Introduction: Weaving China’s climate policy tapestry
China is in the midst of a wholesale economic transformation, driven by the central government’s pursuit of sustainability in all its forms: economic, social, and environmental. At the heart of this transformation sit Xi Jinping’s “dual carbon” targets: one to peak emissions before 2030, and the other to achieve carbon neutrality before 2060.
However, such straightforward guiding targets belie the monumental complexity of unraveling and then rebuilding the fossil fuel–driven economy that enabled China’s rapid rise as a global economic power. The difficulties of moving China’s economy up the value chain – particularly from low-grade, emissions-intensive industrial manufacturing toward high value-add, green and low-carbon production – are compounded by the immense political frictions posed by entrenched interests and bureaucratic inertia.
In this context, it is imperative for observers – particularly those keen on engaging with China during its grand green transformation experiment – to understand the many pieces, players, and problems involved. To this end, this report takes stock of China’s planning and reform efforts across the domains of climate, energy, and industrial upgrading since the 14th Five-Year Plan (2021–2025) was adopted. It then assesses the key drivers and constraints shaping these efforts, with the aim of elucidating the most likely path ahead – even as Beijing itself continues to map it out.
1.1 A strategic shift from growth to sustainability
In September 2020, Xi Jinping took to the world stage – the United Nations General Assembly – to announce China’s dual carbon targets:1
- To achieve peak carbon emissions before 2030
- To achieve carbon neutrality before 2060
Xi’s announcement followed nearly a decade of rising political focus on environmental protection, starting with China’s first-ever binding energy efficiency targets in 2011. Xi himself has promoted green development since coming to power in 2012, though primarily with an eye to combating local pollution. Under this paradigm, environmental policy was politically distinct from – and subordinate to – economic policy.
Xi’s dual carbon targets, however, heralded a striking new policymaking paradigm, under which “green” fully expanded to include “low-carbon” development, and decarbonization became a pillar of both soft power and economic strategy. With the dual carbon targets, China increased its climate ambitions beyond its nationally determined contributions under the Paris Agreement – and prompted successive net-zero commitments from Japan and the Republic of Korea. Meanwhile, Xi’s carbon neutrality commitment was the first from any major developing economy, a highly symbolic status that earned China goodwill amid waning international faith in the global climate governance regime.
But the targets were even more impactful at home. Xi’s targets signaled to China’s vast bureaucracy a fundamental shift in long-term economic strategy: namely, from a growth-centric, GDP-maximizing approach to a more holistic pursuit of sustainability in all its forms – economic, social, and environmental. Accordingly, China’s decarbonization commitments are now bedrock pillars of national, provincial, and local policymaking in virtually every domain.
For the global climate outlook, the question now is how well China’s long-term climate goals can withstand countervailing short-term economic pressures.
1.2 Starting to codify a sustainability-oriented economic model
In March 2021, the annual Two Sessions meetings of China’s major political bodies approved the 14th Five-Year Plan (FYP) (2021–2025) – or, more precisely, its outline, a 148-page document that provides binding headline targets, along with nonbinding guidance to support their achievement. Building on the outline are myriad sectoral FYPs – still being gradually released in 2022 – that provide both binding and nonbinding targets to support China’s 2025 targets.
Among much else, the 14th FYP outline codifies six broad goals to establish a holistically sustainable economic model:
- Move the economy up the value chain
- Increase economic self-reliance
- Improve energy security, both through source diversification and increased self-sufficiency
- Gradually decarbonize the energy system
- Increase domestic production efficiency
- Decrease the environmental impacts of industrial production
Most importantly from the climate perspective, the 14th FYP outline establishes two binding targets for fulfillment by 2025:2
- To reduce carbon dioxide emissions per unit GDP by 18 percent compared to 2020
- To reduce energy consumption per unit GDP by 13.5 percent compared to 2020
In addition, the outline issues a nonbinding target to increase nonfossil energy sources’ proportion of the energy mix to 20 percent, compared to 15.9 percent in 2020 – signaling to local policymakers that binding targets are on the way and providing time to prepare. This target builds on China’s “dual control” mechanism, launched in 2016, which limits energy intensity and total energy consumption. Where “dual control” treats energy as a proxy for carbon emissions, contemporary policymaking – like greening the electricity mix – is increasingly focused on direct decarbonization.
