Categories
Climate Policy Memo

Geopolitics of Hydrogen: Decarbonization and Disruption

Summary

Hydrogen could be the missing piece to solve the clean transition puzzle[1]. It has the potential to substantially decarbonize transportation as well as hard-to-abate industrial, power, and heating processes. Accordingly, more than 30 countries have developed national hydrogen strategies[2] and agreed at COP26 to accelerate the deployment of green hydrogen[3]. As a result, hydrogen could fulfill a quarter of total energy demand by 2050[4].

This anticipated boom carries significant geopolitical implications. New hydrogen export champions will change the geography of the global energy trade, presenting new trade route vulnerabilities as well as potentially new political alliances. Additionally, a new dimension of global energy competition will unfold over the green hydrogen supply chain where China is already leading. To facilitate the growth of hydrogen in line with net-zero goals, nations will have to protect new trade routes, engage in substantive hydrogen diplomacy, and invest in new capacity for critical technologies like electrolyzers and fuel cells.

Hydrogen’s Role in A Decarbonized Economy

Hydrogen has been used as a staple of the chemical and energy industries for decades. Around 120 million tons are produced annually and used primarily as a feedstock in crude oil refining, synthesizing ammonia for fertilizer, and methanol production which goes into a number of products including plastic[5].

Hydrogen’s decarbonization potential centers around transportation, energy storage, power generation, and heating industrial processes. In fuel cells, hydrogen chemically reacts with oxygen to produce electricity without releasing any greenhouse gases. These fuel cells can be used to power trucks and light-duty cars, like the 2022 Toyota Mirai[6], as well as provide onsite power generation for homes and commercial businesses, like is being done by Adobe, Apple, and Microsoft[7]. For policymakers, hydrogen being storable, dispatchable, and potentially a zero-emission source of energy and heat at any time of the day is especially attractive.

Man in China refills hydrogen fuel cell cars

Even more exciting is hydrogen’s potential to clean up hard-to-abate sectors of the economy. Ammonia synthesized from clean hydrogen, known as e-ammonia, can be used to power shipping vessels, effectively decarbonizing 90% of worldwide trade[8]. Hydrogen can also be burned as a fuel to generate heat at extremely high temperatures (greater than 1,000°C) without emitting CO2[9]. This enables it to decarbonize industrial products like steel and cement which account for 15% of all global emissions[10].

However, hydrogen is an energy carrier not an energy source[11]. The significance of this distinction is that it must be produced from another substance, usually by splitting water molecules or fossil fuels. These extraction methods are color-coded to signify how the hydrogen was produced. 95% of today’s supply is “grey” hydrogen, which is produced from fossil fuels through natural gas steam methane reforming or coal gasification[12]. The two most prominent alternatives are “blue” or “green” hydrogen.

Blue hydrogen is simply grey hydrogen, but the emissions are pumped below ground using carbon capture technology. Green hydrogen is produced with an electrolyzer which splits water into oxygen and hydrogen using electricity generated by renewable energy. This process, known as electrolysis, produces no carbon emissions. Green hydrogen represents only 3% of total hydrogen production[13], but is expected to become the dominant production pathway by 2050 as the cost of solar PV and wind continues to decline[14].

How Green Hydrogen Will Disrupt the Global Energy Map

Today, hydrogen consumption is highly localized – nearly 85% of hydrogen produced is consumed on-site, usually at a refinery[15]. But in the last few years more than 30 countries and regions have released or are preparing national hydrogen strategies which is setting the stage for a boom in the cross-border hydrogen trade. The demand for green hydrogen as an internationally traded commodity will spur new investment flows, trade relations, and interdependence between nations that have not traditionally traded energy.

As a result, the geopolitics of the global energy trade will change in four ways: (1) the introduction of new energy export champions, (2) geographic vulnerabilities along hydrogen trade routes, (3) new alliance configurations and the growth of hydrogen diplomacy, and (4) a technology race to secure the green hydrogen supply chain.

