What does the US-China climate change agreement mean in practice? Analytical Insights

Carbon Tracker comment on US-China climate change agreement

“For Carbon Tracker, today’s announcement of the “joint approach” being adopted by the US and China is an important step in building political momentum towards greater efforts mitigating climate change. While our research predicts a peak in China’s coal demand in 2016 – and therefore a much nearer-term emissions peak than that targeted today – today’s peak emissions announcement is the first of its kind from a developing country and could transpire to be a crucial catalyst for political will to act on climate change. The fact that the global ‘CO2 emissions giants’ have reinforced their commitment to act adds pressure on the rest of the international community to take bold new steps on greenhouse gas emissions to prepare the ground for the international negotiations at COP20 and COP21 in Paris, 2015.”

“This announcement shows the direction of travel is a carbon constrained world -companies and investors need to be able to explain how they are adjusting their business models and portfolios to take advantage and respond to that. It shows that some fossil fuel companies are still in denial when they state that they consider a scenario where the world addresses climate change as ‘highly unlikely’.”

Frequently Asked Questions:

Is China’s intention to peak emissions by 2030 more ambitious than business-as-usual? Is the country’s emissions not expected to peak then anyway?

Before today, China was aiming to increase the share of non-fossil fuels in the energy system to 15% by 2020 – today’s announcement increases this target to 20% by 2020, so marks an improvement on BAU.

There was no previously articulated date when China’s emissions might peak. Today’s announcement is significant because not only is it the first time China has explicitly stipulated a peak emissions date, but the first time a ‘developing’ country has made such a target. This sends a strong signal to other world leaders.

At what rate are China’s emissions currently growing?

In 2012 China’s carbon dioxide emissions increased by 3% on the previous year – this marked a dramatic slowdown on previous rates which have centred around 10% pa growth for much of the 2000s.

At what level are China’s emissions likely to peak in 2030?

It is very difficult to say, but last year China established the aim to keep the country’s total energy consumption below the equivalent of 4 billion tonnes of coal (TCE) per year by 2015. According to China’s Bureau of Statistics, total energy consumption was 3.62TCE in 2012. In light of the fact that the majority of China’s greenhouse gas emissions stem from the energy sector, it is reasonable to suggest that an emissions peak may not substantially exceed current levels.

What do you expect to be China’s peak coal use in tons, under the scenarios you are using?

Our scenarios predict China’s thermal coal use will peak in 2016 at approx. 2,900Mt of thermal coal for power generation as outlined in our coal demand technical paper – http://carbontracker.wpengine.com/wp-content/uploads/2014/09/Coal-Demand-IEEFA1.pdf. Carbon Tracker research has also revealed the large potential for stranded coal-fired power generation capacity if this near-term peaking scenario is not managed effectively in our ‘Great Coal Cap’ report – http://carbontracker.wpengine.com/report/the-great-coal-cap-chinas-energy-policies-and-the-financial-implications-for-thermal-coal/

Some brokers are already projecting a similar trend with Deutsche Bank, Morning Star and Bernstein all calling a peak in Chinese thermal coal consumption by 2016. There are also signs of a slowdown in production, consumption and imports so far in 2014.

Could carbon capture and storage allow for any increase in fossil fuel use (specifically coal) under these emissions targets?

The energy sector likes to deal in ‘energy realities’ – the reality is that to date there are only a handful of CCS projects in operation, primarily linked to Enhanced Oil Recovery. Given the current status and cost of CCS, it is hard to see it will translate into thousands of projects around the world by 2030 – although it could make a contribution beyond 2030 if development does advance. CCS also requires suitable storage geology which is not available in all regions where there are significant carbon emissions. Our analysis of the coal cost curve shows that coal is already facing stiff competition from both renewables and gas which have seen the US coal mining industry lose three-quarters of its value. Adding the cost of CCS will only make coal even less financially viable.

How does China’s intention to increase non-fossil fuels’ share to 20% of primary energy consumption by 2030 compare with business-as-usual projections?

Is the US’s stated intention to cut its emissions by 26-28pc below 2005 levels by 2025 not essentially the same as the baseline, scale and timing of cuts proposed in the Environmental Protection Agency’s Clean Power Plan in June?

