China’s growth focus at the Two Sessions comes at the cost of short-term emission targets

Of the many announcements during China’s Two Sessions, the carbon reduction goals are worth watching as they may be read as a shift - although possibly tactical and not structural - in China’s climate change policies. In fact, while reaffirming its commitment to peak emissions by 2030 and carbon neutrality by 2060, the Chinese government has softened its stance from last year. First, last year’s annual target of roughly 3% reduction in energy consumption per unit of GDP has been dropped in the Government Work Report. Instead. Only energy consumption targets within the timeframe of the 14th Five Year Plan, have remained in place, which entail a reduction of energy consumption per unit of GDP of 13.5% from 2020 to 2025. Beyond that, the measurement of total energy consumption is also loosened by excluding the consumption of newly added renewable energy and fossil energy consumed as raw materials. For the former, it can be understood as an attempt to boost the utilization of renewables given the overall goal to increase the share of non-fossil fuel in the energy basket to 25% by 2030. For the latter, it looks more puzzling, but interpretation from state-owned media shows that the amount of emissions generated by coal used as raw material is only 20% that from coal used as fuel. Put more simply, the Chinese government seems to allow more space for the use of coal in area producing less emissions. But such measures clearly lift some of the pressure to reduce the use of coal in China’s energy mix.

That said, the softening measures coming out of the Two Sessions should not be a surprise to us for at least two reasons. First, the role of coal as major energy source has already been highlighted during the Central Economic Working Conference (CEWC) last December, which set the policy tone for the Chinese economy in 2022. Second, coal production has rapidly increased again since last September to alleviate the power crunch, which had clearly affected China’s industrial production in the second half of 2021.

We think there are two main reasons for such a moderation in stance. First, the priority to stabilize growth in 2022 makes it very hard for the government to prioritize emission targets. Although the lower growth target of 5.5% this year, as opposed to the actual growth of 8.1% in 2021, points to a reduction in energy demand in 2022, a renewed energy crunch cannot be ruled out if local governments are still under pressure to meet with their annual targets to control emissions. In fact, it was exactly the local governments’ scramble to comply with their emission targets that led to widespread power outages last September. The good news is, prior to the delivery of central government work report this weekend, many local governments have already tuned down their stances on their carbon reduction in their own work reports, moderating from the "campaign-style" expressions last year to "in an orderly manner" this year, following the same language as in Premier Li’s Work Report. Second, although inflation remains benign in China, the rise in energy prices due to the sharp escalation in the Ukraine crisis still poses challenges to China’s annual inflation target of roughly 3%. More importantly, a renewed push in producer prices, especially upstream, is bound to hit the already squeezed margins of downstream sectors again.?Against this backdrop, a special mention to ensuring energy supply was incorporated in the government report this year, which again explains the push to increase coal production in the light of very volatile energy markets.

All in all, the key takeaway from the Two Sessions for China’s climate policies is clear: Growth comes before emission targets as far as 2022 is concerned while maintaining long-term targets intact. One can of course wonder how such long-term targets may be maintained down the road if growth still comes first.

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