Finally, on the industrial policy front, the 14th FYP outline codifies the move toward a more sustainable economic model by calling for:
- Seven percent growth in R&D across heavy industries, petrochemicals, and other resource-intensive sectors, with a specific eye toward increasing efficiency and reducing resource intensity
- Reduced environmental impacts from industry
- Reduced energy and emissions intensity across value chains
Notably, the 14th FYP outline does not include a hard cap on total emissions. Nor do we expect such a cap to be forthcoming, given Beijing’s energy security concerns (see section 2.1 and the case studies in section 3).
The 14th FYP outline also lacks a cap on total energy production, which had featured in previous FYPs. Presumably, the target was dropped in part due to Beijing’s reluctance to contain its envisioned post-COVID economic recovery. But its disappearance also aligns with Beijing’s sustainability-oriented economic strategy: Rather than cut energy production outright, decarbonize energy and remove the trade-off. This is critical because, to decarbonize heavy industry, transportation, and buildings, China needs to go all-in on electrification, which will dramatically expand electricity consumption. The goal, then, must be ensuring that electricity is green.
Such is the logic implicit in China’s current long-term energy planning – though it poses a clear risk to climate if energy decarbonization takes longer than planned.
1.3 Operationalizing the model
1.3.1 The FYP system
By nature, the 14th FYP outline is an extremely high-level document. It establishes China’s overall trajectory, but not the path by which to traverse it.
Wholesale economic decarbonization is a mammoth undertaking, with hundreds of elements. But among the most urgent tasks are to:
- Reform power markets to enable greater absorption of renewable energy
- Expand interprovincial power trading, to address geographical disparities between renewable energy generation hubs and industrial power demand hubs
- Fundamentally transform heavy industry production, which is highly coal-dependent and both technically difficult and expensive to decarbonize
- Reduce the economy’s dependence on heavy industry and construction, a project that is effectively on hold while the Party staves off economic disaster amid COVID lockdowns this year
- Throughout the above, overcome bureaucratic inertia and vested interests – including the incredibly powerful State Grid, which manages 80 percent of China’s power infrastructure – to enact reforms
Through various subsidiary plans, the 14th FYP targets many of these issues. Most notably, in 2022, Beijing issued the 14th FYP for a Modern Energy System on March 22 and the 14th FYP for Renewable Energy Development on May 30, which together call for:3 4 5
- Increasing total national power generation capacity to 3,000 GW by 2025 – up from 2,380 GW at the end of 2021
- Increasing total installed wind and solar power generation capacity to 1,200 GW by 2025 – up from 634 GW at the end of 2021
- Increasing the percentage of nonfossil energy in China’s total energy consumption to 20 percent by 2025 and 25 percent by 2030 – up from 15.9 percent in 2020
- Raising electricity’s share in total end-use energy consumption to 30 percent by 2025 – up from 26.5 percent at the end of 2020
The FYP for a Modern Energy System also establishes several aspirational targets:
- By 2025, nonfossil energy should account for ~39 percent of China’s total power generation
- By 2035, renewable energy should “become the main power source”
- Creating a unified national electricity market that effectively links medium- and long-term electricity markets with spot and ancillary services markets
In addition, central ministries have also produced:
- A 14th FYP for sci-tech innovation in the energy sector6
- A 14th FYP for energy conservation and emissions reduction7
- A 14th FYP for sci-tech innovation in the transportation sector8
- A 14th FYP for new energy storage9
- A 14th FYP for urban planning that will guide green and low-carbon construction10
And dozens of provinces have issued local 14th FYPs on everything from rural greening to industrial decarbonization, with more emerging monthly.
Despite all these sectoral 14th FYPs, the FYP system itself is not enough to coordinate the whole-of-economy task of decarbonization.
1.3.2 The “1+N” climate policy system
In October 2021, Beijing launched the “1+N” climate policy system – a policy architecture that is consistent with, but separate from, the FYP system, and which is dedicated to operationalizing China’s holistic decarbonization.