The rate of emissions reductions as a result of the Clean Power Plan is still under debate – the EIA anticipate this regulation will retire 60GW of coal-fired power plant capacity by 2020; the US EPA is more bullish on this contraction, believing the impact of the Clean Power Plan to be nearly 180GW of coal-fired power generation capacity to 2020.

What is not under debate however, is the fact that the US is attempting to cut its emissions with the help of the Clean Power Plan and its impact on coal consumption.

Will the two countries’ planned cuts be enough to keep within a remaining global carbon budget of around 1 trillion t CO2 (as outlined by IPCC) if worldwide temperatures are to be kept below a 2°C rise by 2100?

The IPCC recently concluded that greenhouse gas emissions would have to fall by between 41% and 72% by 2050 on 2010 levels to keep to 2C of global warming. Extrapolating today’s commitments by the US, suggest a 60% reduction in emissions would be achieved over this period (making the assumption that this rate is continued). If China’s emissions do not peak until 2030, then it is unlikely they will achieve this require reduction by 2050.

In spite of this, however, today marks an important political breakthrough between the world’s two largest greenhouse gas emitters that should serve as a building block for future progress to the mid-21st century.

How meaningful will China and the US’s cuts be given India’s rapid emissions growth – with India having said it has no intention of making emissions cuts at least until 2030?

This announcement is politically very significant and could serve as a catalyst for other nations globally to act on climate change. As a result, this announcement could apply pressure on India to not be seen as a laggard on an issue rising the international political agenda. 2030 is a very relevant date – indeed it is China’s peaking date, so this is directly relevant. As our analysis has shown, the capital investment that companies are making now will be expected to deliver energy for decades to come. So it is still important that India starts to think about how it could deliver emissions cuts in the future before it commits to more coal investment. India’s economy is also in a different position to China, with significant limitations such as access to capital and crippling grid inefficiencies preventing the rapid scaling up of coal power plants as many predict. Furthermore, as our Energy Access report launched today attests to, CO2-intensive coal power is not the cheapest or quickest approach to bring power to the majority of the rural poor in India who do not have access to energy or grid infrastructure.

What does this mean for China Coal demand?

China has been introducing policies with great regularity that suggest they are attempting to shift their energy system away from carbon-intensive coal burning – the greatest single source of domestic greenhouse gas emissions. Carbon Tracker’s recent technical working paper forecasting global thermal coal demand – http://carbontracker.wpengine.com/wp-content/uploads/2014/09/Coal-Demand-IEEFA1.pdf – predicts China’s demand to peak in 2016 and plateau to 2035 thereafter, suggesting a peak in emissions by 2030 could be being conservative. Improving urban air quality has become an urgent political priority, so it is not just carbon-related measures that are in play. Nevertheless, today’s announcement is another signal hinting at this eventuality to add to this ever-lengthening list.

What does this mean for Oil Majors?

For any company producing fossil fuels, greenhouse gas emissions reduction targets are likely to impact demand for their products. Firstly this sends another signal that the direction of travel is one way – towards a carbon-constrained world. Secondly this challenges the position of a number of oil majors that further efforts to reduce emissions to prevent dangerous levels of climate change are “highly unlikely”. Our analysis of Exxon and Shell papers on carbon asset risk – http://carbontracker.wpengine.com/library/#companies-analysis – highlights that these companies are in denial that there is any outcome other than burning an unlimited amount of fossil fuels.

What does this mean for Europe and the 2030 package?

Just recently, the EU committed to reduce greenhouse gas emissions by at least 40% and to increase energy efficiency and renewables by 27% by 2030. Today’s announcement from arguably a more unlikely source serves to intensify expectations that EU Member States go on to achieve and surpass these new targets.

At the time, many EU leaders hailed the agreement as sending a message to China and the US ahead of the UN talks in Paris – these nations have responded accordingly. This creates a growing group of the largest emitting regions which are setting a path which others can follow – who will be next to follow suit?

The US-China collaboration on clean energy technologies shows that there is a race to produce the energy technologies of the future. If other regions in the world want to participate in this opportunity, then strong domestic targets send the signals investors need to back this kind of economic development

Photograph: Feng Li/Getty Images