New Energy Export Champions

Unlike oil and gas, green hydrogen can theoretically be produced anywhere, but states will benefit from international trade by acquiring it from countries who have a comparative advantage in the availability of renewable energy, freshwater, and necessary export infrastructure. The countries with the biggest advantage in green hydrogen include some new players in the global energy scene, including:

  • Australia: In 2019, Australia released its national hydrogen strategy positioning itself to become one of the top green hydrogen exporters due to its abundance of renewable resources. It has invested more than $1 billion in its hydrogen industry and forged a series of bilateral export deals with Germany, Japan, and Singapore[16].
  • Chile: In 2020, Chile launched a green hydrogen strategy aiming to produce 25 GW of capacity and become the world’s cheapest source hydrogen by 2030 and a top three global exporter by 2040. It’s estimated that it will sell $30 billion in green hydrogen by the end of the decade, taking advantage of its solar and wind resources[17].  
  • Morocco: In 2021, Morocco released a green hydrogen roadmap and is estimating an export market of 10 terrawatt hours (TWh) by 2030[18] on the back of its strong solar industry[19]. IRENA acknowledged the importance of this market by recently signing a partnership to expand Morocco’s green hydrogen investment[20].  
Chile’s national hydrogen strategy aims to make it the world’s cheapest source of green hydrogen by 2030.

Where will this green hydrogen go? The primary nations who have staked their energy future on hydrogen include:

  • Japan: In 2017, Japan was the first to adopt a national hydrogen strategy declaring that it would become a “hydrogen society”[21] . Since then, the government has started building a massive infrastructure to import and distribute hydrogen, including a $670 million investment in 2020 to build nearly a million fuel cell vehicles and 900 hydrogen fueling stations[22].
  • South Korea: In 2019, South Korea instituted a national hydrogen roadmap pledging to use hydrogen to power 30% of cities and towns by 2040. It already has deployed the most fuel cell vehicles in the world at around 10,000 and aspires to reach 200,000 vehicles by 2025[23].
  • Germany: In 2020, Germany unveiled its own national hydrogen strategy, investing 7 billion euros in hydrogen business and infrastructure and pledging to produce 10 GW of power from hydrogen by 2040[24]

Geographic Vulnerabilities Along Hydrogen Trade Routes

Regional and global hydrogen trade is in its early stages. Figure S.2 provides an overview of the potential trade routes from green hydrogen exporting regions in Latin America, Asia Pacific, and Northern Africa crisscrossing around the world to major importers.

Hydrogen can be transported in two ways, via pipeline or shipping. The overseas hydrogen trade will give rise to new important shipping lanes, which will also present themselves as vulnerable maritime choke points, much like the Strait of Hormuz in the Persian Gulf for oil. One prominent green hydrogen shipping route from Australia to Japan would run through the East China Sea which has been prone to territorial disputes between China and Japan[25].

Similarly, transporting green hydrogen via pipeline from northern Africa into Europe will place transiting countries in vulnerable positions much like Ukraine and other critical transit countries in the natural gas market.

These vulnerabilities will inform strategic planning and defense considerations and ultimately could result in new alliances on a bilateral basis centered around hydrogen access and security.

New Alliances and Growth of Hydrogen Diplomacy

As importer nations look to secure access from emerging export champions, hydrogen diplomacy will become a standard fixture of economic and energy diplomacy. Indeed, the Netherlands was the first to appoint a dedicated “hydrogen envoy” in 2019 as part of efforts to ink deals with Chile, Namibia, Portugal and Uruguay as potential suppliers.

Germany has not only established bilateral hydrogen deals with Australia, Chile, Morocco, Namibia, Tunisia, and Ukraine, but set up dedicated hydrogen diplomacy offices in those countries[26]. Japan is engaged in similar diplomacy to establish hydrogen value chains with Australia, Brunei, Norway, and Saudi Arabia. Chile declared that it would use “green hydrogen diplomacy” to attract foreign investment and unleash its export potential.

Profound geopolitical shifts could occur under these new alliances. For example, Germany’s bilateral hydrogen deals could wean its dependence off Russian natural gas. OPEC might find its influence dimming in Japan, which imports nearly 90% of its oil from the Middle East[27], as it opts to substitute oil for hydrogen fuel cells to power cars and buildings.

