Exploring the Road to Carbon Neutrality

Abstract

How to deal with carbon emissions—a rare externality that spans a large time frame and geographical scope—is a difficult task for the world. This task is particularly challenging for China, mainly in that the country must coordinate dual objectives, including existing economic growth targets and the newly added carbon neutrality goal. Over the past 40 years of reform and opening up, China has been setting economic growth targets and striving to achieve them. In recent years, although growth targets have softened along with the secular decline in potential growth rate, economic growth remains a top priority for China, the world’s largest developing country. We expect China to reach the current standard for a high-income country by the end of the 14th Five-Year Plan period, and to double its GDP or per capita income by 2035. Currently, China is adding a new constraint over the next 40 years. As the world’s largest carbon emitter, China has set out a clear timetable for carbon neutrality—to reduce its carbon emission intensity in 2030 by more than 65% from the 2005 level, and reach the peak of carbon dioxide emissions by 2030 and become carbon neutral by 2060. We note that it will take 71 and 45 years, respectively, for the EU and the US to achieve the carbon neutrality goal from peak carbon emissions (reached by the EU in 1979 and by the US in 2005) to net zero emissions. China’s aggressive timetable to achieve carbon neutrality within 40 years means that the country will face a much steeper slope of carbon emissions than the EU and the US. How will China strike a balance between the objectives of economic growth in the past 40 years and carbon neutrality in the next 40 years? We discuss this issue from an aggregate and a structural point of view. In our aggregate analysis, the most important task is to identify the peak of China’s carbon emissions in 2030. We believe that in order to take economic growth and emission reduction into consideration, it is more appropriate to set the carbon peak target in a range to avoid rigid constraints. From a structural perspective, we discuss how China can achieve its carbon peak and neutrality goals. Under the framework of a “green premium”, we come up with a preliminary idea of “technology + carbon pricing” based on the analysis of eight high-emission industries. We prove that this idea can strike a balance between the constraints of economic growth and carbon neutrality goals through general equilibrium analysis using the computable general equilibrium (CGE) model. Finally, we incorporate social governance into our analysis by discussing the meaning of a negative green premium, and arrive at this formula: the road to carbon neutrality = technology + carbon pricing + social governance.