The system is designed to help Beijing manage a complex, multi-stakeholder policymaking process, while leaving room to adapt. It is overseen by the Leading Small Group for peak carbon and carbon neutrality, helmed by Executive Vice Premier Han Zheng and is closely aligned with the powerful macro planner National Development and Reform Commission (NDRC), confirming its bureaucratic authority.
Starting with a core, top-level guidance document – the “1” – the system builds out with progressively more detailed plans for each domain of decarbonization, in a “snowflake” method of policymaking. As of September 9, 2022, Beijing had published the following core documents:
- The “1”: The central guidance document that essentially reaffirms prior FYP climate and energy targets – including to reduce CO2 emissions per unit GDP by more than 65 percent from 2005 levels by 2030.11 12 13
- The first and highest-level “N”: The “Action Plan for Carbon Dioxide Peaking before 2030,” which maps out efforts in over a dozen domains, from fossil fuel substitutions to energy storage expansion, from industrial electrification to circular economy development, serving as the basis for subsequent “N” plans dedicated to each issue area.14
- A second high-level “N” doc: The “Opinions on Improving Institutional Mechanisms and Policies for Green and Low-carbon Energy Transformation,” which collates 34 distinct areas of specific energy policy necessary to achieve China’s 2030 and 2060 climate targets.15 16
- A third high-level “N” doc: The “Opinions on Providing Financial Support for Achieving Peak Carbon Emissions and Carbon Neutrality,” which establishes the basic fiscal policy framework to guide green investment into China’s energy system, key industries, and consumer markets.17 18
- A fourth “N” doc: The “Implementation Plan for Synergistic Pollution Reduction and Decarbonization,” which formally links local pollution and national carbon emission management efforts – a boon to both sides.19
- A fifth “N” doc: The “Implementation Plan for Carbon Peaking in Urban and Rural Construction,” which sets the foundation for much-needed efficiency improvements and waste reduction in the building sector – one of China’s highest-emitting sectors and a source of incredible quantities of preventable waste, rooted in decades of wasteful construction.20
- A sixth “N” doc: The “Implementation Plan for Carbon Peaking in the Industrial Sector,” which is the long-awaited blueprint for China to slowly, gradually begin moving its industrial economy away from its traditional emissions-intensive roots toward greener goods and production processes.21
- A seventh, R&D-focused “N” doc: The Implementation Plan for Science and Technology Support for Carbon Peaking and Carbon Neutrality,” which provides guidance for sci-tech talent development, clean energy tech R&D investment trajectories, and differentiation of key R&D responsibilities across the bureaucracy.22
At the Two Sessions in March, the NDRC confirmed 11 “1+N” plans for future development:23 24 25
- Iron and steel
- Nonferrous metals
- Natural gas
- Urban and rural development
- Agriculture and rural areas
- Building materials
To support these sectoral plans, the NDRC will also formulate guidance for:
- Science and technology research and development
- Green development budget sustainability
- Green financial development
- Carbon absorption capacity
- Statistical accounting of emissions
- Specialized personnel training
- Environmental inspection and evaluation
These plans will, gradually, filter down into provincial policymaking, much as national-level FYP goals are embedded in provincial, then municipal, FYPs. And indeed, the NDRC and National Energy Administration (NEA), among other central agencies, are already being bolstered by numerous supporting plans, such as:
- A set of 21 measures that outline continued, indirect central government support for renewables beyond the era of direct subsidies – helping support renewable energy growth without problematic market price distortions – issued May 3026
- A plan that gives energy storage its first meaningful path to market-based profitability, issued June 727
1.4 How domestic politics mold the model
Xi’s choice to announce the dual carbon targets at the UN served two important political purposes:
- To signal to domestic actors that the commitments are categorically higher on the policy priority list than purely domestic-focused policies, which are subject to behind-the-scenes negotiation
- To implicitly tie the dual carbon targets – and, hence, China’s overall climate transition – to Xi’s personal credibility
Both purposes help to make the dual carbon targets politically non-negotiable. While the scope of net zero was initially moot, July 2021 comments from China’s Special Envoy for Climate Change Xie Zhenhua clarified that the target covers all greenhouse gas emissions.