Technology Race for the Hydrogen Supply Chain

Underlying these shifts will be an intense competition for the green hydrogen supply chain, especially electrolyzers and fuel cells. Europe is currently the largest manufacturer of electrolyzers, but China is vastly beating them on cost with standard alkaline electrolyzers (the most common type) that are 83% cheaper[28]. Moreso, China dominates the access to, and ability to process, raw materials like nickel and zirconium needed to produce electrolyzers and platinum-group metals for fuel cells[29].

China is the world’s largest producer and consumer of hydrogen (almost entirely grey), leads the world in deploying fuel cell trucks and buses, and has placed hydrogen as one of its six industries of the future. This presents a risk that large parts of the green hydrogen supply chain will ultimately be controlled by China, subjecting it to the political volatility seen in other goods caught in global trade disputes and protectionist actions.

Liquified hydrogen storage tank

Although it may be too late to compete with China on cost, Western nations could innovate by maturing solid oxide and proton exchange membrane technologies which are superior to China’s alkaline electrolyzers in utilizing variable renewable energy resources[30]. The market for hydrogen technologies is still relatively small, with upcoming gigafactories for large-scale production of electrolyzers in Australia, France, India, Italy, Norway, Spain and the United Kingdom holding the possibility to drastically change the current manufacturing landscape[31].

Some estimates indicate that by 2050 there will be a $50-60 billion market for electrolyzers and $21-25 billion for fuel cells[32]. Thus, the hydrogen trade will add another dimension to existing geo-economic rivalries and will become a new battleground between major powers and emerging economies for supply chain security and technological superiority.

Conclusion

Green hydrogen has the potential to be a true game-changer in the fight for net-zero. It can power fuel cell electric vehicles, store renewable energy at utility scale, and be burned as a substitute fuel in carbon intensive industrial processes without releasing CO2. As interest in hydrogen grows, new players, alliances, vulnerabilities, and supply chain competition will arise.

While countries like Japan, South Korea and Germany prepare to become significant importers, countries like Australia, Chile, and Morocco stand to gain geopolitical weight as new export champions. But in order to make this vision real, these countries will depend on critical production and distribution technologies that are controlled by China, for now. Hydrogen diplomacy, technology innovation, and new security alliances will be pivotal to ensure that green hydrogen is able live up to its promise of solving a key part of the clean energy puzzle.

About The Author

Chetan Hebbale is currently a graduate student at the Johns Hopkins School of Advanced International Studies (SAIS) in Washington, D.C. focused on international economics, climate change, and sustainability.

Prior to this, he spent over 4 years at Deloitte Consulting working on technology and strategy projects at the CDC and U.S. Treasury Department.

He is a native of Atlanta, GA and attended the University of Georgia.

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[1] Noé van Hulst, “Hydrogen, the missing link in the energy transition,” International Energy Agency, October 17th, 2018, https://www.iea.org/commentaries/hydrogen-the-missing-link-in-the-energy-transition.

[2] International Renewable Energy Agency (IRENA), “Geopolitics of the Energy Transformation: The Hydrogen Factor”, pg.39, 2022, https://irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jan/IRENA_Geopolitics_Hydrogen_2022.pdf.

[3] Cato Koole and Thomas Koch Blank, “COP26 Made Clear That the World Is Ready for Green Hydrogen,” Rocky Mountain Institute, November 23rd, 2021, https://rmi.org/cop26-made-clear-that-the-world-is-ready-for-green-hydrogen/.

[4] International Renewable Energy Agency (IRENA), “Geopolitics of the Energy Transformation: The Hydrogen Factor”, pg. 24, 2022, https://irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jan/IRENA_Geopolitics_Hydrogen_2022.pdf.

[5] International Renewable Energy Agency (IRENA), “Geopolitics of the Energy Transformation: The Hydrogen Factor”, pg. 24, 2022, https://irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jan/IRENA_Geopolitics_Hydrogen_2022.pdf.

[6] Toyota, “2022 Mirai,” https://www.toyota.com/mirai/.

[7] Fuel Cell & Hydrogen Energy Association, “Stationary Power,” https://www.fchea.org/stationary.

