the Dragon: President Xi Jinping’s commitment takes the world by surprise
On 22 September 2020, shortly after US President Donald Trump called the Paris Agreement “a one-sided deal” and criticised China for being “the world’s largest source of carbon emissions”, President Xi Jinping of China – in a surprise move – told the UN General Assembly via video that China would scale up its intended nationally-determined contributions (under the Paris climate agreement) by adopting more vigorous policies and measures. In practice, this would see China achieving a peak in carbon dioxide emissions before 2030 and carbon neutrality before 2060. Xi added that “the human race cannot ignore the warnings of nature over and over again”. He also urged other countries to pursue a “green recovery of the world economy in the post-COVID era”.
China, ever since joining the World Trade Organisation, has prioritised economic growth as part of its national strategy. This is, therefore, a significant step as China has indicated it will incorporate climate policy (with goals) into its national plan.
So far, the main pledge China has made with regards to reducing carbon is to phase out non-hybrid internal combustion engines by 2035. With a target to reach carbon neutrality by 2060, the government will now need to address all areas of the economy that emit carbon, and specifically China’s fossil fuel power generation. With approximately three-quarters² of the country’s carbon emissions over the last two decades coming from coal power generation, this area will require the most immediate action.
China will need to significantly step up its investment in renewable power sources, such as solar and wind, going forward. It will also need to find a good renewable base load power solution to substitute for coal. Here, expect to see increased investments in energy storage, such as battery technology, but also the move to renewable fuels that can be easily transported and stored, such as green hydrogen.
The Eagle has landed: Joseph Biden wins the US Presidential election
On 3 November 2020, the US elected a new President, and one that has a very different approach to the challenges of climate change. Joe Biden made climate change one of the key planks of his campaign and has signalled that re-joining the Paris Climate Deal will be one of his first acts as the 46th President.
There was no ‘blue wave’ as a result of the election, where Democrats could have taken a clean sweep of both the executive and two houses of the legislator, so Biden will need Republican support to enact legislation as leader of the Senate, Mitch McConnell, and his fellow Republican senators will continue to control the upper chamber. This will not be easy, but Biden, who has spent 47 years in politics and most of that time in the US Senate, has a history of striking bi-partisan deals and enacting legislation.
There is also a great deal a President can do without enacted legislation through the senate. Returning to science-based policy making would be a big first step. A taskforce put together and led by former US Secretary of State, John Kerry identified 56 policy improvements on climate and energy that do not need Congressional approval.
Biden’s team have already spoken of how the incoming administration will restrict oil and gas drilling on public lands and waters, increase mileage standards for cars, block pipelines that transport fossil fuels, provide federal incentives to deploy renewable power, and mobilise other nations to make deeper cuts in their own carbon emissions. There is already bi-partisan support for reducing the use of hydrofluorocarbons, chemicals that are used in air conditioners and refrigeration, that are warming the planet.
Biden also campaigned on a pledge to ‘Build Back Better,’ promising US$2 trillion of federal government stimulus over his four-year term; aimed at encouraging the adoption of electric vehicles, better insulation of buildings and increased use of renewable energy in the power generation sector. The incoming administration will look to tie any future required stimulus to its ‘build back better’ policy.
With the large amounts of stimulus that have been poured out this year to counteract the slowdown due to the pandemic, the US now has national debt surpassing US$26 trillion. Here, both Democrats and Republicans could see the need for a carbon tax. For Republicans, this would be a way to be fiscally prudent and reduce the debt burden without having to tax income and, for the Democrats, a market-based way to reduce carbon.
The timing of President Xi Jinping’s announcement just before the US election has an element of politicking to it, as it was also likely made to show the incumbent US Presidents’ policies were outdated. It will be crucial now, that the UN and the rest of the global community continue to push China to ensure they are making progress on their goals.
However, China understands that it has been a laggard in terms of technological developments in the past and it has an opportunity here to develop a new industry in clean power and green technology. It can use this to support its own domestic economic growth and create a strong export market. As Mark Carney, the former governor of the Bank of England has said, the transition to net zero “is creating the greatest commercial opportunity of our age”.
President Trump liked to brag that he has been the greenest President the US had seen and that he has an exceptional environmental record. It is true that US emissions have fallen very rapidly for the last four years under his tenure. This is for the simple reason that the economics of sustainability now work very clearly. The costs of renewable energy, or using recycled products, are better than their alternatives.
Climate challenge can be thought of as a three-legged stool for the stakeholders that need to participate: Consumers, Industry and Government. Studies from across the world now show populations are concerned about climate change and are willing to change their own behaviour. Industry can now see the economics working in favour of sustainability and are willing to commit capital to the effort and starve funding for ‘de-merit’ activities. That then leaves Government – while European governments have taken a lead, the final awakening of both the Chinese and US governments will provide the much-needed impetus to reach our carbon targets over the coming decades.
¹COP stands for Conference of Parties, an annual meeting of all nations that make up the United Nations Framework on Climate Change.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.