China Races to Net Zero: Dual Circularity and What to Expect in 2021

The final days of 2020 turn out to be the busiest ever. Race to Net Zero occupies our minds and keeps us inspired to put a trajectory together to pivot in the new year. Timing cannot possibly be more perfect. From China domestic perspective, a society-wide input solicitation of recommendations to the 14th Five-Year Plan (2021-2025) is coming to close after months' open process, the broadest ever. Such a plan is crucial because specific targets will be announced that sets the pace of transition in this decisive decade. It will guide how government allocates its budget, what policy incentives shall be put in place, and how the country will form a united front to embark on the pathway towards a net zero carbon future.

From global perspective, the convergence of the world largest economies - US, China and EU, in particular, around a carbon neutral future by mid-century, has set the tone, the trend and the pace of a radical decarbonization, a transition and a shift at an unprecedented scale. If the previous two crises of economic collapsing and social upheavals in the US - 1861-1865 American Civil War and the 1930s Great Depression - can shed some light on our current situation, the leading economies have all embraced the new technology-triggered industrial revolution and have decided to invest in new infrastructure and enhance industrialization capability. The narrative is a new, and shared one. And very importantly, it attaches importance to unleash the biggest potential of systemic change. It puts in first priority to invest in a new generation of general-purpose of operating system that is pillared by communication technology, renewable energy technology and clean mobility and transportation technology. Such a foundational infrastructure is being designed by leading economies, respectively, in order to accommodate the plug-ins of all the other pieces of our economy.

I emphasize "respectively" for a reason. Even though we all agree that climate change is the biggest existential threat to humanity, which requires collaboration and cooperation, especially among largest economies, in order to grapple the challenge in a timely manner, we are stuck and contained in a narrow-minded geopolitics. Positively, US, China and EU, among others, are leading investment in a carbon neutral future. And yet, the timeframe to achieve below 1.5C warming goal globally - halving emissions by 2030 and achieving net zero emissions by 2050 - cannot possibly be delivered without global partnership. Economic nationalism and technology nationalism, dominate how how governments made decisions around trade and investment. And coercion, cajole, containment, and competition define how quickly we can advance global climate change agenda.

A few emerging trends to watch from China in the new year.

First, "dual circularity" is now adopted as a new national strategy. A response to an increasingly complex global economy and geopolitics, China starts to look more inward. With 18% of global population and a middle class of 400-million-people, the market is large enough to carry on the momentum of growth. And its commitments to radical decarbonization, though very, very challenging, are expected to be delivered with a united front taking advantage of the country's unique governance system.

China won't give up global market, of course. The world largest developing economy has been a leading voice to champion globalization over the last couple of decades. Its rising has encountered unbearable resentment. The US sees China as an adversary and strategic rivalry, so does EU. The ideological divide seems a hurdle that can never be overcome. This requires China to learn how to play its due role constructively in reshaping global governance to accommodate the new era of radical decarbonization, through multilateral and bilateral platforms, at different levels.

Second, in the name of national security, China follows the common practice of US, EU and many other OECD countries to guard against FDIs into some important sectors in China, such as energy, resources, agriculture, critical infrastructures, internet technology, and production of military products. The December 19th announced "National Security Rules for Foreign Investment" is to control and prevent security risk from foreign investment. This is also an important addition to a revamped foreign investment regulatory trajectory, including the 2015 National Security Law. The new rules will allow government agencies to preview, deny and punish foreign investment activities in areas deemed as threat to national security. The new Rule will become effective 30 days after its announcement.

China's success in opening up to global market is partly reflected in its attractiveness to FDIs. And those sectors now on the list subject to national security preview happen to be among the most attractive ones. What will happen and how China balances and manages its demand for more FDIs conditioned on national security remains to observed.

Third, further alignment of national energy strategy, Chinese government released its latest White Paper: "Energy in China's New Era" on December 21. The world largest energy producer and consumer, China vowed to further open its energy sector to the world, reducing restrictions on foreign investment access to the energy sector, lifting restrictions for foreign investment to enter the sectors of coal, oil, gas, electricity which excludes nuclear power, and new energy. International energy companies have been steadily expanding investment in China, with major foreign investment projects such as Tesla's Shanghai plant being launched one after another and the number of foreign-funded gas stations growing rapidly, the white paper noted.

But how the new national security rule will impact such a vow remains to be seen. As we all know, energy transition relies heavily on digitalization, which poses security risk. We can literally expect news rules and models in the coming year that shape how cross-border investment in net-zero-carbon-related sectors will be regulated from national security perspective.

Fourth, what China will say No next? After Ban to importing foreign solid wastes, especially plastic wastes, the world largest coal consumer decided to ban import of thermal and metallurgical coal from Australia. Drivers seem plenty. Energy security concerns, carbon neutrality commitment, and now dual circularity too. When the world largest energy producer and consumer has 70% of its petroleum demand met by international market, it poses a huge national energy security threat. Peaking fossil fuels has been among some leading voices in the last decade. Peaking coal is becoming a reality. Peaking oil and peaking natural gas are popping up more frequently lately in the context of carbon neutrality commitment. This is another crucial piece of the puzzle for China.

While the country has made serious and specific commitments to decarbonize its energy system, this coming decisive decade will witness some dramatic shift around efficiency and non-fossil fuel development. And yet, the latest Energy White Paper has clearly included fossil fuels as major part of China's energy landscape, but with clear target to reduce emissions. Peaking emissions before 2030, reduction of carbon intensity at beyond 65% by 2030 over 2005 level, 25% non-fossil fuels in its primary energy structure by 2030, and energy security as well as national security are among some major reference points to observe China's energy transition between now and 2030.

Finally, I would watch how the new Biden Administration handles the bilateral relationship with China. The global community, including China, literally open its arms to welcome US back to the Paris Agreement. Details remain to be seen. And a new kind of chemistry is expected around how the world two largest economies would game each other in the era of critical radical decarbonization. Value and ally-based multilateralism seem two most important criteria Biden is very much used to. From trade to investment, from technology to infrastructure, a grand new saga is being curated, which will define how we are limited to mobilize resources to deliver our noble commitment to address climate challenges.

We all aspire to see a more collaborative US-China on this journey. We have all learned heavy lessons. While global community seems very forgiving to the US through its in-and-out of the Paris Agreement, leading nations shall be humbled when painting themselves as climate leaders. The behaviors of many parties already demonstrate how shameful and shameless politicians could be. Stop fooling the citizens of our Planet. Stop fooling our children and grandchildren. And just stop fooling ourselves.

In front of a global existential threat, we have a shared destiny. This is no zero-sum game, but a game that we will end up wiping out our species on this Planet. As the global pandemic in 2020 has shown us, Earth without human interruption carries on and even prospers. But for us, this is the only home place to survive.

I might sound a bit dooms-day. I remain hopeful. Like having a half-empty glass on the desk, I tend to pay more attention to the other half. Together let's grow this half to its fullest possible.

Best wishes for the holiday season.