[8] Gabriel Castellanos, Roland Roesch and Aidan Sloan, “A Pathway to Decarbonise the Shipping Sector by 2050,” International Renewable Energy Agency, October 2021, https://www.irena.org/publications/2021/Oct/A-Pathway-to-Decarbonise-the-Shipping-Sector-by-2050

[9] International Renewable Energy Agency (IRENA), “Geopolitics of the Energy Transformation: The Hydrogen Factor”, pg. 24, 2022, https://irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jan/IRENA_Geopolitics_Hydrogen_2022.pdf.

[10] Rebecca Dell, “Making the Concrete and Steel We Need Doesn’t Have to Bake the Planet,” The New York Times, March 4th, 2021, https://www.nytimes.com/2021/03/04/opinion/climate-change-infrastructure.html.

[11] Marc Rosen, “Natural and Additional Energy,” THEORY AND PRACTICES FOR ENERGY EDUCATION, TRAINING, REGULATION AND STANDARDS, 2004, http://www.eolss.net/sample-chapters/c08/E3-03-05-01.pdf.

[12] International Renewable Energy Agency (IRENA), “Geopolitics of the Energy Transformation: The Hydrogen Factor”, 2022, https://irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jan/IRENA_Geopolitics_Hydrogen_2022.pdf.

[13] International Energy Agency, “The Future of Hydrogen,” June 2019, https://iea.blob.core.windows.net/assets/9e3a3493-b9a6-4b7d-b499-7ca48e357561/The_Future_of_Hydrogen.pdf.

[14] International Renewable Energy Agency (IRENA), “Geopolitics of the Energy Transformation: The Hydrogen Factor”, 2022, https://irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jan/IRENA_Geopolitics_Hydrogen_2022.pdf.

[15] International Energy Agency, “The Future of Hydrogen,” June 2019, https://iea.blob.core.windows.net/assets/9e3a3493-b9a6-4b7d-b499-7ca48e357561/The_Future_of_Hydrogen.pdf.

[16] International Renewable Energy Agency (IRENA), “Geopolitics of the Energy Transformation: The Hydrogen Factor”, pg. 52, 2022, https://irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jan/IRENA_Geopolitics_Hydrogen_2022.pdf.

[17] International Renewable Energy Agency (IRENA), “Geopolitics of the Energy Transformation: The Hydrogen Factor”, pg. 48, 2022, https://irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jan/IRENA_Geopolitics_Hydrogen_2022.pdf.

[18] Ibid.

[19] Aida Alami, “How Morocco went big on solar energy,” BBC, November 18th, 2021, https://www.bbc.com/future/article/20211115-how-morocco-led-the-world-on-clean-solar-energy.

[20] IRENA, “Morocco and IRENA Partner to Boost Renewables and Green Hydrogen Development,” June 10th, 2021, https://www.irena.org/newsroom/pressreleases/2021/Jun/Morocco-and-IRENA-Partner-to-Boost-Renewables-and-Green-Hydrogen-Development.

[21] Monica Nagashima, “Japan’s Hydrogen Strategy and Its Economic and Geopolitical Implications,” French Institute of International Relations, October 8th, 2018, https://www.ifri.org/en/publications/etudes-de-lifri/japans-hydrogen-strategy-and-its-economic-and-geopolitical-implications

[22] International Renewable Energy Agency (IRENA), “Geopolitics of the Energy Transformation: The Hydrogen Factor”, pg.41, 2022, https://irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jan/IRENA_Geopolitics_Hydrogen_2022.pdf.

[23] Ibid.

[24] Rossana Scita, Pier Paolo Raimondi and Michel Noussan, “Green Hydrogen: The Holy Grail of Decarbonisation? An Analysis of the Technical and Geopolitical Implications of the Future Hydrogen Economy,” Fondazione Eni Enrico Mattei, October 2020, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3709789.

[25] Fridolin Pflugmann and Nicola De Blasio, “Geopolitical and Market Implications of Renewable Hydrogen,” Environment and Natural Resources Program – Belfer Center for Science and International Affairs, March 2020, https://www.belfercenter.org/sites/default/files/files/publication/Geopolitical%20and%20Market%20Implications%20of%20Renewable%20Hydrogen.pdf.