As it stands, China’s long-term carbon goals appear uncontroversial within Beijing. However, the means to achieve them remain hotly debated, for both technical and political reasons.
Worth mentioning is China’s nascent carbon emissions trading scheme (ETS). First announced in 2017, the ETS launched active trading in 2021 in a startup phase covering the power sector. Efforts to incorporate additional sectors were expected this year but have been delayed due to data quality issues. While carbon pricing will be important for China’s decarbonization, the current system uses intensity-based allocations that lead to modest results. Incentivizing deeper decarbonization will require reforms that put a price on total emissions. This is unlikely to happen during the 14th FYP period.
On the technical side, experts also debate the proper roles of, and investments in:
- Nuclear power – which requires massive investments with uncertain prospects to make viable in China’s hinterland, as opposed to the coastline where nuclear is now concentrated28
- Hydrogen – the viability of which varies greatly across its passenger vehicle, heavy-duty vehicle, freight, rail, shipping, industry, energy storage, and power applications
- Various power market reforms – these stand to greatly benefit renewables and energy storage, but at the cost of increased power prices and volatility, which are anathema to current regulators’ goals
But the political disagreements are more pernicious: government bodies with differing mandates dispute what short-term economic costs and risks various long-term decarbonization efforts are worth.
In 2018, the Ministry of Ecology and Environment (MEE) succeeded the Ministry of Environmental Protection, claiming the central role on governing greenhouse gas emissions from the National Development and Reform Commission (NDRC), the macro planner. However, between 2018 and 2020, control over the formation of climate policy has largely shifted from MEE back to NDRC, where it is poised to remain.
In part, this transition reflects that climate policy is, ultimately, economic policy. But more broadly, it reflects the fact that the NDRC, representing China’s economic interest, remains the most powerful of China’s ministries, and is able to exert that influence over environmental authorities.
Meanwhile, the MEE and other environmental actors pursue their mandates with considerable constraints. Most notably, the MEE oversees the nascent ETS. But it has become clear that MEE lacks the political standing to rapidly force compliance in the ETS. Indeed, this political weakness is partly why some observers question the ETS’s overall role in China’s decarbonization.
This imbalance of power sets up the incentive problems faced by lower-level officials throughout the bureaucracy.
1.5 The incentive problem: A rock and a coal face
Today, the most fundamental challenge to transforming China’s economic model – and fulfilling its climate ambitions – is not one of financing, or innovation, or talent. The most fundamental challenge is incentives.
With clear central government policies in place to codify the Party’s goals, why do incentive problems exist at all? Effectively, the Party has established two concurrent high-level priorities:
- Achieving the dual carbon targets in the medium to long term
- Protecting the economy from disruption in the short term
However, in reality, the latter generally takes precedent over the former.
Importantly, there is no inherent conflict between China’s climate and economic priorities. Indeed, the bright economic future that Xi has proposed reflects an economy in which green, low-carbon technologies drive the economy, where it once was buoyed by oil with a ballast of coal.
But the two priorities have been at loggerheads since power outages disrupted the economy in fall 2021 (see section 3.1). Industrial concerns were piqued amid global market volatility following Russia’s invasion of Ukraine (see section 3.2), and exacerbated by the resurgence of COVID in April, which has driven lockdowns and massive disruptions.
The NDRC’s central task is preserving economic stability – with energy security a prerequisite. In the current environment, the NDRC fears a coal phase-out will risk energy security, industrial production, and overall economic stability – hence the current perceived policy tension. While ministries continue to advance efforts that support the green transition – e.g., launching carbon-related derivative products for the ETS, designing new green standards, and the like – the most substantive reforms remain chained by economic concerns.
The problem becomes increasingly visible at progressively more local levels. Where a locality is pressed to hit economic and decarbonization targets, they strongly tend to prioritize the former. Why? In large part, because they understand that the real power lies with economic policymakers. Environmental regulators, meanwhile, tend to have less influence over promotions and punishments alike – skewing the pressures for short-term compliance toward economic interests, even as long-term climate goals remain “non-negotiable” – but less immediate.
The realities of the incentive problem are explored in sections 2.1 and 2.2.