[26] International Renewable Energy Agency (IRENA), “Geopolitics of the Energy Transformation: The Hydrogen Factor”, pg. 79, 2022, https://irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jan/IRENA_Geopolitics_Hydrogen_2022.pdf.

[27] U.S. Energy Information Administration, “Country Analysis Executive Summary: Japan,” October 2020, https://www.eia.gov/international/content/analysis/countries_long/Japan/japan.pdf.

[28] Thijs Van de Graaf, Indra Overland, Daniel Scholten, Kirsten Westphal, “The new oil? The geopolitics and international governance of hydrogen,” Energy Research & Social Science, Volume 70, December 2020, https://www.sciencedirect.com/science/article/pii/S2214629620302425?via%3Dihub.

[29] Rajesh Chadha, “Skewed critical minerals global supply chains post COVID-19: Reforms for making India self-reliant,” Brookings India, June 10th, 2020, https://www.brookings.edu/wp-content/uploads/2020/06/Skewed-critical-minerals-global-supply-chains-post-COVID-19.pdf.

[30] International Renewable Energy Agency (IRENA), “Geopolitics of the Energy Transformation: The Hydrogen Factor”, pg. 62, 2022, https://irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jan/IRENA_Geopolitics_Hydrogen_2022.pdf.

[31] International Renewable Energy Agency (IRENA), “Geopolitics of the Energy Transformation: The Hydrogen Factor”, pg. 61, 2022, https://irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jan/IRENA_Geopolitics_Hydrogen_2022.pdf

[32] International Renewable Energy Agency (IRENA), “Geopolitics of the Energy Transformation: The Hydrogen Factor”, pg. 59, 2022, https://irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jan/IRENA_Geopolitics_Hydrogen_2022.pdf.

[33] International Renewable Energy Agency (IRENA), “Geopolitics of the Energy Transformation: The Hydrogen Factor”, pg. 12, 2022, https://irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jan/IRENA_Geopolitics_Hydrogen_2022.pdf.

Categories
Climate Change Policy Memo Short Form

How Climate Finance Can Support International Carbon Pricing Systems

A version of this memo was published in the SAIS Perspectives here.

Executive Summary

Developing countries and cities account for more than 60% of global GHG emissions[1] but represent less than 25% of carbon pricing systems globally[2],[3]. The Green Climate Fund (GCF) can strategically leverage climate finance to incentivize carbon pricing in developing countries by conditioning mitigation and adaptation aid on instituting a minimum price for emissions.

The GCF should provide more aid and compensation for developing countries with higher carbon prices. There are two benefits to this approach. First, it provides an incentive for countries to pursue increasingly ambitious carbon prices – thus increasing trust and coordination in the global climate regime as developed countries know their donations are driving higher emission reductions. Second, the domestic revenues from carbon pricing schemes will help developing countries finance investments associated with the costs of mitigation and enable a just transition to a low-carbon economy.

By establishing carbon pricing systems in developing countries, GCF can help establish international carbon markets that open additional revenue streams. Getting involved in carbon pricing efforts gives GCF an opportunity to shape Article 6 negotiations for global carbon markets where a portion of the sale of carbon credits and emission reductions are required to go to developing countries, thus channeling additional revenue for global mitigation and adaptation efforts.

Why Focus on Carbon Pricing?

Carbon pricing is a uniquely powerful mitigation solution due to its ability to influence energy use and investment decisions across all sectors of the economy as well as being tied to emission targets which guarantee that they are met. A well-designed carbon tax or cap-and-trade system will create incentives for cost effective emission reductions in the short run and cost reducing innovation in the long run[4]. One analysis found that on its own carbon pricing could deliver almost a third of the emission reductions necessary to avoid a rise of 2°C[5]. Unfortunately, GCF has no official policy or involvement in driving this vital policy mechanism while the developing countries it supports are on pace to account for ~70% of global energy demand in the next 20 years[6].

Carbon pricing has several advantages for developing nations:

  • Economy-wide Impacts: It’s a technology neutral way to incentivize economy-wide decarbonization by making it more expensive to pollute than to find lower carbon alternatives.
  • Revenue Generation: It generates revenue through tax collection or permit auctions that can be used by governments to support an equitable clean energy transition through R&D, job re-training, and investment in the poorest, most polluted areas. The revenue could also be used to support U.N. Sustainable Development Goals (SDGs) or directly compensate populations affected by the shuttering of energy intensive industries.
  • International Cooperation: It can serve as a focal point for international carbon pricing coordination resulting in additional revenues through the sale of carbon credits and emissions reduction that can go towards adaptation and mitigation costs.

How Climate Finance Can Spur Carbon Pricing In Developing Countries

International climate cooperation requires mutual commitments and stable incentive structures – coordinating national carbon prices is an efficient solution to achieve this. A major gap in the current Paris regime is that nations are only held to voluntary commitments which are not legally binding. If one country perceives that their decarbonization efforts are not being complemented by similar efforts in other countries, then the ambition and political will to ratchet up mitigation efforts will weaken. This dynamic has the potential to play out between developed and developing countries as the global share of emissions from developed nations continues to decrease[7]. National carbon prices are transparent and easily comparable, thus setting a floor for international cooperation and negotiations.

Conditioning climate finance aid to developing countries based on establishing a carbon price would incentivize adoption of carbon pricing systems globally. Developing countries lack the capacity and expertise to introduce carbon pricing systems and are disincentivized due to the high costs of mitigation. Indeed, even small changes to the prices of basic commodities because of a carbon price can have a significant impact on underprivileged groups. However, if they are compensated by richer countries then developing nations would be more willing to set carbon prices. The GCF should leverage its transfer payments for adaptation and mitigation on the condition that countries set a minimum carbon price. GCF can use existing funds to help establish tax collection or permit auctioning and allocation infrastructure.

Climate aid should be allocated to go more to countries who increase their carbon price over time, thus increasing ambition and trust in the climate regime. As countries start with different minimum carbon prices the hope is that they will rise and converge over time. However, GCF can accelerate this process by allocating increasing amounts of aid to those countries who increase their carbon price. In this way, developing nations continually pursue more ambitious carbon prices and developed nations will have increased trust and confidence that their transfer payments are achieving higher emission reductions.

Supporting Global Carbon Markets Offers New Revenue Streams for Mitigation and Adaptation

Establishing carbon pricing systems globally can facilitate the rules for international carbon markets under Article 6 of the Paris Agreement. Nearly half of the initial Nationally Determined Contributions (NDCS) include the use of international cooperation through carbon markets[8]. Enabling countries to effectively trade emission reductions and carbon credits across borders will be critical to the overall effort of global decarbonization. By helping establish carbon pricing systems, GCF will earn a seat at the table to ensure that carbon market rules are structured appropriately to benefit developing countries and to mitigate against the risks of double counting.

Successful international carbon markets will catalyze additional revenue streams for GCF to funnel to global mitigation and adaptation efforts. Under the Kyoto protocol a fee was levied on international emission trading and carbon credit purchases through the Clean Development Mechanism which funded nearly 30% of the U.N. Adaptation Fund[9]. Article 6.4 of the Paris Agreement would effectively replace the Kyoto Standard by ensuring that this “share of the proceeds” shall “assist developing country parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation” in addition to “covering administration expenses”[10]. By involving itself in Article 6 negotiations, GCF has an opportunity to open a large pool of public and private climate finance contributions to further scale its mission.


[1] Center for Global Development, “Developing Countries Are Responsible for 63 Percent of Current Carbon Emissions,” August 18th, 2015, https://www.cgdev.org/media/developing-countries-are-responsible-63-percent-current-carbon-emissions.

[2] United Nations Development Programme, “Human Development Reports – Developing Regions,” 2020, http://hdr.undp.org/en/content/developing-regions.

[3] World Bank Group, “State and Trends of Carbon Pricing 2021,” May 2021, https://openknowledge.worldbank.org/handle/10986/35620

[4] James Boyce, “Carbon Pricing: Effectiveness and Equity,” 2018, https://www.sciencedirect.com/science/article/abs/pii/S092180091731580X.

[5] Harvey, et. al, “Designing Climate Solutions,” 2018, pg. 253, https://islandpress.org/books/designing-climate-solutions.

[6] Stephen Eule, “A Look at IEA’s New Global Energy Forecast,” Global Energy Institute, November 29th, 2018, https://www.globalenergyinstitute.org/look-ieas-new-global-energy-forecast.

[7] UNFCC, “Most Developed Countries on Track to Meet their 2020 Emission Reduction Targets, but More Ambition Needed by Some,” November 23rd, 2020, https://unfccc.int/news/most-developed-countries-on-track-to-meet-their-2020-emission-reduction-targets-but-more-ambition.

[8] Kelley Kizzier, Kelly Levin and Mandy Rambharos, “What You Need to Know About Article 6 of the Paris Agreement,” December 2nd, 2019, https://www.wri.org/insights/what-you-need-know-about-article-6-paris-agreement.

[9] Carbon Brief, “In-depth Q&A: How ‘Article 6’ carbon markets could ‘make or break’ the Paris Agreement,” November 29th, 2019, https://www.carbonbrief.org/in-depth-q-and-a-how-article-6-carbon-markets-could-make-or-break-the-paris-agreement.

[10] Carbon Brief, “In-depth Q&A: How ‘Article 6’ carbon markets could ‘make or break’ the Paris Agreement,” November 29th, 2019, https://www.carbonbrief.org/in-depth-q-and-a-how-article-6-carbon-markets-could-make-or-break-the-paris-agreement.

About The Author

Chetan Hebbale is currently a graduate student at the Johns Hopkins School of Advanced International Studies (SAIS) in Washington, D.C. focused on international economics, climate change, and sustainability.

Prior to this, he spent over 4 years at Deloitte Consulting working on technology and strategy projects at the CDC and U.S. Treasury Department.

He is a native of Atlanta, GA and attended the University of Georgia.

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Categories
China Climate Change Foreign Policy Policy Memo

Three Ways China Can Tackle Its Emissions

Executive Summary

China is the world’s largest emitter of CO2 emissions, by far. It represents nearly a third of all emissions by itself – more than double the U.S. and the next seven nations combined[1]. As a result, China is under intense pressure to meet its emission targets set out in Glasgow at COP26. Achieving these targets will hinge on the ability for the central government in Beijing to influence a sprawling network of provincial and sub-provincial governments to make emission reductions in their local areas.

China’s emissions come from three primary sources: industrial production (50%), the power sector (40%), and the transportation sector (8%)[2]. Here, we lay out a roadmap to inform diplomatic negotiations on how the Chinese government can reduce emissions from these sectors through center-local coordination on policy reforms in energy investment, production, and consumption. These reforms include stronger permitting rules against coal plants, synchronization of their national emissions trading system, and incentives for electric vehicles (EVs).

Background

By some fiscal measures, China is the most decentralized country in the world[3]. Its “quasi-federal” system was born out of decentralization reforms in the late 1970s which have created a constellation of central and local institutions with varying, sometimes conflicting, responsibilities and mandates for energy and climate decisions[4]. The strength of these mandates largely depend on which agency is issuing and enforcing them.

Historically, regulating GHG emissions originates with China’s most salient environmental concern – air pollution. This fell under the purview of the National Development and Reform Commission (NDRC) until 2018 when the government transferred its climate related responsibilities to the Ministry of Ecology and Environment (MEE)[5]. In July 2021, China reinstated the NRDC as the primary planning body on climate change and has tasked it with creating a roadmap for how China can meet its emission targets.

Since 2007, China had established energy intensity reduction targets whose enforcement has been handed down to local governments and are factored in their performance evaluation[6]. There has been significant geographic variation in local enforcement due to competing incentives for economic growth and development. 

Reform Recommendations

In its roadmap, the NRDC should recommend that the central government:

Reclaim authority on permitting rules for new coal-fired power plants. Authority to permit new coal plants was decentralized to the provinces in 2014 which resulted in a rapid increase in coal permits across the country[7]. China is now the world’s largest consumer and producer of coal[8]. By reclaiming permitting authority, Beijing can restrict new plants and set capacity reduction plans in line with the global pledge to “phase down” coal[9]. China can expect resistance from coal mine owners and provinces with coal dependent economies as they are highly dispersed and enjoy autonomous control – the central government will face substantial difficulty without credible punishments for permitting violations.

Harmonize local emissions trading system (ETS) pilots to transition into the new national carbon market. In 2013, China launched seven provincial/municipal ETS pilots in preparation for the rollout of their national carbon market in 2020 which is to be run by the national MEE department. In these pilots, local governments found ways to bypass fees and lessen the impact of carbon prices on their preferred investments like coal. Thus, in rolling out the national market, MEE will need to contend with those local governments skirting the rules by standardizing and closing loopholes around carbon allowance allocations, compliance, and data measuring, reporting, and verification (MRV) systems.

Require local governments to expand license plate quotas to encourage uptake of electric vehicles. Local governments have broad control over the transportation sector which they have used to limit emissions by forbidding certain types of cars from entering city centers each day through license plate requirements[10]. The central government can require provinces to expand the scope of these requirements in two ways – (1) only allowing cars with EV license plates at certain times, days, and lanes and (2) allowing cities to waive license plate restrictions all together for EVs so they’re not subject to any driving restrictions compared to gas-powered cars[11]. Beijing could complement these regulations with expanded central tax incentives to further increase uptake of EVs on China’s roads.

Taken together, these reforms give China a significant boost in their efforts to slow climate change as they directly take on local resistance to cutting major sources of emissions. At Glasgow, China pledged to peak its CO2 emissions before 2030[12], thus it has roughly eight years to course correct the diverging local interests of the world’s largest population. Failure to do so will likely sink global efforts to avoid a 2°C rise which will precipitate severe environmental deterioration.


[1] BBC, “Report: China emissions exceed all developed nations combined,” May 7th, 2021, https://www.bbc.com/news/world-asia-57018837.

[2] Columbia University In The City Of New York, “Guide to Chinese Climate Policy: Emissions by Sector and Sources,” https://chineseclimatepolicy.energypolicy.columbia.edu/en/emissions-sector-and-source.

[3] Michael Davidson, “Creating Subnational Climate Institutions in China,” Harvard Project on Climate Agreements, December 2019, https://www.belfercenter.org/sites/default/files/files/publication/davidson-china-paper%20designed-version-3.pdf.

[4] Ibid. Davidson

[5] David Stanway, “China shake-up gives climate change responsibility to environment ministry,” Reuters, March 13th, 2018, https://www.reuters.com/article/china-parliament-environment/china-shake-up-gives-climate-change-responsibility-to-environment-ministry-idUSL3N1QV23P.

[6] Ibid. Davidson.

[7] Ibid. Davidson.

[8] Sara Schonhardt, “Energy crunch raises questions about China’s devotion to coal,” E&E News, October 13th, 2021, https://www.eenews.net/articles/energy-crunch-raises-questions-about-chinas-devotion-to-coal/.

[9] Connor Perrett, “World leaders at COP26 strike agreement to ‘phase down’ unabated coal and call on wealthy nations to double funding to vulnerable nations,” November 13th, 2021, https://www.businessinsider.com/cop26-concludes-with-agreement-to-phase-down-coal-2021-11.

[10] Wang, Rui, “Shaping Urban Transport Policies in China: Will Copying Foreign Policies Work?” Transport Policy, 17(3), 147–152, 2010, https://doi.org/10.1016/j.tranpol.2010.01.001.

[11] Sandalow, David, “Guide to Chinese Climate Policy,” Columbia University Center on Global Energy Policy, 2018, https://energypolicy.columbia.edu/sites/default/files/pictures/Guide%20to%20Chinese%20Climate%20Policy%207-27-18.pdf.

[12] Climate Action Tracker, “China,” November 3rd, 2021, https://climateactiontracker.org/countries/china/targets/.

About The Author

Chetan Hebbale is currently a graduate student at the Johns Hopkins School of Advanced International Studies (SAIS) in Washington, D.C. focused on international economics, climate change, and sustainability.

Prior to this, he spent over 4 years at Deloitte Consulting working on technology and strategy projects at the CDC and U.S. Treasury Department.

He is a native of Atlanta, GA and attended the University of Georgia.

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